Choosing your own clients. Setting your own hours. Insurance or private pay. Private practice enables therapists to meet the unprecedented need for mental health services while ensuring that your work is compensated on your own terms. But how do you figure out what a fair compensation structure looks like when you’re your own boss?

If you’ve worked in an agency or other setting, many aspects of the business of providing mental health services might have been taken care of by other staff—scheduling appointments, answering client questions, coordinating with other healthcare providers, processing insurance claims and payments—these are all aspects of mental healthcare that someone must do. And if you’re in private practice, those tasks are essential but unbillable. So, how much client revenue does it take to ensure that the number of sessions of therapy you can bill for actually covers the full cost of your time?

How Much “Paying Yourself” Really Costs

One of the first tasks is to figure out how much “paying yourself” really costs. When you’re an employee, the employer covers a lot of expenses that, when you’re self-employed, you must cover on your own, so calculating the true cost of your labor is an important step. Going into private practice can seem lucrative, but it’s important to compare the value of benefits and taxes covered by an employer and how much revenue you will need to bring in match them.

Here is a very basic breakdown of compensation from two settings, a group practice or nonprofit and a government agency. The Bureau of Labor Statistics estimates that benefits cost non-government employers around 29.6% above an employee’s wages, and government employers, which tend to have more robust benefits, spend about 38.1% in addition to wages. In the example below, a therapist earning a salary of $72,000 receives more in “total compensation” when benefits are included. When considering making a move to private practice, it’s important to understand what benefits you might leave behind, whether you want to provide them for yourself, and how much it might cost to do so.

Benefits included in this calculation are:

• Paid leave – vacation, holiday, sick, and personal leave
• Supplemental pay – overtime and premium, shift differentials, and nonproduction bonuses
• Insurance – life, health, short-term and long-term disability
• Retirement and savings – defined benefit and defined contribution
• Legally required benefits – FICA [Social Security (refers to Old-Age, Survivors, and Disability Insurance (OASDI) program), Medicare], federal and state unemployment insurance, and workers’ compensation.

A Note On Taxes And Benefits

Benefits like health insurance and contributions to a retirement plan are part of your overall compensation but you aren’t taxed on them, so they increase the value of your job without increasing the amount of income you pay taxes on.  FICA tax is a 15.3% federal payroll tax that funds Social Security and Medicare; for people employed by someone else, the employer pays half and the employee pays half. When you are self-employed, you pay the entire 15.3% yourself. The income tax you pay is separate from FICA and depends on your specific tax bracket and a wide variety of credits and deductions, so after tax income will vary. Some employers offer additional benefits, like a budget for professional development that may include travel, which also adds to the “value” of your job.

The benefits package from an employer typically also includes essential pieces of protection, like health insurance, life insurance, and disability insurance (linked article previously approved). Paying for those items yourself increases the amount of revenue you need to bring in, but some of the premiums are also deductible as business expenses when you’re self-employed.

When a comparable benefits package, including time off, retirement plan contribution, life and disability insurance, and taxes are taken into account, it takes a substantial level of client revenue from a private therapy practice to reach an equivalent level of earnings and benefits received in many agency or government sector jobs. Of course, many clinicians do private practice part time, either on its own or as an additional source of income while maintaining a full time job elsewhere, and may not need to cover any benefits at all.

An Example

Now let’s compare a hypothetical income for a therapist in private practice who pays taxes and benefits on their own.  

For this example, let’s use the $72,000 example above. How much does a private practice need to bring in revenue-wise to generate $6,000 per month of take home income? In this example, $12,000 per month, or $144,000 per year, results in a take-home income of about $72,000. Another question to ask yourself is how much you believe you can charge for sessions, whether you will accept insurance, how many sessions per week and how many weeks per year you want to work. All of those factors will impact how much revenue you bring into your practice.

Your business expenses will depend on factors like whether you pay to rent an office; for therapists who see clients exclusively via telehealth, this is a major expense they don’t have to pay. Other expenses include internet, advertising, EHR system, continuing education, credit card processing fees, and beyond.

Taxes will vary depending on your state, level of household income, and other factors, but in this calculation we estimate 40% to include FICA, state, and federal income taxes that are common in the DC/MD/VA area. When first starting out, it’s better to over-estimate the amount of taxes you need to pay, since you won’t have an employer withholding for you. Most self-employed people pay quarterly taxes, and setting aside about 40% of all client fee revenue will help ensure that you have enough to pay each quarter’s amount due.

In our webinar series on Financial Self-Care, (webinars previously approved) we described how self-employed people can structure personal income, retirement savings, and insurance, which are critical pieces of the “benefits package” you want to provide for yourself.

Final Thoughts

The decision to switch to self-employed private practice requires consideration of many factors, including work-life balance, flexibility, and a variety of other concerns. We are happy to help you think through whether a jump to private practice makes sense from a financial standpoint, so you can make a decision about your future with a good estimate of what your income might be.

We work with many people on financial planning, retirement and education savings, and life, disability and long term care insurance, to ensure that private practice is working for you. We are happy to meet with you for a free consultation to learn about you and how we might help!

Check out the background of these financial professionals on FINRA’s BrokerCheck

This website is for informational purposes only and does not constitute investment advice nor a solicitation to buy or sell any security or engage in a particular investment strategy. Toler Financial Group provides advisory services through Rossby Financial LLC, a Registered Investment Adviser with the U.S. Securities and Exchange Commission. Information contained herein is provided by sources deemed to be reliable; however, accuracy and completeness cannot be guaranteed. All investing involves risk, including the possible loss of principal. Results are not guaranteed, as past performance does not indicate future results. Rossby Financial LLC and its affiliates do not provide tax or legal advice. Advisory services are offered in all 50 states.

Toler Financial Group does not provide tax or legal advice.

Being your own boss is a dream for many people. The flexibility to set your schedule, no supervisor to answer to, and freedom to do things the way you want to are compelling reasons to pursue self-employment. But one of the trade-offs that people make when leaving a job with a benefits package is that they must create—and pay for—those benefits on their own.

In our webinar series on Financial Self-Care, we described how self-employed people can structure personal income, retirement savings, and insurance, which are critical pieces of the “benefits package” you want to provide for yourself. Another piece of the puzzle, one that can seem intimidating, is figuring out how to actually “budget” for time off. Whether you want to be able to attend conferences, go on vacation, or take time off if you get sick, ensuring you have enough income to cover time away from work is especially important.

Many jobs offer paid time off for federal and other holidays, sick days, vacation, continuing education or professional development events, bereavement, family leave, any number of situations that allow you to continue to get paid even if you don’t come to work. How do you create that safety net if you’re the employer? Here are a couple of strategies.

How Do You Create An Additional Month Of Revenue?

There are two ways to approach this. One is to assess your fees and ensure they are set appropriately to cover time off. This isn’t greedy—whatever business you’re in, your clients want you to be at your best, and time off to relax, heal and learn is critical to that. I’ve managed budgets for organizations and “fringe” benefits—the amount allocated over and above staff salaries—is typically 20-30% of each person’s salary, to cover time off, insurance and retirement benefits.

If you don’t think you can change or increase your fees (if, for example, you’re in network with insurance companies and have a contracted rate) and don’t want to see more clients, the second approach is to review your business and personal living expenses and see if you can reduce them so that 11 months of revenue will pay for 12 months of expenses. If you can reduce business expenses, you can pay yourself more in profit. If you can reduce personal expenses, the income you take from the business will cover the time you aren’t working.

What Happens If You Get Sick Or Hurt?

The last piece of the puzzle is protect yourself in situations that may lead to extended periods of reduced or no work due to illness or disability. While many of us may plan to take sick day here and there throughout the year due to a minor illness, serious illness can occur unexpectedly and make you unable to work for an extended period.

What if you are too hurt or sick to work for months or years? The loss of income can be devastating to your personal finances. Disability insurance is a critical part of your safety net as a self-employed professional – it would supplement any Social Security disability you might qualify for to leave you with a reduced, but manageable, income to live on. The leading causes of expended time away from work are  neuro-muscular and auto-immune illnesses, though cancer and other diseases certainly come into play. Women are more likely than men to experience a disability that hampers their ability to work, and if you are self-employed, you don’t get paid for time away from clients.

Final Thoughts

Financial planning with self-employed clients allows us to figure out together the best way for business revenue to flow to your personal cash flow, accounting for time off as desired. Included in our financial planning is an independent insurance analysis, with a search of carriers to find the best disability insurance policy to protect them. We are committed to our self-employed clients having a great benefits package! We would be happy to meet with you for a free consultation to discuss any questions you may have.

Check out the background of these financial professionals on FINRA’s BrokerCheck

This website is for informational purposes only and does not constitute investment advice nor a solicitation to buy or sell any security or engage in a particular investment strategy. Toler Financial Group provides advisory services through Rossby Financial LLC, a Registered Investment Adviser with the U.S. Securities and Exchange Commission. Information contained herein is provided by sources deemed to be reliable; however, accuracy and completeness cannot be guaranteed. All investing involves risk, including the possible loss of principal. Results are not guaranteed, as past performance does not indicate future results. Rossby Financial LLC and its affiliates do not provide tax or legal advice. Advisory services are offered in all 50 states.

Toler Financial Group does not provide tax or legal advice.

So you’ve hung out your shingle, gotten some clients, and gotten paid—now what? One of the most popular questions in our webinar series for self-employed professionals is about what to do with the dollars you earn. This article will walk you through how to correctly manage business cash flow. 

Briefly: 

• Deposit Business money (revenue) into an account just for the business 

• Pay all business expenses out of the business account

• Set aside 40% of revenue after business expenses for taxes

• Revenue after expenses and taxes = Income

Money In 

However you get paid—whether it’s cash, credit cards, insurance company reimbursements, Venmo, Zelle, or checks—money to your business (revenue) needs to go into a separate account just for your business. If your business is structured as a sole proprietor, you can simply open a bank account with your own name that you keep independent from your personal, household funds. If you’re an LLC or other structure you will need to open an account with your business’s articles of incorporation. In this case, checks need to be written to “Business Name, LLC.”  

Taxes

Business expenses come out of revenue before it is taxed, so you want to set aside taxes after you have paid all business expenses. A good rule of thumb is to set aside 40% of all revenue after expenses to cover tax payments – FICA, Federal and State/Local. A separate business savings account can be an easy way to keep those tax funds clearly in their own account, and you should have enough to make quarterly tax payments when they are due. 

Retirement Savings

Self-employed people have to set up their own retirement savings plans. A simple and popular plan is a “SEP”. To save for retirement, in addition to the 40% you set aside for taxes, you may want to set aside an additional 10-20% of revenue after expenses to cover a SEP or other retirement plan contribution. After you have been in business a year or two, your accountant should be able to give you a more precise savings goal to aim for and our firm can help you set up a SEP retirement plan for yourself.  

Income

Business revenue becomes available for personal income after expenses and taxes are paid. You can take as much or as little of the left-over funds as you like—you can set up a recurring transfer for the same amount every month or draw funds from the business account only when needed. Having a consistent amount each month should make it easier for you to budget for your own vacation and sick paid time off.

Final Thoughts

Whatever your business looks like, we would love to help you figure out how to make it work for your household. You can schedule a free consultation with us anytime.

Check out the background of these financial professionals on FINRA’s BrokerCheck

This website is for informational purposes only and does not constitute investment advice nor a solicitation to buy or sell any security or engage in a particular investment strategy. Toler Financial Group provides advisory services through Rossby Financial LLC, a Registered Investment Adviser with the U.S. Securities and Exchange Commission. Information contained herein is provided by sources deemed to be reliable; however, accuracy and completeness cannot be guaranteed. All investing involves risk, including the possible loss of principal. Results are not guaranteed, as past performance does not indicate future results. Rossby Financial LLC and its affiliates do not provide tax or legal advice. Advisory services are offered in all 50 states.

Toler Financial Group does not provide tax or legal advice.