Medical transcriptionist tax information
By Laura Naumann
Before becoming a medical transcriptionist I had never been self-employed. I got my W2 at the end of the year, claimed my standard deductions and received my refund. At the end of my first year as an independent contractor I received a 1099 indicating only my gross income with no taxes having been withheld. That whole year I had cashed and spent my paychecks, never considering which portion was taxable and how I would prove which portion wasn’t. I hired an accountant, presented my meager pile of receipts and was shocked by the amount of my self-employment tax.
Over the years I have become much more aware of what expenses I need to keep track of and how to minimize the taxable portion of my gross earnings. I also bypassed the accountant and began preparing my own tax return. Medical transcriptionist tax deductions, tax deductions for medical transcription and medical transcriptionist expenses can vary significantly. I hope this article will save you the headaches I suffered at tax time my first couple of years as an independent contractor.
The setting in which a medical transcriptionist is employed may vary tremendously. You may be in-house at a hospital, clinic or doctor’s office. You may be one of several staff transcriptionists in a busy office or alone at your kitchen table. For the IRS your employee classification guides your tax return. There are basically two types of employee categories, independent contractors and employees. At the end of the year independent contractors will receive a 1099 from their employer, while an employee receives a W2. Somewhere in between these two classifications are statutory employees who receive a W2, but are granted the same deductions as an independent contractor. If you are considered a statutory employee it will be indicated as such on your W2.
Your employee classification significantly affects which deductions you may take on your income taxes. Under regular employee status you are not permitted to file a schedule C for business expenses. You can only deduct work related expenses if you itemize deductions and only if your itemized deductions are higher than your standard deduction.
An independent contractor or statutory employee can deduct work related expenses and still get their standard deduction. Also, it is only as an independent contractor or statutory employee that you are able to deduct home office expenses. As I mentioned above, as an independent contractor I do not have taxes taken out of my paycheck. I am therefore my gross income the less self-employment tax I have to pay. These expenses will ultimately decrease your taxable income so federal income taxes will also be lower.
Schedule C is the IRS form used to deduct business expenses and calculate taxable income. Some expenses a medical transcriptionist may incur that are allowed as business deductions are as follows:
Bank charges, continuing education and dues for professional organizations, equipment, insurance, office supplies, postage, printing expenses, promotion and advertising, as well as home office expenses.
For instructions on filing a Schedule C from the IRS: www.irs.gov/instructions/i1040sc/ar01.html
An independent contractor or statutory employee who works from home is entitled to deductions for home office expenses and the home office itself on IRS form 8829. Although I have the luxury of using a spare bedroom as my private office, your home office need not be a separate room of your house. It can be a portion of a room or even a small sliver. To qualify as a home office the space you allot must be your principle place of business, be used exclusively for your business and be used regularly for your business. A small workstation in the corner of your bedroom can be considered your home office if you use that area only for your business and routinely for your business.
To calculate the percentage of your home that your home office occupies measure the area you have designated as the home office and divide by the total square footage of your home. Home expenses are divided into two categories, those for the entire home and those specific to your home office. For instance, if your monthly electric bill is $240 and your office occupies 10% of your home the allowable deduction for electric in your home office is $24/month. This is also true with trash collection, gas, water, etc. Additionally, the home office percentage also relates to property taxes, homeowners insurance, home maintenance and the like. There are however expenses that are specific to your home office such as an additional phone line for your job, long distance calls, equipment for your office, office furniture, etc. These expenses are strictly home office expenses and should be noted accordingly.
The best source for more information on home expenses is the IRS itself: www.irs.gov/newsroom/article/0,,id=108138,00.html
Remember I am a transcriptionist not a tax expert. While an accountant can be worth every penny they charge even the best accountant cannot deduct expenses he doesn’t know about. I cannot stress how important ongoing tracking of expenses can mean at tax time in both time and $$. Don’t miss out on the tax deductions you deserve!
I find that filing my taxes electronically is the easiest way. I don’t know of any software specific to income tax deductions for medical transcription but the generic business version will do the trick. I have personally used TurboTax and HR Block to file. The basic free software is not adequate to get all the tax deductions medical transcriptionists can take. It costs about $30 or $40 to get the first level upgrade, which will allow access to schedule C tax forms. It’s definitely worth it.
For your 2011 tax return:
I’m currently working on my 2011 tax return and as usual wising I had been more organized the last 11 months. I’ve done a litter research on any changes
that I need to be aware of and find that little differs from last year.
One thing is self-employed workers need to be aware of is the ability to deduct health care premiums from our net earnings, which makes a big impact on the self-employment tax. Be sure to include your insurance premiums on your return for maximum deductions.
Other changes affect deducting the cost of equipment used for business but the limits far exceed anything I’ve spent on transcription equipment in my entire career.
There haven’t been any major changes in home office deductions. However, after a conversation with my sister-in-law last week I wanted
to touch on the subject of home office expenses verses home expenses. Items such as your mortgage, taxes, property insurance, electricity and garbage collection are home expenses and a portion of these costs are deductible based on the entire home versus the office space, as discussed above.
The cost of most home improvements and maintenance are likewise apportioned to the percentage used as a home office. However, repairs and upgrades
that are directed specifically toward home office function ability are completely deductible as a business expense. For instance you may require the services of an electrician over the course of the year. If the call is related to a general repair only a percentage of the cost may be deducted an office expense but if the call is to upgrade wiring to accommodate the equipment necessary for work the entire cost can be listed as an office expense. This theory can be extended to Internet and phone service if your employer mandates them.
For more information on small business deductions from the experts visit the IRS at http://www.irs.gov/businesses/small/article/0,,id=109807,00.html
Update – I just finished my taxes. I wanted to give my endorsement of the tax software. It was very user friendly and best of all it included a schedule c for free. http://www.freetaxusa.com/
The tax deadline was extended this year to 4/17/12. I hope everybody got theirs in on time. Of note: freetaxusa provides free software for previous years as well as the current tax year.
1/4/2013- Arrgh. I’m getting my paperwork together to file my 2012 return. I’m hoping to get it done early this year. Stay tuned for updates and tips for filing your medical transcription 2012 tax return.