A therapy practice's books can look fine all year and still fall apart the week the tax preparer asks for them. These are the warning signs we look for first, and each one is cheaper to fix in October than in March.
Tax preparers do not need perfect books. They need books whose numbers they can trust without rebuilding them. For a private practice therapist, the places where that trust breaks are specific and predictable: insurance deposits that were never tied to the EHR, associate pay that sits in the wrong accounts, an S-Corp owner whose payroll does not match the plan, and balance sheet accounts nobody has looked at since they were created. If you want the background on how we run these books month to month, our page on bookkeeping for therapists covers the full approach. What follows is the self-check.
Your P&L revenue does not match your EHR
Pull your EHR's payment or collections report for the year to date and put it next to the revenue on your profit and loss statement. If nobody can explain the difference in a sentence or two, this is the first thing to fix.
The usual cause is that deposits were recorded as revenue exactly as they hit the bank. Card payouts from SimplePractice, TherapyNotes, and similar platforms arrive net of processing fees, so booking the deposit understates revenue and hides the fees. Insurance EFTs often bundle many sessions and dates of service into one payment. Client refunds and payer recoupments land as negative amounts that someone has to classify. None of this changes the practice's cash, but a preparer looking at revenue that matches neither the EHR nor any 1099-K the practice received will start asking questions, and every question is billable time.
The fix is a month-by-month tie-out of the EHR's payment report to the bank, recording gross revenue with processing fees as a separate expense. Done monthly it takes little time. Done for a full year in one sitting it becomes a project.
Insurance payments or EHR payouts are sitting in a holding account
Many practices route deposits through an undeposited funds or clearing account so they can be matched later. That is a sound technique until the matching stops. Look at your balance sheet: if a clearing account, undeposited funds, or an "Ask My Accountant" account carries a balance that has grown all year, revenue or expenses are missing from the P&L, and the preparer cannot tell which. Only genuine month-end timing differences belong in those accounts at year-end.
Associate and contractor pay is scattered or undocumented
If your practice pays other clinicians, look at where that money went in the books. Contractor pay recorded across "professional fees," "consulting," "outside services," and a few Venmo transfers categorized as miscellaneous makes it very hard to produce accurate 1099-NEC forms, and 1099s for the prior year are due to contractors at the end of January. Every contractor should have a W-9 on file, and their payments should land in one contract labor account so the year-end totals come straight out of a report.
If some clinicians are W-2 employees, their pay should come from your payroll provider's reports, with gross wages, employer taxes, and withholdings in their own accounts and the payroll liability accounts clearing to zero after each deposit. A payroll liability balance that only ever grows usually means payroll was recorded as net checks only. We cover how clinician pay should be structured in the ledger in our guide to supervisee billing and comp splits.
You are an S-Corp but your own pay does not look like it
Therapists who elect S-Corp status take on payroll obligations for themselves. Two patterns come up again and again at year-end. The first is an owner who took distributions all year but ran little or no payroll, which leaves the reasonable compensation question unanswered at exactly the point it is hardest to fix. The second is health insurance for the owner paid by the practice but never added to the owner's W-2, which for a shareholder owning more than two percent of an S-Corp is generally required for the deduction to work as intended. Both have to be handled on the payroll side before the year closes.
Whether an S-Corp makes sense for your practice, and what your reasonable compensation should be, are tax questions. For our clients, those are answered by our affiliated CPA firm, PizzelloCPA, PLLC, under its own engagement. The bookkeeping side is making sure payroll actually ran as planned and was recorded correctly. For the concept itself, see What Is Reasonable Compensation for S-Corp Owners?
Personal spending and practice spending share an account
Solo practitioners in particular often start out paying a few practice costs from a personal card, or a few personal costs from the practice account. By year-end the preparer is sorting through a mix of license renewals, CE, groceries, and a streaming subscription and guessing which is which. Anything personal paid from the practice belongs in owner draws or distributions, not an expense account. Anything the practice owes the owner back, such as a practice expense paid personally, should be documented and reimbursed rather than left as an undocumented expense. For an S-Corp owner, reimbursements generally run through an accountable plan, which is worth setting up with your tax preparer.
Therapy-specific costs are lumped together
A tax return does not need every cost split finely, but a preparer does need to know what things are. Credentialing services, clinical supervision you pay for, continuing education, license and board fees, professional liability insurance, EHR and telehealth subscriptions, and office rent are all normal practice costs. When they are lumped into one "professional expenses" line, questions follow: was that payment to a clinician a contractor fee or supervision? Is that monthly charge the EHR or a personal app? Clear categories answer those questions before they are asked.
Home office costs deserve their own mention. Many therapists see telehealth clients from home, and how those costs are treated depends on whether the practice is a sole proprietorship or an S-Corp. The books should keep the underlying costs documented and separate from office rent, and the treatment is a decision for your tax preparer.
You see clients in other states and cannot say how many
Telehealth makes it easy for a practice to serve clients in more than one state, and a tax preparer may ask where clients were located when sessions happened. Whether that creates a state filing obligation is a question for your preparer, and it depends on the states involved. What the books and the EHR can do is make the answer retrievable. If your EHR records client location and you can produce a report of sessions or revenue by client state, you are ready for the question. If not, it is worth setting up now rather than reconstructing a year of sessions later.
Accounts have not been reconciled to their statements
This one applies to every business, but it is still the most common problem we see. Every bank account, credit card, and loan should be reconciled to its statement through December 31. Unreconciled accounts can hide duplicate transactions, missing transactions, and bank feed errors, and a preparer who finds one unreconciled account has to wonder about the others.
What to do if several of these sound familiar
Start with the tie-out of EHR revenue to the bank and the reconciliation of every account, because nearly every other problem becomes visible once those two are done. Then clean up contractor pay and W-9s before January, and get any S-Corp payroll questions to your tax preparer before the last payroll of the year. If the backlog is more than a few months, a one-time catch-up project followed by monthly service is almost always faster than trying to fix a year of books in tax season. Our tax prep checklist lists the documents a preparer will ask for once the books are in order.
Key takeaways. The fastest test of a therapy practice's books is whether P&L revenue ties to the EHR's payment report, with processing fees recorded as an expense. Balances growing in clearing or undeposited funds accounts mean something is missing from the P&L. Contractor pay belongs in one account backed by W-9s so 1099s are straightforward, and payroll liabilities should clear to zero. S-Corp owners need payroll that actually ran as planned, including owner health insurance where it applies, before the year closes. Personal spending belongs in owner draws, and multi-state telehealth revenue should be reportable by client location.
Common questions
What is the first thing to check in a therapy practice's books before tax season?
Whether revenue on the P&L ties to your EHR's payment report for the same period. If it does not, and nobody can explain the difference, the deposits were probably recorded as revenue net of processing fees or with insurance EFTs and refunds misclassified. Fixing that tie-out usually surfaces most of the other problems.
Why does my P&L show less revenue than SimplePractice or TherapyNotes says I collected?
Most often because card payouts were recorded as revenue after processing fees were already deducted, so the fees were never recorded as an expense and revenue is understated by the same amount. Refunds, payer recoupments, and payments that crossed month-end also create differences.
What records do I need for the clinicians I pay as contractors?
A W-9 from each contractor before the first payment, and every payment to them recorded in one contract labor account so the year-end total for their 1099-NEC comes straight out of a report. Whether a clinician can be a contractor at all is a legal question that depends on the working relationship and, for pre-licensed associates, sometimes on state board rules.
I elected S-Corp status. What should my books show by year-end?
Payroll for the owner that actually ran during the year, recorded with wages, employer taxes, and withholdings in the right accounts, and any owner health insurance paid by the practice handled through payroll where it applies. Whether the election makes sense and what your reasonable compensation should be are tax questions; for our clients, PizzelloCPA, PLLC handles them under a separate engagement.
Do I need to track which state my telehealth clients are in?
It is worth being able to report it. Whether seeing clients in another state creates a filing obligation depends on the states involved and is a question for your tax preparer. The practical step is making sure your EHR records client location so revenue by state can be produced if it is asked for.
How far behind is too far to fix before tax season?
A month or two of missed reconciliation can usually be caught up in the normal course. Once the backlog runs to many months, a one-time catch-up project followed by monthly service is typically faster and cheaper than having a tax preparer rebuild the books at their rates during tax season.
Keep reading
For how we keep a therapy practice's books tax-ready all year, see our page on accounting for therapists and group practices and the walkthrough of what monthly bookkeeping does for a therapy practice. If you are still choosing tools, start with the best accounting software for therapists.
Get an honest read on your books
Book a free 30-minute consult. Bring your year-to-date P&L and your EHR's payment report, and we will tell you whether they tie and what would need to happen before your tax preparer sees them.