How to Handle Your Private Practice Taxes

Operating a private practice provides professionals with autonomy, but it also introduces tax responsibilities that are different from those of a traditional employee. The tax rules shift from the familiar W-2 withholding system to a framework where the owner is directly responsible for calculating and paying their own taxes. This requires a proactive approach to financial planning and record-keeping throughout the year to ensure compliance and avoid potential penalties.

Choosing Your Business Structure for Tax Purposes

The initial decision of how to structure a private practice is a foundational element that dictates how taxes are handled. The simplest structure is the sole proprietorship, where the business is not legally separate from its owner. For tax purposes, all business income and losses are reported on the owner’s personal tax return using Schedule C (Form 1040). This structure is straightforward, but it means the owner’s personal assets are not protected from business liabilities, and all net earnings are subject to self-employment taxes.

A partnership operates similarly to a sole proprietorship but involves two or more owners. The partnership itself does not pay income tax; instead, it files an information return, Form 1065. The profits and losses are “passed through” to the partners and reported on their personal tax returns, based on the share outlined in the partnership agreement. Each partner then pays income and self-employment taxes on their share of the income.

A Limited Liability Company (LLC) offers a more flexible approach, combining the liability protection of a corporation with the tax efficiencies of a pass-through entity. By default, a single-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership. However, an LLC can elect to be taxed as an S corporation by filing Form 2553.

The S corporation, or S corp, is a popular choice for established private practices. The primary difference from other structures lies in how owner compensation is treated. S corp owners must pay themselves a “reasonable salary,” which is subject to standard payroll taxes like Social Security and Medicare. Any remaining profits can be distributed as dividends, which are not subject to self-employment taxes, potentially leading to tax savings.

Understanding Your Core Tax Obligations

Regardless of the business structure chosen, owners of a private practice are responsible for several core federal tax obligations. The primary responsibility is paying federal income tax on the net earnings of the business. The amount of tax due is calculated based on the individual’s total taxable income and is subject to the applicable marginal tax rates.

A significant obligation for practice owners is the self-employment tax. This tax is levied on the net earnings of the business and is composed of two parts: a 12.4% tax for Social Security on the first $176,100 of earnings for 2025, and a 2.9% tax for Medicare with no income limit. Unlike traditional employment where the employer and employee split these taxes, a self-employed individual is responsible for the entire amount. High-income owners may also be subject to an Additional Medicare Tax of 0.9% on earnings over certain thresholds.

One benefit of the self-employment tax system is that the payer can deduct one-half of their self-employment tax when calculating their adjusted gross income (AGI). This deduction is an adjustment to income, meaning it can be taken even if the taxpayer does not itemize deductions.

While federal taxes are a primary concern, practice owners must also be aware of their state and local tax responsibilities. Most states have their own income tax systems, and the rules for how business income is taxed can vary. Some localities may also impose their own income or business taxes.

Identifying Deductible Business Expenses

Accurately identifying and documenting all deductible business expenses is an important part of managing a private practice’s tax liability. The Internal Revenue Service (IRS) allows business owners to deduct expenses that are both “ordinary and necessary” for their business. These deductions reduce the practice’s net income, which lowers the amount of income and self-employment tax owed. Keeping meticulous records is a requirement for substantiating deductions in the event of an IRS audit.

Office expenses are a common category of deductions. This includes the cost of renting office space, as well as utilities such as electricity, water, and internet service. For practitioners who operate their business from home, a portion of home expenses may be deductible through the home office deduction. This deduction has strict requirements, including that the space must be used exclusively and regularly for business purposes.

Professional costs are another significant area for deductions. These include annual licensing and registration fees, malpractice and liability insurance premiums, continuing education courses, industry publications, and professional memberships.

For practices with employees, the salaries, wages, and benefits paid to staff are deductible expenses, including contributions to employee retirement plans and the employer’s share of payroll taxes. Marketing and advertising costs incurred to promote the practice are also fully deductible. Business-related travel and meals may also be deductible, though they are subject to specific limitations and documentation requirements.

A valuable deduction for many private practice owners is the Qualified Business Income (QBI) deduction. This allows eligible owners of pass-through businesses to deduct up to 20% of their qualified business income. The deduction is subject to limitations for professional practices, which are considered “specified service trades or businesses.” For these businesses, the deduction begins to phase out for taxable incomes above $197,300 for single filers and $394,600 for joint filers in 2025. Under current law, the QBI deduction is set to expire after the 2025 tax year.

Making Quarterly Estimated Tax Payments

Private practice owners are required to pay their taxes throughout the year in the form of quarterly estimated tax payments. These payments cover both federal income tax and self-employment tax. Failure to pay enough tax throughout the year can result in underpayment penalties. The IRS has established four due dates for these payments:

• For income from January 1 to March 31, the due date is April 15.
• For income from April 1 to May 31, the due date is June 16, 2025.
• For income from June 1 to August 31, the due date is September 15.
• For income from September 1 to December 31, the due date is January 15 of the following year.

To calculate each quarterly payment, practice owners must estimate their total expected income for the year and subtract any anticipated deductions and credits to find their expected tax liability. This total amount is divided by four to determine each payment. Tax software or the worksheet in Form 1040-ES can assist with this calculation.

Payments can be made by mailing a check with a voucher from Form 1040-ES. The IRS also offers online payment portals, including IRS Direct Pay and the Electronic Federal Tax Payment System (EFTPS), for making payments directly from a bank account.

Tax-Advantaged Retirement Planning

Private practice owners have access to several tax-advantaged retirement plans that can help them save for the future while reducing their current tax burden. Contributions made to these plans are generally tax-deductible, which lowers the practice’s taxable income. The earnings in these accounts also grow tax-deferred until they are withdrawn in retirement.

One popular option is the Simplified Employee Pension (SEP) IRA. A SEP IRA is relatively easy to set up and maintain, and it allows for significant contribution flexibility. For the self-employed, contributions are limited to 20% of net earnings from self-employment, up to a maximum of $70,000 for 2025. Contributions are not required every year, which is beneficial for practices with fluctuating income.

Another choice is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. This plan is suitable for practices with a small number of employees and involves both employer and employee contributions. A SIMPLE IRA can be an effective way to offer a retirement benefit to employees while also saving for the owner’s retirement.

For self-employed individuals with no employees other than a spouse, the Solo 401(k) is a useful retirement savings tool. This plan allows the owner to contribute as both the “employee” and the “employer.” For 2025, an owner can contribute up to $23,500 as an employee, plus an employer contribution of up to 25% of their compensation. Total contributions cannot exceed $70,000 for the year, though those age 50 and over can make an additional catch-up contribution. The Solo 401(k) can also be established with a loan provision.