Tax Requirements for a Private Practice Therapist

Navigating the financial landscape of a private therapy practice requires skills separate from clinical work. For many therapists, becoming a business owner means confronting the complexities of the United States tax system for the first time. Understanding your obligations is fundamental to maintaining a compliant and financially healthy practice.

Establishing Your Business’s Tax Identity

The initial decision of how to structure your therapy practice is a foundational step with significant tax implications. The simplest structure is the sole proprietorship. For tax purposes, a sole proprietorship is not a separate entity from its owner; the business’s income and expenses are reported directly on the therapist’s personal tax return. This is accomplished by filing Schedule C, “Profit or Loss from Business,” along with your standard Form 1040.

Many therapists form a Limited Liability Company (LLC) to gain legal protection for their personal assets. For federal tax purposes, the IRS considers a single-member LLC a “disregarded entity” by default, meaning it is taxed like a sole proprietorship. The therapist reports all business income and expenses on Schedule C, and the LLC itself does not pay a separate federal income tax. This structure offers the liability protection of a corporation while retaining tax simplicity.

A more complex option is electing for an LLC to be taxed as an S Corporation (S Corp). This election, made by filing Form 2553, changes how the owner is compensated and taxed. Under an S Corp structure, the therapist must be paid a “reasonable salary” as an employee of the business. This salary is subject to standard employee payroll taxes, paid by both the employee and the business.

The remaining profits can then be distributed to the owner as dividends, which are not subject to self-employment taxes. The IRS requires that the salary paid be “reasonable” for the services provided, and it is important to document how the salary figure was determined.

Common Tax Deductions for Therapists

A significant part of managing your practice’s finances involves identifying and tracking deductible business expenses. These are the ordinary and necessary costs incurred in running your practice, which can be subtracted from your gross income to determine your taxable net profit.

A deduction available to therapists with pass-through businesses like sole proprietorships and LLCs is the Qualified Business Income (QBI) deduction. This allows for a deduction of up to 20% of qualified business income, which can lower your taxable income. The rules for this deduction are complex and have income limitations. This deduction is scheduled to expire after 2025 unless Congress extends it.

Other common deductions include:

• Office Costs: The cost of rent for your commercial office space, along with associated utilities like electricity, water, and internet service.
• Professional Requirements: Fees you pay for state licensure renewal and board certifications, as well as premiums for professional liability insurance.
• Continuing Education: The costs associated with workshops, seminars, and conferences that improve your expertise, plus subscriptions to professional journals.
• Supplies: Clinical supplies such as therapeutic workbooks or assessment tools, and general office supplies like paper and printer ink.
• Marketing and Development: Expenses for website hosting, listing fees for professional directories, business cards, and advertising.
• Technology: Subscription fees for Electronic Health Record (EHR) systems, billing software, and telehealth platforms.
• Bank and Professional Fees: Bank fees associated with a business checking account, credit card processing fees, and fees paid to accountants or lawyers for professional services.
• Business Travel: The costs of transportation and lodging when you travel for business, such as attending an out-of-town conference.

For therapists who work from home, the home office deduction allows for a portion of home expenses to be written off. The IRS provides two methods: the simplified option and the actual expense method. The simplified method allows a standard deduction of $5 per square foot, up to a maximum of 300 square feet. The actual expense method involves deducting a percentage of actual home costs, such as mortgage interest and insurance, based on the portion of your home used for business. To qualify, the space must be used exclusively and regularly for your business.

Understanding and Paying Self-Employment and Income Taxes

As a self-employed individual, you are responsible for paying your own Social Security and Medicare taxes, known as self-employment tax. This is the equivalent of the FICA taxes withheld from an employee’s paycheck. The self-employment tax is calculated on 92.35% of your net earnings from self-employment at a rate of 15.3%. For 2025, the 12.4% Social Security portion applies to the first $176,100 of net earnings, while the 2.9% Medicare portion applies to all earnings.

In addition to self-employment tax, you must pay federal income tax on the net profits of your practice. Your business profit is added to any other income you may have to determine your total taxable income for the year. This total income is then taxed at the applicable federal income tax rates.

Because taxes are not automatically withheld from your income, you are required to pay these taxes throughout the year in the form of quarterly estimated tax payments. These payments are necessary if you expect to owe at least $1,000 in tax for the year. This system helps you pay your tax liability as you earn income, avoiding a large bill and potential penalties when you file your annual return.

For the 2025 tax year, the deadlines for these quarterly payments are April 15, 2025; June 16, 2025; September 15, 2025; and January 15, 2026. To calculate your payment amount, you can estimate your income and deductions for the current year or use your previous year’s tax liability as a “safe harbor” to avoid underpayment penalties. Form 1040-ES can help you calculate and make these payments.

Key Tax Forms and Recordkeeping Practices

Properly filing your taxes begins with gathering a summary of your total gross income and a categorized list of all your business expenses from the year.

The primary tax form for sole proprietors and single-member LLCs is Schedule C (Form 1040), Profit or Loss from Business. On this form, you report your gross income and list deductible expenses by category to determine your net profit or loss. This final figure is then carried over to your personal Form 1040. Another key form is Form 1040-ES, Estimated Tax for Individuals, used to make your quarterly payments.

Meticulous recordkeeping is essential for substantiating the figures you report on your tax forms. It is highly recommended that you maintain a separate bank account and credit card for your business. This practice creates a clear distinction between your business and personal finances, simplifying the process of tracking income and expenses. Using accounting software can further streamline this process.

You must keep all receipts, invoices, and bank statements related to your business expenses, stored either physically or digitally. These must be available to support your deductions in the event of an IRS audit. For expenses like business mileage, maintain a log that details the date, mileage, and business purpose of each trip.