Tax Basics for Therapists in Private Practice
Running a private therapy practice brings tax decisions that an employer once handled for you. How the practice is taxed, when you make payments, and which retirement plan you use can affect both your tax bill and your cash flow. The best choices depend on your profit, your household income, and whether you have employees.
Schedule C or S corporation?
A sole proprietor or a single-member LLC that hasn't elected corporate tax treatment generally reports practice income and expenses on Schedule C. Net profit is subject to income tax and generally to self-employment tax.
Self-employment tax is generally calculated on 92.35% of net profit. It includes a 12.4% Social Security component and a 2.9% Medicare component. For 2026, the Social Security limit is $184,500 of covered earnings, taking wages from other employment into account. Medicare has no earnings cap.
An additional 0.9% Medicare tax can apply to combined Medicare wages and self-employment income above $200,000 for single and head-of-household filers, $250,000 for married couples filing jointly, or $125,000 for married people filing separately.
With an S corporation, an owner who works in the practice must receive reasonable compensation for that work. Remaining distributions generally aren't subject to self-employment tax. Reasonable pay depends on your duties, hours, qualifications, and comparable pay. The IRS can treat distributions as wages when compensation is too low.
An S-corp election is worth considering when the practice can support reasonable pay for your work and still leave enough profit to justify the added costs. Payroll, a separate corporate return, and other administrative work reduce the savings. Profit alone doesn't establish that the election will help, particularly in a solo practice where the owner provides most of the services.
The qualified business income deduction
Clinical mental health practices generally fall within the health-field rules for a specified service trade or business. That classification matters for the qualified business income, or QBI, deduction, which can be up to 20% of qualifying business income.
For 2026, the deduction attributable to the practice begins to phase out above the first amount below and reaches zero at the second. These limits use taxable income before the QBI deduction, not practice revenue or profit alone.
| Filing status | Phaseout starts above | Practice deduction reaches zero |
|---|---|---|
| Married filing jointly | $403,500 | $553,500 |
| Married filing separately | $201,775 | $276,775 |
| All other returns | $201,750 | $276,750 |
The deduction has other limits, and S-corp wages aren't QBI. Include its effect when comparing business tax structures.
Estimated payments when insurance receipts vary
Practice income often arrives without tax withholding. Federal estimated payments may be required in April, June, September, and January. An underpayment penalty can apply even if you pay the remaining balance when you file.
Generally, timely estimated payments and withholding should cover the smaller of 90% of the current year's tax or 100% of the prior year's tax. The prior-year amount increases to 110% if prior-year adjusted gross income exceeded $150,000, or $75,000 when filing separately.
The prior-year calculation generally requires that you filed a return covering a full 12 months. A separate exception can apply if you had no prior-year tax liability, your prior tax year covered 12 months, and you were a U.S. citizen or resident for that entire year. Estimated payments generally aren't required when your current-year tax after wage withholding is less than $1,000.
When insurance collections vary substantially, the annualized-income method may reduce the payment required for a particular period. It calculates payments using income earned through each period instead of assuming income arrives evenly.
A separate tax savings account can help with cash flow. Base the amount you set aside on projected practice profit, household income, withholding, and federal, state, and local taxes. Revisit the projection when collections or expenses change.
Deductions for the practice
Ordinary and necessary practice expenses generally include license renewals, professional association dues, electronic health record and telehealth subscriptions, malpractice insurance, and qualifying supervision or consultation fees. Personal expenses and nondeductible portions of dues must be excluded.
Continuing education can qualify when it maintains or improves skills used in your current work or is required to keep your existing license or position. Education that meets minimum entry requirements or qualifies you for a new trade or business doesn't qualify for this business deduction.
For a sole proprietor, a home office generally needs regular and exclusive business use plus a qualifying business purpose, such as serving as the principal place of business. An office used for administration can qualify when there is no other fixed location where you perform substantial administrative or management work. Using a room for telehealth alone doesn't settle the question. An S-corp owner generally handles qualifying home-office costs through reimbursement by the corporation under an accountable plan, which requires a business connection and substantiation, rather than a Schedule C home-office deduction.
Commercial office rent and business utilities are generally deductible. Furniture and equipment may be deducted immediately under an applicable expensing rule or recovered through depreciation. The business purpose, business-use portion, and supporting records matter.
Retirement plans, including the solo 401(k)
A retirement plan can reduce current taxable income while helping you save. The available contribution depends on eligible earnings, the plan's terms, and contributions to other plans. Roth contributions don't provide a current deduction.
A SEP IRA generally permits employer contributions up to 25% of eligible employee compensation, subject to the annual limit. A sole proprietor uses a special calculation, generally up to 20% of net business earnings after subtracting the deductible part of self-employment tax. The 2026 annual contribution limit is $72,000.
A solo 401(k) can allow larger contributions at moderate income because it permits employee deferrals as well as employer contributions. Deferrals still cannot exceed eligible compensation or self-employment earnings.
| Contribution | Annual limit |
|---|---|
| Regular employee deferral | $24,500 |
| Total regular employee and employer contributions | $72,000 |
| Additional catch-up at age 50 or older | $8,000 |
| Higher catch-up for ages 60 through 63 | $11,250 instead of $8,000 |
These are maximums, subject to sufficient eligible earnings and the plan's rules. The employee deferral limit generally applies across your plans, including a 401(k) or 403(b) at another job. The $72,000 regular limit excludes permitted catch-up contributions.
Starting in 2026, catch-up contributions generally must be Roth contributions if your prior-year wages subject to Social Security tax from the employer sponsoring the plan exceeded $150,000. This can affect a therapist paid through an S corporation and changes whether the catch-up reduces current taxable income.
A solo 401(k) generally covers the business owner, or the owner and spouse. Hiring staff can change the plan's obligations. Eligible employees must be included, and long-term part-time employees can become eligible to make deferrals. Employees of related businesses can also affect the coverage requirements. A group practice may consider a standard 401(k), including a safe-harbor design, among its options.
For questions about plan features and administration, see our guide on how to choose a solo 401(k) provider.
Plan before the deadlines
An S-corp election is generally due no later than two months and 15 days after the beginning of the tax year it will cover, or it can be filed during the preceding tax year. For an existing calendar-year practice, that usually means March 15, adjusted for weekends and holidays. A new entity's first-year deadline can differ, and late-election relief may be available.
Retirement-plan adoption, contribution elections, and funding can have different deadlines. Some actions must happen before year-end, while others can wait until a tax-return deadline. Confirm the requirements for the specific plan before relying on a deduction.
Reviewing these choices during the year gives you time to adjust estimated payments, compare entity options, and choose a retirement contribution that fits the practice's cash flow.
Learn more about our services on the mental health practitioners page, or reach out to Schultz CPA, LLC to discuss your practice's tax planning.
This article provides general information for U.S. taxpayers. Tax treatment depends on your practice and household circumstances. It is not individualized tax, legal, or investment advice.