March 3, 2026
13 min read
By Albert Wong, PhD · Clinical Psychologist
What Your Accountant Wishes You Knew: Tax Strategy for Solo Therapists
A solo therapist in private practice owes self-employment tax (15.3% on most net earnings) on top of federal and state income tax, and nobody withholds any of it. The four habits that prevent a painful April: set aside part of every deposit, pay quarterly estimated taxes, claim the business deductions you're entitled to, and contribute to a self-employed retirement plan. An S-corp election can lower self-employment tax once profit is steady, but it adds cost and paperwork, so have a CPA run your numbers first.
The first-year checklist
- Open a separate business checking account and run every practice dollar through it.
- Move a fixed share of each deposit into a separate “taxes” savings account. Many CPAs suggest starting around 25–35% of profit and adjusting once you see a real return.
- Put the four estimated-tax due dates (table below) on your calendar with reminders.
- Pick bookkeeping software and categorize expenses monthly, not in March.
- Photograph receipts as you go and keep a mileage log for business driving.
- Choose a retirement plan (SEP-IRA or Solo 401(k)) before year-end so you know your deadline.
- Book a planning call with a CPA who works with healthcare or solo practitioners.
What you owe as a self-employed therapist
As a W-2 employee at an agency or group practice, your employer withheld income tax from every paycheck and paid half of your Social Security and Medicare. In private practice every dollar a client or insurer pays arrives whole. It looks like more money because, until the tax bill, it is.
Self-employment tax: 15.3%
12.4% for Social Security plus 2.9% for Medicare, charged on 92.35% of your net self-employment earnings. The Social Security part stops at the annual wage base ($184,500 for 2026); the Medicare part does not. You pay both the employer and employee halves, and you can deduct the employer-half when figuring your adjusted gross income.
Federal income tax
Your net practice profit is added to any other household income and taxed at your marginal rate.
State (and sometimes local) income tax
Anywhere from none to a significant share, depending on where you live. Many states also expect quarterly estimates.
Quarterly estimated taxes: the 2026 calendar
With no employer withholding, the IRS expects you to pay during the year. You estimate your annual tax and pay it in four installments with Form 1040-ES (or through IRS Direct Pay or your IRS online account).
| Income earned | Payment due |
|---|---|
| January 1 – March 31, 2026 | April 15, 2026 |
| April 1 – May 31, 2026 | June 15, 2026 |
| June 1 – August 31, 2026 | September 15, 2026 |
| September 1 – December 31, 2026 | January 15, 2027 |
If a due date falls on a weekend or legal holiday, the payment is on time if made the next business day. Your state has its own schedule.
The safe harbor. You generally avoid the federal underpayment penalty if your withholding and estimated payments cover at least 90% of this year's tax or 100% of last year's tax, whichever is smaller. If last year's adjusted gross income was over $150,000 ($75,000 if married filing separately), the prior-year figure is 110% instead of 100%. In practice: if you pay in at least last year's total tax in four even installments, you don't have to predict this year perfectly.
The penalty itself works like interest on the shortfall. The bigger cost is the April surprise: a five-figure bill you don't have in checking. Automatic transfers into a tax savings account the day revenue lands are the simplest fix.
Deductions therapists often miss
Ordinary and necessary business expenses reduce the profit that both income tax and self-employment tax are figured on. Most therapists claim rent, liability insurance, and CE. These are the ones that slip:
- Home office. Space used regularly and exclusively for the practice (telehealth room, admin desk). The simplified method is $5 per square foot, up to 300 square feet. The regular method uses the business share of rent or mortgage interest, utilities, insurance, and repairs.
- Business mileage. For 2026 the IRS standard rate is 72.5 cents a mile for January 1 through June 30 and 76 cents a mile for July 1 through December 31. Commuting from home to your regular office doesn't count; driving between offices, to trainings, or to a school consult generally does. Log date, purpose, and miles.
- Continuing education and training. Workshops, conferences, certification trainings, and related books and travel that maintain or improve skills in your current profession.
- Insurance. Malpractice, general liability, and cyber liability premiums.
- Licenses and dues. License renewals, professional association memberships, specialty certification fees.
- Consultation and supervision you pay for.
- Software. EHR and practice management, bookkeeping, secure email, telehealth.
- Marketing. Directory listings, website hosting, business cards, ads.
- Phone and internet. The business-use percentage.
- Office supplies and furnishings. Tissues, the couch, the white-noise machine, the sand tray.
- Self-employed health insurance. Premiums may be deductible on your personal return if you weren't eligible for an employer-subsidized plan, including through a spouse's job.
Retirement plans that lower this year's tax
Pre-tax contributions to a self-employed retirement plan reduce this year's taxable income and grow tax-deferred. Roth options trade today's deduction for tax-free withdrawals later. The 2026 limits:
| Plan | 2026 contribution limits | Good fit when | Watch for |
|---|---|---|---|
| SEP-IRA | Employer contributions up to 25% of compensation (for a sole proprietor, figured on net earnings after the self-employment tax deduction), capped at $72,000 | You want the simplest setup and little paperwork | If you hire eligible employees, you contribute the same percentage for them |
| Solo 401(k) | Up to $24,500 as an employee deferral plus an employer contribution, $72,000 combined; age 50+ can add $8,000 catch-up ($11,250 at ages 60–63) | You want to shelter the most at moderate income, or want a Roth option; only you (and a spouse) work in the business | Form 5500-EZ is due once plan assets pass $250,000 |
| SIMPLE IRA | Up to $17,000 employee deferral plus a required employer match or contribution | You have a few employees and want one low-cost plan for everyone | Lower ceiling than a Solo 401(k) for a true solo practice |
The deduction is worth your marginal rate. At a combined 29% federal and state marginal rate, for example, a $20,000 pre-tax contribution cuts this year's income tax by about $5,800. Even a small contribution builds the habit.
S-corp election: how it works and when to ask about it
As a sole proprietor (or single-member LLC, by default), all of your profit is subject to self-employment tax. An LLC or corporation can elect S-corp tax treatment by filing IRS Form 2553. You then pay yourself a W-2 salary through payroll, which carries the usual 15.3% payroll taxes, and take the remaining profit as a distribution, which does not.
The arithmetic, with made-up numbers
- Profit $120,000 as a sole proprietor: self-employment tax ≈ $16,955
- Same profit as an S-corp paying a $65,000 salary: payroll taxes on salary ≈ $9,945
- Difference before income-tax effects and added costs: ≈ $7,010
These numbers only show the mechanics. They are not a recommended salary or a threshold. Your actual savings depend on what a defensible salary is for your role and area, plus the added costs below.
The costs and catches:
- Reasonable compensation. The IRS expects S-corp owners who work in the business to pay themselves a salary comparable to what the work is worth. An artificially low salary invites reclassification, back taxes, and penalties.
- Payroll. Payroll service, quarterly payroll filings, and W-2s for yourself.
- A second return. The S-corp files Form 1120-S every year, usually prepared by a CPA.
- State rules. Some states charge entity-level taxes or fees on S-corps.
- Timing. It rarely makes sense in a first year with unpredictable income. Ask a CPA to model it once profit is steady.
Bookkeeping that makes tax season boring
A separate business account
Every practice dollar goes in, every business expense comes out. Commingled funds make your books, and any audit, harder than they need to be.
Bookkeeping software
Free and low-cost options connect to your bank, categorize expenses, and produce a profit-and-loss statement. Knowing your real profit each month is also how you size your estimated payments.
Receipts and logs as you go
Photograph receipts into one folder and keep a mileage log. Reconstructing a year of records in March is where deductions get lost.
Your practice software should make the income side easy to hand over: session revenue, payments, and outstanding balances in one report. If you're still setting your fee, the tax picture above belongs in that math too; see setting your session rate and revenue per session.
When to hire a CPA
You're considering an S-corp election
Entity choice, salary, payroll setup, and the 1120-S are not a DIY project.
Your first year in practice
A planning session early in the year sets your estimated payments and retirement plan before the deadlines, not after.
You received an IRS or state notice
Bring in a CPA, enrolled agent, or tax attorney before you respond. You'd tell a client in crisis to see a professional; take your own advice.
Your time is worth more than the fee
Compare the hours you'd spend on your return with what you earn per clinical hour. For most therapists the math favors a professional.
Look for a CPA who works with therapists or other healthcare solo practitioners; ask colleagues who they use. If you're still setting up the business itself, the guide to starting a private therapy practice covers entity formation, credentialing, and the rest of the checklist.
Keep Your Finances Organized. Keep Your Accountant Happy.
Practice Harbor keeps session billing, payments, and statements in one place, so when tax season arrives you're prepared instead of panicked. Scheduling, documentation, and billing your CPA can actually read, with income and payment reports that export to CSV.
Frequently Asked Questions
How much should a self-employed therapist set aside for taxes?
There is no single right percentage, because it depends on your income, state, and household. Many CPAs suggest starting by moving roughly 25 to 35 percent of profit into a separate tax savings account with every deposit, then adjusting after your first return. Remember that self-employment tax alone is 15.3 percent of 92.35 percent of net earnings, before any income tax. This is general information, not tax advice.
When are quarterly estimated taxes due for 2026?
For the 2026 tax year, federal estimated tax payments are due April 15, 2026, June 15, 2026, September 15, 2026, and January 15, 2027. If a date falls on a weekend or legal holiday, paying the next business day is on time. States set their own schedules.
How do therapists avoid the estimated tax underpayment penalty?
Under the federal safe harbor, you generally avoid the penalty if your withholding and estimated payments cover at least 90 percent of this year’s tax or 100 percent of last year’s tax, whichever is smaller. If last year’s adjusted gross income was over $150,000 ($75,000 married filing separately), the prior-year figure is 110 percent. Confirm with a CPA.
Should a therapist choose a SEP-IRA or a Solo 401(k)?
Both allow up to $72,000 in total contributions for 2026. A SEP-IRA is simpler: employer contributions only, up to 25 percent of compensation. A Solo 401(k) adds an employee deferral of up to $24,500 plus catch-up contributions after 50, so it usually lets a solo therapist with moderate income shelter more, and it can offer a Roth option. A Solo 401(k) is only for businesses with no employees other than the owner and a spouse.
Should a solo therapist elect S-corp status?
Sometimes. An S-corp pays you a reasonable W-2 salary subject to payroll taxes and passes the remaining profit through without self-employment tax, which can save money once profit is steady. It also adds payroll costs, a separate Form 1120-S return, possible state entity taxes, and IRS scrutiny of your salary. Have a CPA model it with your real numbers before filing Form 2553.
Categories: Financial, Tax Planning, Private Practice
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