Owning a private practice requires you to wear many hats, and that means managing your taxes and finances effectively. Even if you’re working with a tax advisor, understanding the tax implications of operating your practice will help you make wiser decisions throughout the year that can lessen the tax burden your business faces. Here’s what you need to know.
If you operate as a sole proprietorship, LLC, or as an S-Corporation the amount of money you take out of the business as your salary each year will be subject to self-employment tax. Self-employment tax can add up to a substantial amount.
As of 2023, the self-employment tax rate is 15.3%, which covers the Social Security and Medicare contributions that an employer would make on your behalf if you were a W-2 employee of someone else’s business. Since you’re both an owner and employee in the above situations, you must pay this portion yourself.
Self-employment tax is owed in addition to the state and federal personal income tax you pay each year. That’s why failing to plan for self-employment tax could totally blindside you, so it’s important to make sure you’re budgeting enough for your tax bill.
The IRS expects you to make quarterly estimated tax payments as a self-employed individual, which makes you estimate your tax burden for the year and make a proportional payment every quarter based on that estimate. Any excess will be refunded to you in April. If you owe more than you estimated, the amount will be due when you file your return. If you don’t pay quarterly estimated taxes, you’ll be subject to a small fine when you file your taxes.
If you run a payroll — which includes a situation where you have a C-Corp or S-Corp that pays your salary — you must pay two small additional taxes known as FUTA (Federal Unemployment Tax) and SUTA (State Unemployment Tax).
To avoid excess forms, you can outsource your payroll management to a dedicated service that handles it for you. They will pay the taxes on your behalf and ensure that you (and any other employees) get paid the right amount on time. While it comes at a small fee, this service is often worth the convenience, especially for a busy private practice owner.
If you have formed an LLC that you have elected to be taxed as a C-Corp or if you have formed a corporation that is taxed as a C-Corp, you must pay corporate taxes on your business income. The corporate status will also require you to file information returns with the IRS that report your annual income, losses, dividends, and other numbers.
Currently, the corporate tax rate is set to a maximum of 21%. This is why some private practice owners opt to form a C-Corporation because the personal income tax rate currently maxes out at 37%. If you are in a higher income tax bracket, forming a C-Corporation can reduce your tax burden. However, there are other considerations to keep in mind.
Important Tax Deductions
As a savvy business owner, looking for legal ways to reduce your tax burden is an important step in maximizing your earnings. Fortunately, there are a number of deductions you may be able to take on both the individual and corporate levels. Some of the most common deductions for private practice owners include:
- Up to 20% of their qualified business income with the QBI deduction.
- Professional organization fees.
- The cost of education and conferences.
- Software used to run the business and handle accounting.
- Office expenses, including the cost of maintaining a home office.
If you’re unsure which deductions you qualify for, it’s a good idea to reach out to a tax advisor for more information.