What Taxes Does a New Functional Medicine Practice Pay? A Complete Guide

2026-08-21

New functional medicine practices face federal, state, and local taxes. Learn about income, self-employment, payroll, sales, and property taxes, plus practical steps to stay compliant.

Starting a functional medicine practice brings clinical challenges, but also a new layer of financial obligations. You will owe several types of taxes, from federal income tax to state and local levies. This guide breaks down the specific taxes you can expect, with realistic 2026 figures, and gives you concrete steps to handle them without surprises.

Federal Income Tax

Your practice’s legal structure determines how you pay federal income tax. Most new functional medicine practices choose an LLC or S-corporation.

Sole proprietorship or single-member LLC: You report business income on your personal tax return (Form 1040, Schedule C). You pay income tax at your individual rate, which ranges from 10% to 37% for 2026. The average effective rate for a practice owner earning $150,000 is roughly 20% to 25%.
Partnership or multi-member LLC: The practice files an informational return (Form 1065), but profits pass through to partners, who pay tax on their share.
S-corporation: You must pay yourself a reasonable salary, subject to payroll taxes, and the remaining profits pass through to your personal return. This can save on self-employment tax, but adds administrative costs.

You must make estimated quarterly payments if you expect to owe more than $1,000 in tax. For 2026, the IRS requires payments by April 15, June 15, September 15, and January 15 of the following year. Underpaying can trigger penalties, so set aside 25% to 30% of your net income for taxes.

Self-Employment Tax

If you are a sole proprietor, partner, or LLC member (not taxed as an S-corp), you pay self-employment tax. This covers Social Security and Medicare, and the rate is 15.3% of your net earnings. That breaks down to 12.4% for Social Security and 2.9% for Medicare. For 2026, the Social Security wage base is $176,100, so earnings above that are only subject to the 2.9% Medicare portion. You can deduct the employer half of this tax when calculating your adjusted gross income.

For a functional medicine practice earning $100,000 in net profit, self-employment tax alone is about $15,300. This is on top of income tax, so plan accordingly.

Payroll Taxes

If you have employees, including yourself if you are an S-corp, you must handle payroll taxes.

Federal income tax withholding: You withhold from each employee’s paycheck based on their W-4.
Social Security and Medicare (FICA): You and your employee each pay 7.65% (6.2% Social Security, 1.45% Medicare). The employer share is a deductible business expense.
Federal unemployment tax (FUTA): You pay 6% on the first $7,000 of each employee’s wages, but you usually get a credit for state unemployment taxes, reducing the effective rate to 0.6%.
State payroll taxes: Most states have their own unemployment insurance and disability taxes. Rates vary, but budget 2% to 5% of payroll for state unemployment.

You must file quarterly payroll tax returns (Form 941) and deposit taxes on a semiweekly or monthly schedule. Many new practices use a payroll service like Gusto or ADP, which costs $40 to $100 per month plus per-employee fees.

State and Local Income Taxes

Most states impose their own income tax on your practice’s profits. Rates vary widely:

No state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Flat rate states: Colorado (4.4%), Illinois (4.95%), Indiana (3.05%), Massachusetts (5%), Michigan (4.25%), North Carolina (4.5%), Pennsylvania (3.07%), and Utah (4.65%).
Progressive states: California (1% to 13.3%), New York (4% to 10.9%), New Jersey (1.4% to 10.75%), and Oregon (4.75% to 9.9%).

Some cities also levy local income taxes, such as New York City (up to 3.876%) and Philadelphia (3.75%). Check your state’s department of revenue website for specific rates and filing requirements.

Sales Tax on Services and Products

Functional medicine practices often sell supplements, lab tests, and other products. Whether you collect sales tax depends on your state’s rules.

Services: Most states do not tax professional medical services, but some do. For example, Connecticut taxes certain alternative medicine services. Check your state’s list of taxable services.
Products: Supplements, vitamins, and over-the-counter items are generally taxable, but some states exempt items sold by licensed practitioners. For instance, Texas exempts supplements prescribed by a practitioner, while California taxes them.

If you sell products, you must register for a sales tax permit, collect tax at the point of sale, and file returns monthly, quarterly, or annually. Rates range from 0% to 9.5% depending on state and local jurisdictions. For 2026, the average combined state and local rate is about 6.5%.

Property Tax

If you own your practice building, you pay property tax on the real estate. Rates vary by location, but typical effective rates range from 0.5% to 2.5% of the property’s assessed value. If you lease, you may still pay personal property tax on equipment and furniture, but many states exempt small businesses. Check with your county assessor.

Excise Taxes

Some practices may owe excise taxes, such as the federal tax on certain medical devices (2.3% of the sale price, but this is suspended through 2030). You are unlikely to face this unless you manufacture devices. If you sell tobacco or alcohol products, you would owe excise tax, but that is rare in functional medicine.

Practical Steps for This Week

Determine your filing structure: If you haven’t already, decide between sole proprietorship, LLC, or S-corp. Consult a CPA who works with healthcare practices.
Open a separate business bank account: This simplifies tracking income and expenses for tax purposes.
Set up a bookkeeping system: Use software like QuickBooks or Xero, or hire a bookkeeper. Track all income and expenses from day one.
Register for state taxes: Visit your state’s revenue department website to register for sales tax (if applicable) and unemployment insurance.
Create a tax savings account: Transfer 25% to 30% of every deposit into a separate savings account for quarterly estimated taxes.
Schedule a meeting with a tax professional: A CPA or enrolled agent can help you plan for quarterly payments and identify deductions specific to functional medicine, such as continuing education, lab equipment, and home office expenses.

FAQ

Q: Do I need to charge sales tax on supplements I sell in my practice? A: It depends on your state. Some states exempt supplements sold by licensed practitioners, while others tax them. Check your state’s department of revenue or consult a tax advisor.

Q: Can I deduct my functional medicine certification courses? A: Yes, continuing education expenses directly related to your practice are deductible as business expenses, as long as they maintain or improve skills required in your current business.

Q: What is the penalty for missing a quarterly estimated tax payment? A: The IRS charges interest on underpayments, and the rate for 2026 is around 7% per year, compounded daily. You may also face a penalty of 0.5% per month on the unpaid amount, up to 25%.

Q: Should I form an S-corp to save on self-employment tax? A: Possibly, if your net income exceeds $50,000 to $60,000. An S-corp lets you split income between salary (subject to payroll taxes) and distributions (not subject to self-employment tax). However, you must pay yourself a reasonable salary, and payroll processing adds costs. Run the numbers with a CPA.

The Bottom Line

A new functional medicine practice faces federal income tax, self-employment tax, payroll taxes (if you have employees), state and local income taxes, sales tax on products, and possibly property tax. The total tax burden can range from 30% to 50% of your net income, depending on your structure and location. Start by setting up solid bookkeeping, making estimated payments, and working with a tax professional who understands healthcare practices. Taking these steps now will prevent costly surprises at tax time and keep your practice financially healthy.