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How Much Should a New Medical Practice Set Aside for Taxes?

2026-08-21

How Much Should a New Medical Practice Set Aside for Taxes?
Photo: https://kaboompics.com/ / Pexels

Learn how much new medical practices should set aside for taxes, including federal, state, and self-employment rates, with practical steps and examples.

Starting a medical practice brings many financial questions, and taxes are often the most pressing. A common rule of thumb is to set aside 25% to 35% of your net income for taxes, but the exact amount depends on your business structure, location, and revenue. This guide breaks down the numbers and gives you a clear plan to avoid surprises at tax time.

Why 25% to 35% Is a Good Starting Point

For a new medical practice, your tax liability includes federal income tax, state income tax (if applicable), and self-employment tax (Social Security and Medicare) if you are a sole proprietor, partner, or LLC owner. The self-employment tax alone is 15.3% on net earnings up to the Social Security wage base, which is $176,100 in 2026. Federal income tax brackets range from 10% to 37%, but most new practices fall into the 22% to 24% bracket for taxable income after deductions. State rates vary from 0% (in states like Texas and Florida) to over 13% in California.

Here is a simplified example: If your practice nets $150,000 after expenses, and you are a sole proprietor in a state with a 5% income tax, your estimated taxes might look like this:

  • Self-employment tax: 15.3% of $150,000 = $22,950
  • Federal income tax (24% bracket): approximately $36,000
  • State income tax (5%): $7,500
  • Total: $66,450, or 44.3% of net income

That is higher than the 25% to 35% range because the self-employment tax adds a significant burden. If you incorporate as an S-corp and pay yourself a reasonable salary, you can reduce self-employment tax on distributions, but you still need to account for payroll taxes.

How Business Structure Affects Your Tax Rate

Your practice’s legal structure determines how much you pay and when. Here are the common structures and their tax implications:

  • Sole Proprietorship: You report business income on Schedule C. You pay self-employment tax on all net earnings. No separate business tax return.
  • Partnership: Similar to sole proprietorship, but you file Form 1065 and receive a K-1. You pay self-employment tax on your share of income.
  • LLC (single-member or multi-member): Taxed as a sole proprietorship or partnership unless you elect S-corp status. Same self-employment tax rules.
  • S-Corporation: You pay yourself a reasonable salary (subject to payroll taxes) and take distributions that are not subject to self-employment tax. This can save thousands, but requires payroll processing and additional compliance.
  • C-Corporation: The corporation pays a flat 21% federal tax, and you pay personal tax on dividends. This can lead to double taxation, but may be beneficial for large practices.

For a new practice, an S-corp election often reduces self-employment tax, but you must file Form 2553 within 75 days of formation. If you are already operating as a sole proprietor, you can switch later, but plan ahead.

Calculating Your Estimated Tax Payments

The IRS requires quarterly estimated tax payments if you expect to owe more than $1,000 in tax. For new practices, the safe harbor rule is to pay at least 100% of the previous year’s tax liability (or 110% if your adjusted gross income exceeds $150,000). Since you likely had no prior tax liability, you may need to pay based on your current year’s projection.

To calculate your quarterly payment, follow these steps:

  1. Estimate your net income for the year (revenue minus deductible expenses).
  2. Apply your effective tax rate (federal + state + self-employment) to get total tax.
  3. Subtract any credits or withholdings.
  4. Divide by 4 to get each quarterly payment.

For example, if you expect $120,000 net income and your effective rate is 30%, your total tax is $36,000. Each quarter, you pay $9,000. Use Form 1040-ES for individuals or Form 1120-W for corporations.

What Counts as a Deductible Expense

Reducing your taxable income lowers your tax bill. As a medical practice, you can deduct ordinary and necessary expenses, including:

  • Office rent and utilities
  • Medical equipment and supplies
  • Malpractice insurance premiums
  • Staff salaries and benefits
  • Continuing education and licensing fees
  • Marketing and website costs
  • Vehicle expenses (if used for business)
  • Retirement plan contributions (e.g., SEP IRA, 401(k))

Keep meticulous records. Use accounting software like QuickBooks or Xero, and separate business and personal expenses. A certified public accountant (CPA) who specializes in medical practices can help you identify all eligible deductions.

Practical Steps to Take This Week

  1. Open a separate business bank account and transfer 25% to 35% of every deposit into a tax savings account. This creates a buffer.
  2. Set up a bookkeeping system to track income and expenses daily. Use a tool like Bench or QuickBooks.
  3. Consult a CPA to determine your optimal business structure and estimated tax payments. Many offer free initial consultations.
  4. Review your state’s tax requirements at your state’s department of revenue website. Some states require separate estimated payments.
  5. Create a cash flow projection for the next 12 months, including tax payments, to avoid cash shortages.

FAQ

Q: What if I don’t set aside enough and owe more at tax time? A: You will owe penalties and interest on underpayment. The IRS charges about 0.5% per month on the unpaid balance. To avoid this, adjust your quarterly payments as soon as you realize the shortfall.

Q: Can I pay taxes with a credit card? A: Yes, but the IRS charges a processing fee (around 1.85% to 2.9%). It is better to pay from a bank account to avoid fees.

Q: Do I need to pay state taxes if my practice is in a no-income-tax state? A: No, but you may still have franchise taxes or gross receipts taxes. Check your state’s rules.

Q: How long should I keep tax records? A: Keep records for at least 7 years, as the IRS can audit returns up to 6 years after filing.

The Bottom Line

Set aside 25% to 35% of your net income for taxes, but recalculate quarterly based on actual revenue. Use an S-corp if it makes sense, track deductions diligently, and work with a CPA to stay compliant. Start your tax savings account today, and you will avoid the stress of a large tax bill next April.