What Taxes Does a New Medical Practice Pay? A Complete Guide

2026-08-21

Learn the federal, state, and local taxes new medical practices must pay, including income, payroll, and sales tax, with practical steps to stay compliant.

Starting a medical practice brings clinical challenges, but also a new set of financial obligations. Taxes are a major part of that. This guide answers the question directly: what taxes does a new medical practice pay? You will pay federal income tax, self-employment or payroll taxes, state income tax, and possibly sales tax, property tax, and local taxes. The exact amounts depend on your business structure, location, and revenue. Here is a concrete breakdown to help you plan and avoid surprises.

Federal Income Tax

Your practice’s federal income tax obligation depends on its legal structure. Most new medical practices choose either an S corporation or a limited liability company (LLC) taxed as an S corp, because these structures help owners save on self-employment taxes. However, some start as sole proprietorships or partnerships.

S corporation: The practice files Form 1120-S. Profits and losses pass through to owners, who report them on their personal tax returns. Owners pay income tax at their individual rates, which range from 10% to 37% for 2026. The practice itself does not pay federal income tax, but owners must pay themselves a reasonable salary, which is subject to payroll taxes.
LLC taxed as a partnership (default for multi-member LLCs): Files Form 1065. Owners receive Schedule K-1 and pay income tax on their share of profits. They also pay self-employment tax on that income.
Sole proprietorship: You report business income on Schedule C of your personal return. You pay income tax and self-employment tax on all net profits.

For 2026, the corporate tax rate for C corporations is 21%, but most medical practices avoid C corp status because of double taxation. If you are unsure, consult a CPA who specializes in medical practices.

Self-Employment and Payroll Taxes

If you are self-employed (sole proprietor, partner, or LLC owner not taxed as an S corp), you pay self-employment tax, which covers Social Security and Medicare. The rate is 15.3% on net earnings up to the Social Security wage base ($176,100 in 2026), plus 2.9% Medicare tax on all earnings above that. If your income exceeds $200,000 (single) or $250,000 (married filing jointly), you also pay an additional 0.9% Medicare surtax.

If you form an S corp, you must pay yourself a reasonable salary. That salary is subject to payroll taxes: 6.2% Social Security and 1.45% Medicare from you as the employee, and the same amounts from the practice as the employer. The practice also pays federal unemployment tax (FUTA), which is 6% on the first $7,000 of each employee’s wages, but you get a credit for state unemployment taxes, often reducing the effective rate to 0.6%.

If you have employees, you must withhold income tax, Social Security, and Medicare from their paychecks and remit these to the IRS. You also pay the employer’s share of Social Security and Medicare. Use a payroll service or software to handle this accurately.

State Income Tax

Most states impose a state income tax on business profits. Rates vary widely:

No state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Flat tax states: For example, Colorado (4.55%), Illinois (4.95%), Indiana (3.05%), Massachusetts (5%), Michigan (4.25%), North Carolina (4.75%), Pennsylvania (3.07%), and Utah (4.85%).
Progressive tax 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 states also have a franchise tax or gross receipts tax. For example, Texas has a franchise tax (0.375% for retail/wholesale, 0.75% for most other businesses), and Washington has a business and occupation tax (ranging from 0.471% to 1.5% depending on the business type). Check with your state’s department of revenue for specific rates and filing requirements.

Sales Tax

Medical practices generally do not charge sales tax on professional services, but you may owe sales tax on retail sales of products. For example, if you sell over-the-counter items, durable medical equipment, or supplements, you may need to collect and remit sales tax. Each state has its own rules. For instance, in California, most medical services are exempt, but sales of tangible goods are taxable. In New York, certain medical supplies are exempt, but others are not. Register for a sales tax permit if you plan to sell any products, and check your state’s guidelines.

Property Tax

If you own the building where your practice operates, you will pay property tax on the real estate. The rate varies by county and city, typically ranging from 0.5% to 2.5% of the assessed value. If you lease, you may still pay property tax indirectly through your rent, as landlords often pass on these costs. You may also pay personal property tax on equipment, furniture, and computers, depending on your state. For example, Texas has a personal property tax on business assets, while California does not.

Local Taxes

Some cities and counties impose additional taxes on businesses. These can include:

Business license tax: A flat fee or a percentage of gross receipts. For example, Los Angeles charges $0.275 per $1,000 of gross receipts, with a minimum of $50. New York City has a general corporation tax of 8.85% on net income.
Gross receipts tax: Some municipalities, like San Francisco, have a gross receipts tax that ranges from 0.1% to 0.6% depending on the business type.
Occupational taxes: Some states, like Kentucky, have an occupational tax on wages earned in certain counties.

Check with your local city or county government to see what taxes apply to your practice.

Estimated Quarterly Payments

Because taxes are pay-as-you-go, you must make estimated quarterly payments to the IRS and your state if you expect to owe more than $1,000 in federal taxes. The due dates are April 15, June 15, September 15, and January 15 of the following year. Use Form 1040-ES for individuals and Form 1120-W for corporations. If you are an S corp, you may need to make payroll tax deposits more frequently, depending on your payroll amount.

To avoid penalties, pay at least 90% of your current year’s tax liability or 100% of the previous year’s liability (110% if your adjusted gross income exceeds $150,000). A CPA can help you calculate the right amount.

Tax Deductions for Medical Practices

You can reduce your taxable income by deducting legitimate business expenses. Common deductions for medical practices include:

Office rent and utilities
Medical equipment and supplies (including depreciation)
Staff salaries and benefits
Malpractice insurance premiums
Continuing medical education (CME) costs
Professional dues and subscriptions
Software and technology (EMR, billing software)
Marketing and advertising
Vehicle expenses (if used for business)
Retirement plan contributions

Keep detailed records and receipts. Work with a tax professional to ensure you capture all eligible deductions.

Practical Steps to Take This Week

Choose your business structure if you haven’t already. Consult a CPA to determine if an S corp is right for you.
Apply for an Employer Identification Number (EIN) from the IRS. It’s free and required for most practices.
Register with your state for income tax, sales tax (if applicable), and any local business licenses.
Set up a payroll system if you have employees or plan to hire soon. Consider using a service like Gusto or ADP.
Open a separate business bank account to keep finances clean and simplify tax preparation.
Schedule a meeting with a tax advisor who specializes in medical practices to create a tax strategy.

FAQ

Q: Do I have to pay self-employment tax if I form an S corp? A: No, but you must pay yourself a reasonable salary, which is subject to payroll taxes. The remaining profits are not subject to self-employment tax, which is a key advantage of the S corp structure.

Q: Can I deduct the cost of my medical license and board certifications? A: Yes, these are ordinary and necessary expenses for your practice and are deductible as business expenses.

Q: What is the penalty for not making estimated tax payments? A: The IRS charges a penalty based on the amount underpaid and the time it was due. The rate is typically around 5% per year, but it can be higher. Avoid this by paying quarterly estimates.

Q: Do I need to collect sales tax on copays or patient payments? A: No, copays and payments for professional services are generally not subject to sales tax. However, if you sell products like braces or supplements, you may need to collect sales tax on those items.

The Bottom Line

New medical practices face a complex tax landscape, but you can manage it with planning. You will pay federal income tax, self-employment or payroll taxes, state income tax, and possibly sales tax, property tax, and local taxes. The key is to choose the right business structure, keep accurate records, and work with a tax professional who understands the medical field. Take the practical steps above this week to get on solid footing. By staying proactive, you can minimize your tax burden and focus on what matters most: patient care.