7 Things to Know Before You Start a New OT Practice

2026-08-21

Learn the 7 key tax facts every new occupational therapy practice owner must know, from entity choice to deductions, to avoid costly mistakes.

Starting an occupational therapy (OT) practice is exciting, but the tax side can trip you up if you’re not prepared. Here are 7 things you need to know before you open your doors, so you can keep more of what you earn and avoid penalties.

1. Your Business Entity Affects Your Taxes

The structure you choose (sole proprietorship, LLC, S-corp) determines how you pay taxes. Most new OT practices start as a single-member LLC, which is simple and offers liability protection, but you’ll still be taxed as a sole proprietor unless you elect S-corp status. An S-corp can save you self-employment tax, but it adds payroll complexity. For 2026, the self-employment tax rate is 15.3% (12.4% Social Security, 2.9% Medicare).

What to do this week: Consult a CPA or tax professional to decide which entity fits your revenue projections. If you expect net income above $40,000, ask about S-corp election.

2. You Must Pay Estimated Taxes Quarterly

The IRS expects you to pay taxes as you earn, not once a year. If you’re self-employed, you’ll likely need to make quarterly estimated tax payments (due April 15, June 15, Sept 15, and Jan 15). Underpaying can result in penalties, even if you settle up at year-end.

What to do this week: Estimate your annual income and calculate your quarterly payments using Form 1040-ES. Set aside 25-30% of each client payment into a separate savings account for taxes.

3. You Can Deduct a Home Office, But Follow the Rules

If you see clients in a home office or use a dedicated space for admin, you may qualify for the home office deduction. The space must be used regularly and exclusively for business. You can use the simplified method ($5 per square foot, up to 300 square feet) or the actual expense method (tracking mortgage interest, utilities, and repairs).

What to do this week: Measure your office space and take photos. If you use the actual method, start a spreadsheet for home-related expenses.

4. Equipment Purchases Offer Big Tax Breaks

Under Section 179, you can deduct the full cost of qualifying equipment (like treatment tables, computers, and therapy tools) in the year you buy it, instead of depreciating over years. For 2026, the Section 179 limit is $1,160,000, but your deduction can’t exceed your taxable income. Bonus depreciation also allows 100% expensing for certain assets, but it’s phasing down; check current rules.

What to do this week: List equipment you plan to buy in the next 12 months. Keep receipts and note the date and purpose of each purchase.

5. Hiring Contractors vs. Employees Changes Your Tax Load

If you hire independent contractors (e.g., a part-time OT or billing specialist), you don’t pay payroll taxes, but you must issue 1099-NEC forms if you pay them $600 or more in a year. If you hire employees, you must pay employer taxes (Social Security, Medicare, and unemployment) and handle withholding. Misclassifying an employee as a contractor can lead to back taxes and penalties.

What to do this week: Review the IRS guidelines on worker classification. If you’re unsure, file Form SS-8 for an official determination.

6. You Can Deduct Health Insurance Premiums

If you’re self-employed and pay for your own health insurance, you can deduct premiums for yourself, your spouse, and dependents. This deduction reduces your adjusted gross income and is not subject to self-employment tax. However, you can’t deduct premiums if you’re eligible for an employer-subsidized plan through another job.

What to do this week: Check your policy and confirm you’re paying premiums with after-tax dollars. Keep a copy of your premium statements.

7. Retirement Plans Can Slash Your Tax Bill

A SEP IRA or Solo 401(k) allows you to contribute up to 25% of your net self-employment income (capped at $69,000 for 2026, or $76,500 if age 50+). These contributions are tax-deductible, reducing your taxable income now. A Solo 401(k) also allows employee contributions (up to $23,000, plus catch-up) and can be set up even after year-end, as long as it’s opened by Dec 31.

What to do this week: Open a SEP IRA or Solo 401(k) with a brokerage like Fidelity, Vanguard, or Schwab. Set up automatic transfers to hit your contribution goal.

FAQ

Q: Do I need to charge sales tax on OT services? A: In most states, healthcare services provided by licensed professionals are exempt from sales tax. However, some states tax certain products (like braces or ergonomic aids). Check your state’s Department of Revenue for specifics.

Q: Can I deduct continuing education costs? A: Yes, if the courses maintain or improve skills required in your practice. Deduct tuition, travel, and lodging, but not meals that are lavish. Keep records of the course content and how it relates to your OT work.

Q: What if I make a mistake on my estimated taxes? A: You can adjust your next quarterly payment to make up the difference. If you underpay by a small amount, the penalty is usually minor. But if you’re consistently underpaying, increase your withholding or payments.

Q: Should I hire a CPA or use tax software? A: For a new practice, tax software (like QuickBooks Self-Employed or TurboTax) can handle basic filings for $50-$200/year. But a CPA (costing $300-$800 per return) can provide personalized advice, especially if you have employees or complex deductions. Many owners start with software and move to a CPA as they grow.

The bottom line

Starting an OT practice is exciting, but tax mistakes can cost you thousands. Focus on these 7 areas: choose the right entity, pay quarterly taxes, take advantage of deductions (home office, equipment, health insurance), classify workers correctly, and save for retirement. Take one action this week: set up a separate tax savings account and estimate your first quarterly payment. With a little planning, you’ll keep more of your hard-earned revenue and stay on the IRS’s good side.