How Much Should a New Ot Practice Set Aside for Taxes?
Learn how much a new OT practice should set aside for taxes, with realistic ranges, practical steps, and expert tips for 2026.
Starting an occupational therapy (OT) practice is exciting, but taxes can quickly become a headache if you don’t plan. The short answer: set aside 25% to 35% of your net income for federal and state taxes. This range covers self-employment tax, income tax, and state obligations. In this guide, you’ll get concrete numbers, a step-by-step plan, and answers to common questions.
Why 25% to 35%? Breaking Down the Numbers
As a new OT practice owner, you’re likely a sole proprietor, LLC, or S-corp. Your tax burden includes:
- Self-employment tax: 15.3% (12.4% for Social Security, 2.9% for Medicare) on net earnings.
- Federal income tax: Based on your bracket, typically 10% to 37%.
- State income tax: Varies by state, from 0% (e.g., Texas, Florida) to over 13% (e.g., California).
For a rough estimate, combine self-employment tax (15.3%) with a modest federal rate (10% to 15%) and state rate (5% to 10%). That yields 30% to 40%. However, deductions and the qualified business income deduction (QBI) can lower your effective rate. A safe range is 25% to 35% of net profit.
Example: If your practice nets $80,000 after expenses, set aside $20,000 to $28,000 for taxes. That’s $1,667 to $2,333 per month.
How to Calculate Your Tax Set-Aside Rate
Follow these steps to find your personal rate:
- Estimate your net income: Project revenue minus deductible expenses (rent, supplies, marketing, software, etc.).
- Calculate self-employment tax: Multiply net income by 92.35% (since half of SE tax is deductible), then by 15.3%.
- Add federal income tax: Use IRS tax brackets for 2026 (single or married filing jointly). For example, a single filer with $80,000 taxable income falls in the 22% bracket, but effective rate is lower.
- Add state tax: Check your state’s rate. Use a flat 5% as a default if unsure.
- Subtract deductions: QBI deduction (up to 20% of qualified business income) and half of SE tax reduce your taxable income.
Quick formula: Set aside 30% of net profit as a baseline, then adjust after your first quarter.
Practical Steps to Set Aside Money This Week
Don’t wait until April. Here’s what to do now:
- Open a separate business savings account: Use it only for tax savings. Aim to transfer a percentage of every client payment.
- Set up automatic transfers: Schedule a weekly or monthly transfer from your operating account to your tax account. For example, transfer 30% of each deposit.
- Use accounting software: Tools like QuickBooks or FreshBooks can track income and estimate taxes. Many integrate with payment processors.
- Make estimated tax payments: The IRS requires quarterly payments if you expect to owe over $1,000. Deadlines are typically April 15, June 15, Sept 15, and Jan 15. Use Form 1040-ES.
- Track expenses diligently: Every deductible dollar reduces your tax. Use a dedicated business credit card and save receipts.
Estimated Tax Payment Schedule for 2026
Here’s a table of key dates and what to do:
| Payment Period | Due Date | What to Pay |
|---|---|---|
| Jan 1 - Mar 31 | April 15, 2026 | 25% of estimated annual tax |
| Apr 1 - May 31 | June 15, 2026 | 25% of estimated annual tax |
| Jun 1 - Aug 31 | Sept 15, 2026 | 25% of estimated annual tax |
| Sep 1 - Dec 31 | Jan 15, 2027 | 25% of estimated annual tax |
If you miss a payment, you may face penalties. Use the IRS Direct Pay system or EFTPS.
Deductions Every New OT Practice Should Use
Lower your taxable income with these common deductions:
- Home office: If you have a dedicated space, deduct $5 per square foot (up to 300 sq ft) or actual expenses.
- Equipment and supplies: Tables, therapy tools, computer, printer, and office furniture.
- Software and subscriptions: EHR systems, billing software, practice management tools.
- Marketing: Website, ads, business cards, and networking events.
- Professional fees: Accounting, legal, and consulting services.
- Continuing education: Courses, conferences, and certifications.
- Insurance: Malpractice, liability, and health insurance premiums.
Keep receipts and log mileage for any business travel.
Common Mistakes to Avoid
- Underestimating taxes: Many new owners set aside only 10% to 15%, then face a huge bill. Start at 30%.
- Mixing personal and business funds: This complicates bookkeeping and can trigger audits.
- Ignoring quarterly payments: Even if you’re profitable, skip them and you’ll pay penalties.
- Forgetting state taxes: Some states have their own estimated payment requirements.
FAQ
Q: What if I don’t have enough cash to pay estimated taxes? A: Pay as much as you can by the deadline. The IRS charges interest and penalties on unpaid amounts, but partial payments reduce the hit. Adjust your set-aside rate upward for future quarters.
Q: Can I deduct health insurance premiums? A: Yes, if you’re self-employed and not eligible for an employer plan. Deduct them on your personal return, not the business return.
Q: Should I form an S-corp to save on taxes? A: An S-corp can reduce self-employment tax by paying yourself a reasonable salary and taking distributions. However, it adds payroll costs and complexity. For new practices with net income under $60,000, a sole proprietorship or LLC is often simpler.
Q: What if I’m an employee of my own practice? A: If you’re an S-corp, you must pay yourself a reasonable salary and withhold payroll taxes. If you’re a sole proprietor, you pay self-employment tax instead.
The Bottom Line
Set aside 25% to 35% of your net income for taxes, starting now. Open a separate savings account, automate transfers, and make quarterly payments. Track every deduction and adjust your rate after your first year. With discipline, you’ll avoid surprises and keep your practice financially healthy. If in doubt, consult a CPA who works with small practices. They can help you plan and save in the long run.