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

Starting an occupational therapy (OT) practice brings clinical freedom, but it also brings a new set of financial obligations. As a new practice owner, you are responsible for several taxes beyond personal income tax. This guide breaks down the specific taxes you will likely pay, with realistic figures for 2026, and gives you actionable steps to manage them from day one.

Federal Income Tax

Your practice’s structure determines how you pay federal income tax. Most new OT practices choose either a sole proprietorship, a partnership, an S corporation (S corp), or a limited liability company (LLC) taxed as an S corp.

• Sole Proprietor or Single-Member LLC: You report business income on your personal tax return (Form 1040, Schedule C). You pay tax at your individual marginal rate, which ranges from 10% to 37% for 2026. The average effective rate for small business owners is around 20% to 25%.
• Partnership or Multi-Member LLC: The practice files an information return (Form 1065), but profits and losses pass through to partners, who pay tax on their personal returns.
• S Corporation: The practice files Form 1120-S, and profits pass through to shareholders. You must pay yourself a “reasonable salary” (subject to payroll taxes) and can take additional distributions that are not subject to self-employment tax. This can save you money, but requires payroll processing and additional compliance.

Key point: Federal income tax is a progressive tax. Your effective rate depends on your total taxable income, not just the practice’s profit.

Self-Employment Tax (Social Security and Medicare)

If you are a sole proprietor, partner, or LLC owner who is not taxed as an S corp, you pay self-employment tax. This covers Social Security (12.4%) and Medicare (2.9%), for a total of 15.3% on your net earnings. For 2026, the Social Security wage base is projected to be $176,100 (up from $168,600 in 2024). Earnings above that are only subject to the 2.9% Medicare tax, plus an additional 0.9% for high earners (over $200,000 single or $250,000 married filing jointly).

Example: If your practice nets $80,000 after expenses, you owe $12,240 in self-employment tax, in addition to income tax. You can deduct the employer-equivalent portion (half) of this tax when calculating your adjusted gross income.

Payroll Taxes (If You Have Employees)

If you hire staff, you must withhold and pay payroll taxes. These include:

• Federal Income Tax Withholding: You withhold from each employee’s paycheck based on their W-4.
• Social Security and Medicare (FICA): You withhold 6.2% for Social Security and 1.45% for Medicare from each employee, and you also pay the matching 6.2% and 1.45% as the employer.
• Federal Unemployment Tax (FUTA): You pay 6% on the first $7,000 of each employee’s wages, but you can claim a credit of up to 5.4% if you pay state unemployment tax on time, reducing the effective rate to 0.6% (up to $42 per employee per year).

You must deposit payroll taxes on a semi-weekly or monthly schedule, depending on your total tax liability. The IRS requires you to use the Electronic Federal Tax Payment System (EFTPS) for all federal tax deposits.

State and Local Taxes

State taxes vary widely. Most states impose an income tax on business profits, ranging from 0% (in states like Texas and Florida) to over 13% (California’s top rate). Some states also have a gross receipts tax, such as Washington’s Business and Occupation tax (ranging from 0.471% to 1.5% depending on the classification).

Additionally, you may owe:

• State Unemployment Tax (SUTA): Paid by employers, rates vary by state and your experience rating. New businesses often pay a standard rate, typically 2% to 4% on a wage base (e.g., $7,000 to $40,000).
• Local Taxes: Some cities and counties impose a business license tax, a gross receipts tax, or a professional tax. For example, New York City has a general corporation tax, and many municipalities require an annual business license fee ranging from $50 to $500.

Action step: Check your state’s department of revenue website for a new business tax guide. Many states have a single portal for registration and tax filing.

Sales Tax (If Applicable)

Most OT services are exempt from sales tax because they are considered medical or therapeutic services. However, if you sell products, such as adaptive equipment, splints, or therapy tools, you may need to collect sales tax. Rates vary by state, typically 4% to 8%, plus local options. For example, California’s base rate is 7.25%, but with local add-ons it can reach 10.25%.

You must register for a sales tax permit in the state(s) where you have nexus (physical presence, such as an office or employees). Filing frequency is usually monthly, quarterly, or annually, depending on your sales volume.

Property Tax and Other Taxes

If you own your office building or equipment, you may owe property tax. Rates vary by locality, typically 1% to 2% of assessed value per year. If you rent, you do not pay property tax directly, but your lease may include a pass-through of the landlord’s taxes.

Also, if you use a vehicle for business, you may owe personal property tax on that vehicle, depending on your state.

Estimated Quarterly Taxes

The IRS expects you to pay taxes throughout the year, not just at filing time. As a self-employed individual, you must make estimated tax payments if you expect to owe at least $1,000 in federal tax. Payments are due:

• April 15
• June 15
• September 15
• January 15 (of the following year)

Each payment should cover your income tax and self-employment tax. A common method is to pay 100% of your previous year’s tax liability (or 110% if your adjusted gross income was over $150,000) to avoid penalties. Alternatively, you can pay 90% of your current year’s liability.

Practical step: Set aside 25% to 30% of your net income each month in a separate bank account for taxes. This helps you avoid a cash crunch at payment deadlines.

Tax Deductions Specific to OT Practices

To reduce your taxable income, track these deductions:

• Home office deduction: If you have a dedicated space for administrative work, you can deduct $5 per square foot (up to 300 square feet) using the simplified method, or actual expenses.
• Continuing education: Courses, conferences, and licensing fees are deductible.
• Professional liability insurance: Premiums are fully deductible.
• Equipment and supplies: Therapy tables, exercise equipment, and office supplies are deductible under Section 179 (up to $1,220,000 for 2026) or bonus depreciation.
• Vehicle expenses: Use the standard mileage rate (67 cents per mile for 2026) or actual expenses.

FAQ

Q: Do I need to pay taxes if my OT practice loses money? A: Yes, you may still owe self-employment tax if you have net earnings, but if you have a net loss, you generally do not owe self-employment tax. However, you must still file a return and may be able to carry the loss forward to offset future profits.

Q: Should I form an S corp to save on self-employment tax? A: An S corp can save you money on self-employment tax, but it adds payroll costs and administrative burden. If your net profit is over $40,000 to $50,000, it may be worth consulting a CPA to run the numbers.

Q: What happens if I miss an estimated tax payment? A: You will owe interest and possibly a penalty. The penalty is calculated based on the underpayment amount and the number of days late. You can minimize this by making catch-up payments as soon as possible.

Q: Can I deduct health insurance premiums? A: Yes, if you are self-employed, you can deduct health insurance premiums for yourself, your spouse, and dependents, as long as you are not eligible for an employer-sponsored plan.

The Bottom Line

New OT practices face a complex tax landscape, but it is manageable with planning. Start by understanding your federal income tax, self-employment tax, and any state and local obligations. Set up a separate tax savings account, make estimated payments on time, and track deductions carefully. Consider working with a CPA who specializes in healthcare practices to ensure you stay compliant and minimize your tax burden. The cost of professional advice is a deductible business expense, and it can save you thousands in the long run.

Related guides

• How Much Should a New Ot Practice Set Aside for Taxes?
• How to File Quarterly Estimated Taxes as a New Ot Practice
• S-Corp vs LLC for New OT Practices: Which Saves More on Taxes?