7 Mistakes New Therapy Practices Make in Their First Year

2026-08-21

Avoid common tax pitfalls in your first year of private practice. Learn the 7 mistakes new therapy practices make and how to fix them.

Starting a therapy practice is exciting, but the first year brings a steep learning curve, especially around taxes. Many new practice owners make avoidable mistakes that cost them money, time, and stress. Here are the 7 most common tax mistakes new therapy practices make in their first year, and how to avoid them.

1. Mixing Personal and Business Expenses

One of the biggest mistakes is using the same bank account or credit card for personal and business purchases. This makes bookkeeping a nightmare and can trigger red flags with the IRS. If you’re audited, you’ll struggle to prove which expenses are deductible.

Fix it this week: Open a separate business bank account and credit card. Use them exclusively for practice expenses. Even if you’re a sole proprietor, this separation is critical. It also makes it easier to track your profit and loss.

2. Not Setting Aside Money for Taxes

As a self-employed therapist, you’re responsible for paying both income tax and self-employment tax (Social Security and Medicare). That’s roughly 15.3% for self-employment tax alone, on top of federal and state income taxes. Many new owners are shocked by their first tax bill.

Fix it this week: Open a separate savings account for taxes. Each time you get paid, transfer 25% to 30% of your net income into that account. This covers federal, state, and self-employment taxes. If you’re in a high-tax state like California or New York, aim for 30%.

3. Ignoring Quarterly Estimated Taxes

The IRS expects you to pay taxes quarterly if you expect to owe more than $1,000. New practice owners often miss these deadlines (April 15, June 15, September 15, and January 15). Penalties for underpayment can add up.

Fix it this week: Mark the quarterly deadlines on your calendar. Use Form 1040-ES to calculate your estimated payments. If you’re unsure, work with a CPA or use tax software designed for self-employed individuals. Even a rough estimate is better than skipping a payment.

4. Choosing the Wrong Business Structure

Many therapists start as sole proprietors, which is simple but offers no liability protection and can lead to higher self-employment taxes. An LLC or S-corp might be better, but it depends on your income and goals.

Fix it this week: Research the pros and cons of sole proprietorship, LLC, and S-corp. For many practices, an LLC is a good middle ground: it provides liability protection and allows you to choose how you’re taxed. If your net income exceeds $50,000, an S-corp election could save you money on self-employment taxes, but it comes with payroll requirements. Consult a tax professional to make the right choice for your situation.

5. Overlooking Deductions for Home Office and Mileage

If you use a home office exclusively and regularly for your practice, you can deduct a portion of your rent, utilities, and internet. Similarly, mileage to and from client sessions (if you travel) is deductible. Many new therapists miss these deductions because they don’t track them.

Fix it this week: Measure your home office space and calculate the percentage of your home used for work. Keep a mileage log in a simple spreadsheet or app like MileIQ. The standard mileage rate for 2026 is $0.70 per mile (check the IRS website for the exact rate). Even a few trips a week can add up to hundreds of dollars in deductions.

6. Not Tracking Continuing Education and Licensing Fees

Your continuing education (CE) courses, license renewal fees, and professional association dues are all deductible business expenses. But if you don’t keep receipts, you’ll forget them at tax time.

Fix it this week: Create a folder (physical or digital) for all CE receipts, license renewals, and membership fees. At the end of the year, total them up. These can easily amount to $500 to $1,500 annually.

7. Failing to Separate Personal and Business Use of Your Vehicle

If you use your car for both personal and business purposes, you must track the business percentage. Many new owners either claim 100% (which is risky) or forget to deduct anything.

Fix it this week: Keep a log of every business trip: date, purpose, and miles. At the end of the year, divide business miles by total miles to get your business percentage. Apply that percentage to your actual car expenses (gas, repairs, insurance) or use the standard mileage rate. Consistency is key.

FAQ

Q: When are quarterly estimated taxes due? A: The deadlines are April 15, June 15, September 15, and January 15 of the following year. If a date falls on a weekend or holiday, it moves to the next business day.

Q: Can I deduct health insurance premiums as a self-employed therapist? A: Yes, if you’re self-employed and not eligible for an employer-sponsored plan, you can deduct health insurance premiums for yourself, your spouse, and dependents. This deduction is taken on your personal tax return, not as a business expense.

Q: What if I miss a quarterly payment? A: You’ll likely face a penalty, but you can minimize it by paying as soon as possible. The IRS charges interest on the underpayment. If it’s a one-time mistake, you can often request a penalty waiver if you have a reasonable cause.

Q: Should I hire a CPA or use tax software? A: If your practice is straightforward, tax software like QuickBooks Self-Employed or TurboTax can work. But if you have employees, an S-corp, or complex deductions, a CPA who works with therapists is worth the $300 to $500 per year. They can also help you plan for future tax years.

The bottom line

Your first year in private practice is a learning curve, but tax mistakes are avoidable. Separate your finances, set aside money for taxes, pay quarterly, and track your deductions. These simple steps will save you money and stress. If you’re ever unsure, invest in a good accountant. The cost is far less than the penalties and missed deductions you’ll face otherwise. Start with one fix this week, and build from there.