How Much Should a New Therapy Practice Set Aside for Taxes?

Starting a therapy practice brings many financial questions, and taxes are often the most confusing. The short answer: most new therapy practices should set aside 25% to 35% of net income for federal and state taxes, plus self-employment tax. But the exact amount depends on your business structure, income level, and state. This guide breaks down the numbers and gives you a step-by-step plan to avoid a tax bill shock.

Why 25% to 35% Is a Safe Range

As a self-employed therapist, you pay both income tax and self-employment tax (Social Security and Medicare). The self-employment tax alone is 15.3% of your net earnings. On top of that, federal income tax rates range from 10% to 37%, depending on your taxable income. Most new practices start in the 22% to 24% federal bracket, but your effective rate is lower because of the standard deduction.

Here is a realistic example for a solo therapist earning $80,000 in net profit (after business expenses) in 2026:

• Self-employment tax: 15.3% of $80,000 = $12,240 (but you deduct half, so the effective hit is lower)
• Federal income tax: roughly $8,500 to $10,000 after the standard deduction
• State income tax: varies, often 4% to 9% (e.g., California 9.3%, Texas 0%)
• Total tax: approximately $20,000 to $22,000, which is 25% to 27.5% of net profit

If you earn more, your percentage goes up. At $120,000 net profit, the total tax might be 30% to 35%. At $50,000, it might be 20% to 25%. The 25% to 35% range covers most new practices.

How to Calculate Your Exact Percentage

Follow these steps to get a number specific to your situation:

1. Estimate your net profit: Subtract all business expenses (rent, software, marketing, continuing education, etc.) from your gross revenue. Use last year’s numbers or a conservative projection.
2. Calculate self-employment tax: Multiply net profit by 15.3%. But remember, you can deduct half of that on your income tax return.
3. Estimate federal income tax: Use the 2026 tax brackets (single filer: 10% up to $11,600, 12% up to $47,150, 22% up to $100,525, 24% up to $191,950). Apply the standard deduction ($14,600 for single, $29,200 for married filing jointly in 2025, likely adjusted for 2026).
4. Add state tax: Check your state’s rate. Some states have no income tax (Texas, Florida, Nevada), others are high (California, Hawaii, New Jersey).
5. Divide total tax by net profit: That gives you your effective percentage.

For example, a single therapist in Oregon with $70,000 net profit:

• Self-employment tax: $10,710
• Federal income tax: about $6,500 (after standard deduction)
• Oregon state tax: about $6,000 (9% marginal rate, but effective lower)
• Total: $23,210, which is 33% of net profit

So set aside 33%.

Set Aside Money Every Payment, Not Quarterly

Many new therapists wait until quarterly estimated tax deadlines (April 15, June 15, Sept 15, Jan 15) and scramble. Instead, create a separate savings account and transfer a percentage of every client payment or insurance reimbursement.

• Open a dedicated tax savings account at a bank like Ally or Capital One (no monthly fees, interest around 4% APY as of 2026).
• Transfer 25% to 35% of each deposit immediately. If you use a practice management system like SimplePractice or TherapyNotes, you can set up automatic transfers.
• Track your actual net profit monthly and adjust the percentage if you’re over or under.

This method ensures you have the cash when estimated taxes are due. If you don’t set aside enough, you may face underpayment penalties from the IRS (currently 7% of the underpaid amount, but it changes quarterly).

Quarterly Estimated Tax Payments: What You Need to Know

The IRS requires you to pay estimated taxes if you expect to owe more than $1,000. For most new practices, that’s a given. Here’s how to handle it:

• Use Form 1040-ES to calculate and pay. You can pay online via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS).
• Pay 25% of your estimated annual tax each quarter. If your income is uneven, you can use the annualized income installment method, but that’s complex. Most new owners just pay equal amounts.
• Avoid the penalty: The IRS safe harbor rule says you won’t owe a penalty if you pay at least 100% of last year’s tax liability (or 110% if your adjusted gross income was over $150,000). If you’re new and had no tax last year, pay 90% of this year’s liability to be safe.

A common mistake is forgetting state estimated payments. Most states require them too, and they have their own forms. Check your state’s revenue department website.

Tax Deductions That Reduce Your Tax Bill

Every dollar of deductible business expense lowers your taxable income, which lowers your tax percentage. New therapists often miss these deductions:

• Home office: If you use a dedicated space exclusively for work, you can deduct $5 per square foot (up to 300 sq ft) using the simplified method, or actual expenses. That’s up to $1,500.
• Health insurance premiums: Self-employed individuals can deduct premiums for themselves and dependents.
• Retirement contributions: A SEP IRA allows you to contribute up to 25% of net earnings (max $69,000 in 2026). This directly reduces your taxable income.
• Continuing education: Courses, books, and travel to conferences are deductible.
• Software and tech: Practice management, telehealth platforms, and even your phone bill (if used for work).
• Marketing: Website, ads, business cards.

Keep receipts and track expenses in a tool like QuickBooks Self-Employed or a simple spreadsheet. The more you deduct, the less you owe.

What If You Set Aside Too Much or Too Little?

If you set aside too much, you’ll get a refund after filing your tax return. That’s not a disaster, but it means you gave the government an interest-free loan. If you set aside too little, you’ll owe more at tax time and may face penalties.

To fine-tune, review your numbers quarterly. After each quarter, compare your actual net profit to your projection. If you’re earning more, increase your set-aside percentage. If less, decrease it. Most new practices see income grow in the first year, so err on the higher side (30%) initially.

FAQ

Q: Do I need to pay taxes if I’m an LLC or S-Corp? A: Yes. An LLC is a pass-through entity, so you pay taxes on your personal return. An S-Corp requires you to pay yourself a reasonable salary and pay payroll taxes, but you may save on self-employment tax. Consult a CPA to decide which structure is best.

Q: Can I just pay taxes once a year instead of quarterly? A: If you owe less than $1,000, you can pay annually. But most practices owe more, and the IRS charges penalties for underpayment. Pay quarterly to avoid this.

Q: What if I have a side job with W-2 income? A: Your employer already withholds taxes from your W-2. You may need to adjust your withholding or make estimated payments for your practice income. Use the IRS Tax Withholding Estimator to see if you’re on track.

Q: Should I hire a tax professional? A: For the first year, yes. A CPA who works with therapists can help you set up your structure, find deductions, and avoid costly mistakes. Costs range from $300 to $800 for a basic return, but the savings usually outweigh the fee.

The Bottom Line

Set aside 25% to 35% of your net profit for taxes, and start from day one. Open a separate savings account, transfer a percentage of every payment, and make quarterly estimated payments. Track your actual income monthly and adjust as needed. If you’re unsure, work with a CPA to get a precise number. The goal is to avoid a surprise tax bill and keep your practice financially healthy.

Related guides

• How to File Quarterly Estimated Taxes as a New Therapy Practice
• S-Corp vs LLC for New Therapy Practices: Which Saves More on Taxes?
• What Taxes Does a New Therapy Practice Pay? A Complete Guide