Navigating the Financial Landscape of Private Practice: The Importance of Saving for Taxes

Owning a private practice can be one of the most rewarding career paths, allowing for autonomy, personal connection with clients, and the ability to shape your professional destiny. However, with these rewards come responsibilities, particularly when it comes to managing finances. One of the most crucial aspects of financial management in private practice is preparing for tax obligations.

 The Reality of Tax Responsibilities

As a private practice owner, you're likely classified as a self-employed individual. This means that rather than having taxes withheld from your paycheck, you're responsible for setting aside money to cover your tax liabilities. Many new practitioners underestimate the financial implications of this responsibility, leading to stressful situations come tax season.

The 25% Rule: A Smart Strategy

To simplify tax preparation and avoid surprises, a common recommendation is to save approximately 25% of your profits for taxes. This percentage serves as a general guideline, helping you to build a cushion that can cover federal, state, and local taxes, as well as self-employment taxes.

Why 25%?

1. Tax Bracket Considerations: Depending on your income level, your effective tax rate may vary. The 25% rule provides a buffer that accounts for various tax brackets and potential increases in income over time.

2. Self-Employment Tax: As a self-employed individual, you’ll pay both income tax and self-employment tax (which covers Social Security and Medicare). This can add up to around 15.3% on top of your income tax rate, making the 25% savings a wise choice.

3. Unexpected Expenses: Owning a practice comes with its share of surprises, from unexpected repairs to client fluctuations. Saving consistently helps mitigate the financial impact of these surprises while ensuring you meet your tax obligations.

Practical Tips for Implementation

- Automate Savings: Set up a separate savings account dedicated to taxes. Automating transfers from your main account can help ensure that you don’t spend what you need to save.

- Monitor Your Income: Regularly review your earnings and adjust your savings rate if necessary. If you see significant growth or fluctuations, you may want to increase your savings percentage.

- Consult a Professional: Consider working with an accountant or financial advisor who specializes in private practices. They can provide tailored advice and help you navigate complex tax laws.

Owning a private practice is an exciting journey filled with opportunities for growth and connection. By proactively saving 25% of your profits for taxes, you can alleviate financial stress and focus on what truly matters: providing exceptional care to your clients. Embrace the financial responsibility that comes with ownership, and you’ll be well-equipped to thrive in both your practice and your personal finances.

Interested in learning more about starting your own private therapy practice?

If you’re a friendly, professional clinician, ready to take the next steps toward private practice in the south shore, we would love to speak with you.

Please contact Karen Peabody: 774-222-3196 | Email: info@forgewellsolutions.com

Karen Peabody, LICSW is a therapist and business consultant for social workers and therapists interested in starting their private practice. She founded Forgewell Solutions in East Bridgewater, MA. Her office is a great place to start a private practice. Visit her FOR THERAPISTS page to learn more.