5 Tax Strategies Every Therapist in Private Practice Should Know

5 Tax Strategies Every Therapist in Private Practice Should Know

Keywords: tax strategies for therapists, private practice tax tips, S Corp for therapists, therapist retirement plans, tax planning for mental health professionals, CPA for therapists

If you're a therapist running a private practice, managing your finances probably wasn’t the reason you got into this field. But let’s face it—handling your taxes smartly can mean the difference between stress and security. The good news? With the right tax strategies, mental health professionals can keep more of what they earn while building a strong financial foundation for the future.

Here at Later CPA & Associates, we specialize in helping therapists make sense of their numbers. Below, we’re sharing five categories of tax strategies that can help reduce your tax burden, prepare for the future, and support your long-term goals—whether you're just starting out or scaling your practice.

1. Practical Tax Strategies You Can Start Using Today

Bookkeeping and Expense Tracking

Accurate records are essential. Not only do they help you claim every deduction you’re entitled to, but they also give you a real-time view of your practice’s financial health. Use platforms like QuickBooks, Xero, or Wave to track your income and expenses, and make sure to properly categorize items such as rent, therapy supplies, continuing education, professional memberships, software subscriptions, utilities, and business mileage.

Example: Let’s say you spent $1,200 on CEU workshops and $900 on therapy supplies this year. Without organized tracking, these deductions might go unclaimed—resulting in lost tax savings.

Digital Receipts and Documentation

Instead of dealing with piles of paper, snap photos of receipts as soon as you get them and store them in a designated folder in Google Drive or Dropbox. There are also receipt-tracking apps that integrate with your bookkeeping software for a seamless workflow.

Tip: Create folders labeled by month or expense type to make tax season effortless.

Quarterly Financial Reviews

Review your books every three months. This helps you:

• Check profit trends

• Pay estimated taxes accurately

• Spot unusual spending patterns

Example: If you notice that Q2 was far more profitable than Q1, you might consider increasing your estimated tax payment or reinvesting in growth strategies.

Payroll Setup (Especially for S Corps)

Running your own payroll is crucial if you're structured as an S Corporation. This allows you to pay yourself a reasonable salary and access tax-saving benefits like retirement contributions and fringe benefits.

Tools: Gusto, QuickBooks Payroll, and OnPay are popular options.

2. Choosing the Right Business Structure for Tax Efficiency

Sole Proprietor vs. S Corporation

Most therapists start as sole proprietors, but this structure comes with higher self-employment taxes. Once your net income reaches around $80,000, it might make sense to become an S Corporation. With an S Corp, you split your income:

• Part as salary (subject to payroll taxes)

• Part as distributions (not subject to payroll taxes)

Example: If your net income is $120,000, you might pay yourself a $70,000 salary and take $50,000 as distributions, potentially saving thousands in self-employment tax.

Hiring Employees (or Your Kids)

Hiring admin staff or associate therapists can unlock additional tax deductions like wages, benefits, and training costs. You can also hire your children (if they perform real work), pay them a reasonable wage, and deduct it from your business income.

Example: Paying your 14-year-old $6,000 per year for admin support may be tax-free for them and deductible for you.

3. Retirement Plans for Therapists in Private Practice

Retirement savings are a powerful way to reduce taxable income and secure your future.

SEP IRA

• Contribute up to 25% of your net earnings (up to $70,000 in 2025)

• Minimal paperwork and ideal for solo practices

Example: If your compensation is $100,000, you could contribute $25,000 pre-tax.

SIMPLE IRA

• Easier than a 401(k), great for small teams

• Contribution limits: $16,500 + $3,500 catch-up for those 50+

Example: You and your employee each contribute, and the business provides a matching contribution.

Solo 401(k)

• Best for solo therapists or those with a spouse on payroll

• Combine employee and employer contributions up to $70,000 (2025 limits)

• Allows Roth and pre-tax options

Benefit: Higher contribution limits and greater flexibility make this a favorite among self-employed professionals.

4. Payroll & Fringe Benefits = Smart Tax Savings

If you’re paying yourself via payroll, you can unlock additional benefits that are both tax-efficient and good for retention if you have a team.

Examples of Tax-Free Benefits:

• Health Insurance: Deduct premiums paid for you and your employees

• HSA Contributions: Triple tax benefits (deductible going in, tax-free growth, and tax-free qualified withdrawals)

• Accountable Plans: Reimburse yourself for your home office, travel, and mileage without paying extra tax

• Dependent Care Assistance: Up to $5,000 in tax-free benefits for eligible employees

Tip: To stay compliant, put written policies in place and track benefits carefully.

5. Tax-Advantaged Investment Strategies for Therapists

After building a solid foundation, consider investment strategies that align with your long-term goals.

Real Estate

• Depreciation: Deduct wear and tear while your property increases in value

• 1031 Exchange: Defer taxes by rolling profits into another property

• Owner-Occupied Offices: Deduct expenses and build equity simultaneously

Education Savings Accounts

• 529 Plans: Tax-free growth and withdrawals for qualified education expenses

• Coverdell ESA: Federal tax deduction plus investment growth (with income limits)

Health Savings Accounts (HSAs)

• Contribution limits (2025): $4,300 individual / $8,550 family

• Funds grow tax-free and are not taxed when used for medical expenses

Traditional and Roth IRAs

• Combine with other plans for additional tax savings

• Roth IRAs grow tax-free and allow tax-free withdrawals in retirement

Bonus: Trusts & Estate Planning

A living trust allows you to:

• Avoid probate

• Maintain privacy

• Ensure your assets go where you intend

As your assets grow, speak with a CPA or estate attorney about setting up irrevocable or charitable trusts to reduce estate tax and support long-term giving.

Final Thoughts: Start Where You Are, Plan for Where You’re Going

Implementing these strategies step by step can make a huge difference in your financial peace of mind. Whether you’re looking to clean up your books, save on taxes, or grow your wealth, we’re here to help.

Ready to Take Control of Your Tax Strategy?

Book a free discovery call with Daniel at Later CPA & Associates:
https://meet.latercpa.com/discovery

We specialize in helping therapists and mental health professionals create smart, ethical, and stress-free tax strategies.