Tax Planning Basics for DPC¶

Quick Summary: DPC practice taxes are generally straightforward, but planning ahead saves money and stress. Pay quarterly estimates, track expenses from day one, and find an accountant who understands small medical practices.

Table of Contents¶

• Tax Structure by Entity Type
• Quarterly Estimated Taxes
• Common Deductions
• Self-Employment Tax
• Qualified Business Income Deduction
• Retirement Accounts
• Record Keeping
• Finding an Accountant
• First Year Considerations

Tax Structure by Entity Type¶

Sole Proprietorship¶

• Business income reported on Schedule C of personal return
• All profit is taxable income to you
• Subject to self-employment tax (15.3% of 92.35% of net profit; the 12.4% Social Security portion stops at the annual wage base, $184,500 in 2026)
• Simplest structure, lowest compliance costs

LLC (Single-Member)¶

• Treated same as sole proprietorship for federal taxes
• Schedule C reporting
• State treatment varies

LLC (Taxed as S-Corp)¶

• Must pay yourself "reasonable salary"
• Salary subject to payroll taxes
• Remaining profit is "distribution" — no self-employment tax
• More complex, but can reduce taxes at higher income levels

S-Corporation¶

• Same tax treatment as LLC taxed as S-Corp
• Salary + distribution structure
• Requires payroll processing
• Quarterly payroll tax filings

Partnership/Multi-Member LLC¶

• Partnership return (Form 1065)
• Each partner receives K-1
• Income passes through to personal returns

Quarterly Estimated Taxes¶

Why Quarterly Payments?¶

As a self-employed physician, no employer withholds taxes from your income. You must pay estimated taxes quarterly to avoid penalties.

Due Dates¶

How Much to Pay¶

Safe harbor options:

1. 100% of prior year tax — Pay at least what you owed last year (110% if your prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately — 26 USC 6654(d)(1)(C))
2. 90% of current year tax — Estimate this year's liability and pay 90%

For your first year: Estimate conservatively. It's better to overpay and get a refund than underpay and face penalties.

Rule of thumb: Set aside 25-30% of net income for taxes (typical range; unsourced estimate—varies by bracket and state).

How to Pay¶

• IRS Direct Pay (irs.gov/payments)
• EFTPS (Electronic Federal Tax Payment System)
• Mail with Form 1040-ES

State Estimated Taxes¶

Most states require quarterly estimated payments too. Check your state's requirements and due dates (often align with federal).

Common Deductions¶

Startup Costs¶

• Legal fees (entity formation, contracts)
• Business licenses and registration
• Initial marketing and branding
• Pre-opening rent and utilities

Note: Up to $5,000 of startup costs can be deducted in year one, reduced dollar-for-dollar once total startup costs exceed $50,000; the remainder is amortized over 180 months (26 USC 195). A separate $5,000 first-year allowance, with the same $50,000 phase-out, applies to organizational costs such as state filing fees and the legal cost of drafting bylaws or an operating agreement (26 USC 248 for corporations, 26 USC 709 for partnerships and multi-member LLCs).

Operating Expenses¶

Home Office Deduction¶

If you use part of your home exclusively and regularly for business:

Simplified method: $5 per square foot (max 300 sq ft = $1,500)

Regular method: Calculate actual expenses proportional to space used

Requirements: - Space must be used exclusively for business - Must be your principal place of business OR used regularly to meet patients

Vehicle Expenses¶

If you use your personal vehicle for business (house calls, errands):

Standard mileage rate: IRS rate per mile (check current year rate)

Actual expenses: Gas, insurance, maintenance, depreciation — proportional to business use

Keep a log: Date, destination, purpose, miles

Health Insurance¶

Self-employed individuals can deduct health insurance premiums for themselves and family: - Deducted on Form 1040 via Form 7206 (not on Schedule C) - Reduces income tax only. It does not reduce self-employment tax: 26 USC 162(l)(4) excludes the deduction when computing net earnings from self-employment

Equipment¶

Section 179 deduction: Expense equipment purchases in the year bought (up to annual limits)

Bonus depreciation: 100% first-year deduction, restored permanently by P.L. 119-21 for qualifying property acquired after January 19, 2025 (26 USC 168(k))

Examples: Exam tables, diagnostic equipment, computers, furniture

Self-Employment Tax¶

What It Is¶

Self-employment tax covers Social Security (12.4%) and Medicare (2.9%) — totaling 15.3% on net self-employment income. Net earnings are 92.35% of net profit, and the 12.4% Social Security portion applies only up to the annual wage base ($184,500 in 2026); the Medicare portion has no cap.

Why so high? Employees pay half (7.65%) and employers pay half. As self-employed, you pay both portions.

Reducing Self-Employment Tax¶

S-Corp election: - Pay yourself a "reasonable salary" subject to payroll taxes - Take remaining profit as distribution (not subject to self-employment tax) - Only makes sense above certain income levels ($60-80k+ is the usual rule of thumb; unsourced convention)

Example: - Sole proprietor with $150,000 net income: ~$21,200 in self-employment tax (working: $150,000 × 92.35% = $138,525 × 15.3% = $21,194) - S-Corp with $80,000 salary + $70,000 distribution: $12,240 in payroll taxes (15.3% × $80,000)

Caution: IRS scrutinizes unreasonably low salaries. Your salary must be "reasonable" for your work, and an $80,000 salary on $150,000 of physician income is on the aggressive end—the benchmark is what a comparably employed physician would be paid for the same work.

Deduction¶

You can deduct half of self-employment tax on Form 1040 (above-the-line deduction).

Qualified Business Income Deduction¶

Sole proprietors, LLC members and S-Corp shareholders may deduct up to 20% of qualified business income (QBI) under 26 USC 199A. P.L. 119-21 (2025) made the deduction permanent; it had been due to expire after 2025.

Limits that matter for physicians:

• Medicine is a specified service trade or business (SSTB). Once taxable income passes an inflation-indexed threshold the deduction phases out, and above the top of the phase-out range an SSTB gets nothing. Check the current-year figures on the IRS QBI page.
• S-Corp wages paid to yourself are not QBI. A higher salary lowers both the self-employment tax savings and the QBI deduction at the same time.
• The deduction is taken on Form 1040 (Form 8995 or 8995-A); it reduces income tax, not self-employment tax.

Model the S-Corp election and the QBI deduction together with your accountant.

Retirement Accounts¶

Options for Self-Employed¶

2026 limits per IRS Publication 560; they are indexed annually, so re-check each year.

Why Contribute?¶

• Reduce taxable income
• Build retirement savings
• Tax-deferred growth

Timing¶

• SEP-IRA: Can contribute until tax filing deadline (including extensions)
• Solo 401(k): Employee contributions by Dec 31; employer contributions by tax filing deadline. Exception: a sole proprietor with no employees who adopts a new plan after year-end may make first-year employee deferrals up to the filing deadline (without extensions) under SECURE 2.0 Act §317
• SIMPLE IRA: Specific deadlines apply

Record Keeping¶

What to Keep¶

• All income records (membership payments, patient payments)
• All expense receipts
• Bank and credit card statements
• Mileage logs (if claiming vehicle expenses)
• Home office measurements and expenses (if claiming)
• Equipment purchase records

How Long to Keep¶

• 3 years minimum (IRS statute of limitations)
• 4 years for employment tax records (payroll, if you elect S-Corp), counted from the later of the due date or the payment date (IRS: How long should I keep records?)
• 6 years recommended (covers extended audit periods)
• Indefinitely for asset purchase records, retirement contributions

Organization Tips¶

• Separate business bank account and credit card
• Accounting software (QuickBooks, Wave, FreshBooks)
• Monthly reconciliation
• Digital copies of paper receipts

Finding an Accountant¶

What to Look For¶

• Experience with small medical practices
• Understanding of self-employment tax
• Familiarity with your entity type
• Proactive tax planning (not just filing)
• Reasonable fees

Questions to Ask¶

1. Do you work with other physicians or medical practices?
2. What's your approach to quarterly estimated taxes?
3. How do you handle tax planning vs. just preparation?
4. What's your fee structure?
5. How do you communicate throughout the year?

When to Hire¶

• Before your first year ends (for tax planning)
• Earlier if complex situation (partnership, significant startup costs)

Cost¶

Typical ranges (unsourced estimates):

• Annual tax preparation: $500-$2,000+ depending on complexity
• Quarterly payroll (if S-Corp): $50-$150/quarter
• Bookkeeping services: $100-$500/month (optional)

First Year Considerations¶

Startup vs. Operating Expenses¶

• Pre-opening costs are "startup expenses" (special treatment)
• Post-opening costs are regular deductions
• Document when you "opened for business"

Cash vs. Accrual Accounting¶

• Most small practices use cash basis (income when received, expenses when paid)
• Simpler and often more favorable for tax timing
• The cash method remains available even if you carry inventory (dispensed medications, for example) as long as the practice meets the inflation-indexed small-business gross-receipts test in §448©; inventory can then be treated as non-incidental materials and supplies under 26 USC 471©

Break-Even and Losses¶

• First year losses are normal
• Losses can offset other income in the same year (a spouse's W-2, for example), subject to the excess business loss cap in 26 USC 461(l)
• Any remaining net operating loss carries forward indefinitely and can offset up to 80% of taxable income in a later year; losses arising after 2017 cannot be carried back to prior years (26 USC 172)

Documentation¶

Keep records from day one: - Business expenses (even before opening) - Startup costs - Mileage - Home office setup

Checklist¶

Before Launch¶

• Choose entity structure (consult accountant if unsure)
• Get EIN from IRS
• Open business bank account
• Set up accounting system
• Understand quarterly tax requirements

Ongoing¶

• Track all income and expenses
• Pay quarterly estimated taxes
• Reconcile accounts monthly
• Keep receipts organized
• Track mileage (if applicable)

Year-End¶

• Review retirement contribution options
• Calculate final quarterly payment
• Gather all tax documents
• Meet with accountant for planning

Resources¶

• IRS Self-Employed Individuals Tax Center
• IRS Publication 334: Tax Guide for Small Business (Publication 535 has been discontinued)
• IRS Publication 946: How to Depreciate Property
• IRS Form 7206: Self-Employed Health Insurance Deduction
• IRS Publication 560: Retirement Plans for Small Business

Sources checked against primary law and agency guidance on 2026-09-22.

Related Guides¶

• Choosing a Legal Entity — Entity structure decisions
• Startup Costs Overview — What to budget
• Working with Attorneys — Professional services

Taxes aren't complicated if you plan ahead. Set aside money quarterly, keep good records, and find an accountant who understands your business.