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
• 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%)
• 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

[!TIP] Most new DPC physicians start as sole proprietors or single-member LLCs. As income grows, consult an accountant about S-Corp election timing.

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 income over $150k)
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 federal taxes (varies by 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; remainder amortized over 15 years.

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 (not Schedule C) - Reduces income, including for self-employment tax calculation

Equipment¶

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

Bonus depreciation: Additional first-year depreciation

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.

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+ typically)

Example: - Solo proprietor with $150,000 net income: ~$21,000 in self-employment tax - S-Corp with $80,000 salary + $70,000 distribution: ~$12,000 in payroll taxes

Caution: IRS scrutinizes unreasonably low salaries. Your salary must be "reasonable" for your work.

Deduction¶

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

Retirement Accounts¶

Options for Self-Employed¶

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
• SIMPLE IRA: Specific deadlines apply

[!TIP] A SEP-IRA is the simplest option for most solo DPC physicians. You can open one at any major brokerage and contribute significant amounts with minimal paperwork.

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)
• 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¶

• 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
• Accrual required if inventory is significant

Break-Even and Losses¶

• First year losses are normal
• Losses can offset other income (spouse's W-2, prior year income)
• Net Operating Loss (NOL) rules allow carryforward

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 535: Business Expenses
• IRS Publication 560: Retirement Plans for Small Business

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.