Understanding Business Taxes¶

No one is withholding taxes from your paychecks anymore. Every dollar that lands in your business account is pre-tax. If you don't plan for it, April will break you.

The Big Shift: Employee → Owner¶

When you were an employed physician, your hospital or group did something invisible but important: they withheld federal income tax, state income tax, Social Security, and Medicare from every paycheck and sent it to the government for you. By April, most of your tax bill was already paid.

As a DPC owner, that stops. You're now responsible for:

1. Federal income tax on your profit
2. State income tax (if your state has one) on your profit
3. Self-employment tax — your share and the "employer" share of Social Security/Medicare (15.3% on most self-employment income)
4. Quarterly estimated payments throughout the year
5. Year-end filings with the IRS and state

This section is a plain-English tour. It is not tax advice. Hire a CPA. Seriously.

How Your Entity Type Changes the Math¶

Your legal entity determines how the IRS taxes your practice. This is covered in more depth in Choosing a Legal Entity, but here's the bookkeeping-relevant summary:

Sole Proprietor / Single-member LLC (default)¶

• Business income flows to your personal tax return (Schedule C)
• You pay income tax + self-employment tax on all net profit
• Simple, but no tax-optimization opportunities beyond deductions

LLC electing S-Corp taxation¶

• You pay yourself a "reasonable salary" via W-2 payroll
• Remaining profit flows through as distributions, not subject to self-employment tax
• Potentially significant savings on the self-employment tax portion
• Requires payroll setup, additional filings, and a CPA who knows the rules
• Only makes sense above a certain income threshold — talk to your CPA about when it's worth it

PC / PLLC (Professional Corporation)¶

• Many states require physicians to use a PC or PLLC
• Can elect S-Corp or C-Corp taxation
• Adds complexity; talk to a healthcare-focused CPA

The takeaway: your entity choice has real tax consequences. Don't pick one based on Reddit threads. This is the single highest-value CPA consultation you'll have.

Self-Employment Tax¶

The concept that catches new owners off guard.

When you were employed, you paid 7.65% in Social Security and Medicare and your employer paid another 7.65%. As a self-employed person, you pay both halves: 15.3% on net self-employment income up to the Social Security wage base, plus Medicare tax (with no cap).

On top of that you still owe federal and state income tax.

A rough example¶

Say your DPC practice generates $150,000 in net profit (after business expenses).

These numbers are illustrative only — your CPA will give you accurate projections.

The rule of thumb most CPAs give new DPC owners: save 25–35% of net profit for taxes, sweep it into a separate account, and dial in the exact number after the first year.

Quarterly Estimated Payments¶

The IRS doesn't want to wait until April. They want installments four times a year. If you don't pay them, you get hit with underpayment penalties.

The 2025 schedule (for reference)¶

Dates shift when they fall on weekends/holidays. Verify each year.

How much to pay¶

Two "safe harbor" options most small businesses use:

1. Pay 100% of last year's tax (or 110% if you earned > $150k) in four equal installments. If you do this, you avoid penalties even if you owe more at year-end.
2. Pay 90% of this year's actual tax liability — requires forecasting current-year income.

For a brand-new practice with no prior-year baseline, your CPA will estimate based on projected income. Overpay slightly the first year — refunds are better than penalties.

How to pay¶

• Federal: IRS Direct Pay or EFTPS (free, direct debit from your business account)
• State: each state has its own portal

Set calendar reminders for all four dates. Do not rely on memory.

Deductions That Matter for DPC¶

The IRS allows you to deduct "ordinary and necessary" business expenses. For a DPC practice, that commonly includes:

Clearly deductible¶

• Rent for dedicated practice space
• Malpractice insurance, business insurance
• Medical supplies and equipment
• Dispensed medication cost
• EMR and software subscriptions
• Phone, internet (business portion)
• Continuing medical education
• Medical licenses, DEA registration, board dues
• Professional fees (CPA, attorney, bookkeeper)
• Marketing and advertising
• Business travel, mileage to home visits (with proper records)
• Employee wages and benefits (if applicable)
• Retirement plan contributions (SEP-IRA, Solo 401(k), etc.) — often the single biggest tax-saving move

Deductible with care¶

• Home office — legitimate if the space is used regularly and exclusively for business. Keep photos and measurements.
• Vehicle — track business vs. personal mileage rigorously
• Meals — 50% deductible, and only in specific contexts
• Cell phone — business-use portion only, unless there's a dedicated business line

Commonly misunderstood¶

• Your own health insurance premiums may be deductible as a self-employed health insurance deduction on your personal return — ask your CPA.
• Your own "salary" or draws are not deductible. The money you take out of the business is taxed on the business's profit; you don't get to deduct your own compensation on Schedule C.

Retirement Plans as Tax Strategy¶

For a self-employed physician, retirement contributions are often the single biggest legal tax reduction tool available.

These let you defer taxes on a large chunk of profit and fund retirement. Your CPA and a financial advisor should walk you through which is right for you.

This is one of the most valuable conversations you can have in year one of your practice.

State Taxes¶

Don't forget your state. States vary enormously:

• No income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
• Moderate income tax: most states
• High income tax: California, New York, Oregon, Hawaii, Minnesota, etc.

Some states also have gross receipts taxes, franchise taxes, or annual LLC fees. California's $800 minimum franchise tax catches new owners off guard. Know what your state charges.

See the State Guides for DPC-relevant state information (though not comprehensive tax advice).

Year-End Checklist¶

Roughly the last two weeks of December and first month of January:

• Pay Q4 estimated tax (due January 15)
• Reconcile all accounts through December 31
• Gather 1099-NEC info for any contractors paid > $600 (and send forms by January 31)
• Confirm payroll filings if you have employees
• Max out retirement contributions (deadlines vary; some allow until tax filing)
• Meet with your CPA for a year-end review
• Gather receipts and documentation for deductions
• Schedule tax return preparation appointment

Common Tax Mistakes¶

1. Not paying quarterly estimates. Penalty + interest + lump sum at year-end.
2. Spending the tax reserve. If the money's in your account, it looks like money you have. It isn't.
3. DIY tax filing for the first year. A CPA for your first year pays for itself in missed deductions alone.
4. Mixing personal and business expenses. Blurs your deductions and risks LLC protection.
5. Forgetting state and local filings. State penalties compound quickly.
6. Ignoring the S-Corp decision. Waiting too long to elect costs money.
7. No retirement plan. You're leaving the single biggest tax tool on the table.

Key Takeaways¶

• No one withholds taxes for you now. Budget 25–35% of net profit for taxes.
• Quarterly estimated payments are mandatory, not optional. Set calendar reminders.
• Your entity structure (sole prop, S-Corp, etc.) materially changes your tax bill. This is your highest-leverage CPA conversation.
• Retirement contributions are the #1 legal tax reduction tool. Use them.
• Hire a CPA. For real.

Next¶

• Working with Accountants & Bookkeepers — how to find and evaluate a CPA
• Cash Flow Management — why the tax savings account exists
• Choosing a Legal Entity — upstream decision that shapes your tax picture