Doctors frequently juggle two separate income streams: a steady salary from a hospital or academic setting, and revenue from a private practice or consulting engagements.

Even though the two income streams are taxed differently, the overall tax picture can be complicated, especially when including self‑employment tax, health‑insurance premiums, retirement contributions, and state‑specific rules.

Here we dissect the main tax factors for balancing salary and practice income and present practical tactics to keep your tax liability low while maximizing net income.

Understanding the Two Income Streams

Wage Income

If you work as an employed physician—whether at a hospital, clinic, or university—you obtain a salary that is subject to payroll deductions.

Included are federal income tax, Social Security tax, Medicare tax, and, if applicable, state and local taxes.

Your employer usually withholds the appropriate amount regularly, and you receive a W‑2 by year‑end.

Self‑Employment Income

Alternatively, earnings from a private practice, consulting, or other self‑employment pursuits are filed on Schedule C (or a partnership return if the practice is a partnership) and are subject to self‑employment tax plus income tax.

Self‑employment tax includes both employee and employer shares of Social Security and Medicare, amounting to roughly 15.3% of net earnings.

However, you can deduct the employer portion (7.65%) when calculating your adjusted gross income, which reduces your taxable income.

Key Distinctions to Remember

Tax Withholding: Salary income has taxes automatically withheld; practice income may require quarterly estimated tax payments.

Deductions: Practice income allows for more business deductions—office rent, equipment, supplies, mileage, professional liability insurance, and continuing education.

Retirement Contributions: Salary income may be directed into employer‑sponsored accounts (403(b), 401(k), etc.), while practice income can be rolled into a solo 401(k), SEP‑IRA, or SIMPLE IRA.

Health Insurance: You may be able to claim a health‑insurance deduction on your personal return if you pay premiums out of pocket for practice income.

Self‑Employment Tax: Only practice income is subject to self‑employment tax, but you can recover part of it via deductions.

Planning for Quarterly Estimated Taxes

Because salary taxes are withheld, you typically need to worry less about quarterly tax payments unless you have significant practice income that isn’t fully withheld.

Determine your total tax liability for the year by adding anticipated salary and practice income, then subtracting deductions and credits.

Should your practice income be substantial enough that you expect to owe over $1,000 in tax at year‑end, quarterly payments will probably be necessary.

The IRS supplies a worksheet (Form 1040‑ES) to aid in calculating these payments.

Maximizing Deductions on Practice Income

Office Space
• Rent, utilities, and office supplies are fully deductible when the space is used solely for business.
• If you work from home, a reasonable portion of your home expenses (mortgage interest, property taxes, utilities, internet) can be deducted as a home office.

Mileage and Transportation
• Keep a logbook or app for all business mileage. The IRS standard mileage rate is $0.655 per mile for 2025.
• Alternatively, deduct actual expenses (gas, maintenance, depreciation) if they exceed the standard rate.

Professional Development
• Continuing medical education (CME) courses, conferences, and certifications can be deducted.
• Hold receipts and ensure the courses are required or advantageous for your practice.

Equipment and Technology
• Computers, medical devices, software licenses, and phones used for patient communication are deductible.
• For major purchases, 法人 税金対策 問い合わせ consider depreciation (MACRS) or Section 179 expensing.

Insurance
• Professional liability (malpractice) insurance premiums are fully deductible.
• Health insurance premiums related to practice for yourself and employees can be deducted as a business expense.

Employee Compensation
• If you hire staff, such as nurses, medical assistants, or billing clerks, their salaries are deductible.
• Payroll taxes paid by the practice are also deductible.

Retirement Planning for Dual Income

Salary Portion
• Should your employer provide a retirement plan, contribute up to the maximum allowed ($22,500 for 2025, plus $7,500 catch‑up if 50+).
• Employer matches add benefit and are untaxed.

Practice Portion
• You can create a solo 401(k) or SEP‑IRA for practice income, contributing up to 25% of net self‑employment income, up to $66,000 (or $73,500 if 50+).
• A solo 401(k) additionally lets you take a salary from your practice, which can reduce self‑employment tax because the salary portion is subject to only the employee portion of payroll taxes.

Health Insurance Deductions
• If self‑employed, you can deduct all health‑insurance premiums on your personal return (Form 1040, Schedule 1).
• The deduction isn’t capped by income percentage and can notably reduce your adjusted gross income.

State‑Specific Considerations
• New York and California have high state income taxes and additional physician taxes. Check whether your state imposes a separate tax on medical professionals.
• Some states allow a deduction for out‑of‑state practicing physicians if they meet residency requirements.
• State‑level health‑insurance mandates may require you to file additional forms (e.g., California’s SDI for self‑employed individuals).

Avoiding Common Pitfalls

Under‑Withholding
• Don’t depend solely on salary withholding for practice income; use the IRS’s Tax Withholding Estimator to adjust your W‑4 or make quarterly payments.

Improper Tracking
• Maintain detailed records of every business expense. Digital receipts, a separate bank account, and regular reconciliation prevent audit problems.

Overlooking Deductions
• Many physicians miss out on deductions for student loan interest, tuition for continuing education, or charitable contributions related to their practice.

Ignoring Tax Credits
• QBI deduction offers up to a 20% cut on qualified income. Verify eligibility and claim it.

Failing to Update Your Tax Strategy
• Tax statutes evolve yearly. Review your tax strategy annually, especially after income, expense, or life changes (marriage, children, etc.).

Putting It All Together: A Sample Planning Scenario

Dr. Lee earns $300,000 in salary from a teaching hospital and runs a private practice that nets $200,000 after expenses. Here’s how the tax picture might look:
• Salary: $300,000 subject to payroll withholding. No self‑employment tax.
• Practice: $200,000 net income. Self‑employment tax on $200,000 (15.3% = $30,600). Deduct employer portion (7.65% of $200,000 = $15,300) from AGI.
• Total taxable income before deductions: $300,000 + $200,000 – $15,300 = $484,700.
• After standard deduction ($14,600 for married filing jointly), taxable income: $470,100.
• Federal tax: Roughly $120,000 (using 2025 brackets).
• Self‑employment tax: $30,600.
• Total tax: $150,600.

To reduce this burden, Dr. Lee could:
• Contribute $22,500 to a 403(b) from salary.
• Max out a solo 401(k) with $66,000 from practice income.
• Deduct $15,300 employer portion of SE tax.
• Deduct health‑insurance premiums.
• Use Section 179 to expense new imaging equipment ($40,000) in the first year.

After these adjustments, the taxable income shrinks, and the overall tax bill could drop by tens of thousands of dollars.

Final Thoughts

Balancing salary and practice income involves careful taxation, deduction maximization, and financial planning.

Treating each stream per its distinct tax rules, keeping meticulous records, and using retirement and health‑insurance options helps physicians lower tax liability while maintaining healthy cash flow for both employment and entrepreneurial ventures.

Regular consultation with a tax professional who knows the medical field is invaluable; they can spot opportunities and pitfalls that might otherwise slip through the cracks.

With the right strategy, you can retain more of what you earn and focus on what matters most—providing excellent patient care.