Doctors often find themselves juggling two distinct income streams: a regular salary from a hospital or academic institution, and the earnings from a private practice or consulting work.

Although each stream faces different tax treatments, the combined tax landscape can be intricate, particularly when considering self‑employment tax, health‑insurance premiums, retirement contributions, and state‑specific regulations.

This guide breaks down the key tax considerations for balancing salary and practice income and offers practical strategies to keep your tax bill reasonable while maximizing your take‑home pay.

Grasping the Two Income Streams

Employed Income

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

The deductions encompass federal income tax, Social Security tax, Medicare tax, and, when relevant, state and local taxes.

The employer generally withholds the right amount consistently, and you obtain a W‑2 at the end of the year.

Practice Income

In contrast, income from a private practice, consulting, or other self‑employment activities is reported on Schedule C (or a partnership return if the practice is a partnership) and is subject to self‑employment tax in addition to income tax.

The self‑employment tax accounts for both employee and employer contributions to Social Security and Medicare, totaling around 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 receives automatic tax withholding; practice income may need quarterly estimated tax payments.

Deductions: Practice income provides greater chances for business deductions such as office rent, equipment, supplies, mileage, professional liability insurance, and continuing education.

Retirement Contributions: Salary income may be funneled into employer‑sponsored plans (403(b), 401(k), etc.), whereas practice income can be channeled into a solo 401(k), SEP‑IRA, or SIMPLE IRA.

Health Insurance: If you pay premiums out of pocket for practice income, you may claim a health‑insurance deduction on your individual return.

Self‑Employment Tax: Practice income alone faces self‑employment tax, but deductions can recover a portion.

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.

Calculate your overall tax liability for the year by summing expected salary and practice income, and then deducting any deductions and credits.

If your practice income is large enough that you anticipate owing more than $1,000 in tax at year‑end, you’ll likely need to file quarterly payments.

The IRS provides a worksheet (Form 1040‑ES) to help calculate 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 suitable part 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 real expenses (gas, maintenance, depreciation) if they outstrip the standard rate.

Professional Development
• Continuing medical education (CME) courses, conferences, and certifications can be deducted.
• Keep receipts and confirm that the courses are needed or useful for your practice.

Equipment and Technology
• Computers, medical devices, software licenses, and phones used for patient communication are deductible.
• For large purchases, 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
• Hiring staff (nurses, medical assistants, billing clerks) makes their salaries 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
• A solo 401(k) or SEP‑IRA can be established for your practice, letting you contribute up to 25% of net self‑employment income, up to $66,000 (or $73,500 if 50+).
• With a solo 401(k), you can draw a salary from your practice, reducing self‑employment tax since the salary portion is taxed only as employee payroll tax.

Health Insurance Deductions
• Self‑employed individuals may deduct 100% of health‑insurance premiums on their 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
• In New York and California, high state income taxes and extra physician taxes exist. Verify if your state has a distinct tax on medical professionals.
• Some states allow a deduction for out‑of‑state practicing physicians if they meet residency requirements.
• State‑level health‑insurance requirements may demand additional filings (e.g., California’s SDI for self‑employed).

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
• Keep meticulous records of all business expenses. Digital receipts, a dedicated bank account, and regular reconciliation help avoid audit issues.

Overlooking Deductions
• Many doctors miss deductions for student loan interest, continuing‑education tuition, or charitable contributions linked 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 laws change every year. Perform an annual review of your tax strategy, especially if you’ve had changes in income, expenses, or life events (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 法人 税金対策 問い合わせ married filing jointly), taxable income: $470,100.
• Federal tax: About $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 is a fine balance of taxation, deduction maximization, and financial planning.

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

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

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