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.

While each stream is taxed differently, the overall tax picture can become complex, especially when you factor in self‑employment tax, health‑insurance premiums, retirement contributions, and state‑specific rules.

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.

Understanding the Two Income Streams

Salary

As an employed physician—whether in a hospital, clinic, or university—you earn a salary that undergoes 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.

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.

The self‑employment tax accounts for both employee and employer contributions to Social Security and Medicare, totaling around 15.3% of net earnings.

You can offset the employer portion (7.65%) when determining your adjusted gross income, reducing the amount of taxable income.

Important Differences to Note

Tax Withholding: With salary income, taxes are automatically withheld; with practice income, you might have to make quarterly estimated 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: For premiums paid out of practice income, you might be able to deduct health insurance on your personal return.

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

Since salary taxes are withheld, quarterly tax payments become less of a concern unless you have substantial practice income that isn't fully withheld.

Estimate your total tax liability for the year by adding your expected salary and practice income, then subtracting any 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 provides a worksheet (Form 1040‑ES) to help calculate these payments.

Maximizing Deductions on Practice Income

Office Space
• Rent, utilities, and office supplies can be fully deductible if the space is used exclusively for business.
• If you work from home, a reasonable share 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 are deductible.
• Maintain receipts and verify that the courses are required or beneficial for your practice.

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

Insurance
• 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 (nurses, medical assistants, billing clerks), their salaries are deductible.
• Payroll taxes paid by the practice are also deductible.

Retirement Planning for Dual Income

Salary Portion
• If your employer offers 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+).
• 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
• If you’re self‑employed, you can deduct 100% of your health‑insurance premiums on your personal return (Form 1040, Schedule 1).
• This deduction is not limited to a percentage of your income and can significantly lower your adjusted gross income.

State‑Specific Considerations
• New York and California feature high state income taxes and additional physician taxes. Confirm if your state levies a separate tax on medical professionals.
• Certain states permit a deduction for out‑of‑state physicians who meet residency criteria.
• State‑level health‑insurance requirements may demand additional filings (e.g., California’s SDI for self‑employed).

Avoiding Common Pitfalls

Under‑Withholding
• Avoid depending only on salary withholding for practice income. Use the IRS’s Tax Withholding Estimator to tweak 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 doctors miss deductions for student loan interest, continuing‑education tuition, or charitable contributions linked to their practice.

Ignoring Tax Credits
• The Qualified Business Income deduction can reduce qualified income by up to 20%. Confirm 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 with 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 is a fine balance of taxation, deduction maximization, and financial planning.

By treating each stream according to its unique tax rules, staying organized with meticulous record‑keeping, and leveraging retirement and health‑insurance options, physicians can significantly reduce their tax liability while ensuring a healthy cash flow for both their employment and entrepreneurial ventures.

Regular consultation with a tax professional familiar with the medical field is 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.