Physicians regularly balance two different income sources: a regular salary from a hospital or academic institution, and income from a private practice or consulting gigs.

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

Salary

If you work as an employed physician—whether at a hospital, clinic, or university—you obtain 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.

Your employer typically withholds the correct amount on a regular basis, and you receive a W‑2 at the end of the year.

Private 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.

Self‑employment tax covers both the employee and employer portions of Social Security and Medicare, totaling about 15.3% on net earnings.

Nonetheless, you may deduct the employer portion (7.65%) in computing your adjusted gross income, thereby lowering 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 offers more opportunities for business deductions (office rent, equipment, supplies, mileage, professional liability insurance, continuing education).

Retirement Contributions: Salary income can 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: 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 taxed for self‑employment, yet deductions help offset some of it.

Planning for Quarterly Estimated Taxes

As salary taxes are withheld, you usually need less attention to quarterly payments unless significant practice income escapes full withholding.

Estimate your total tax liability for the year by adding your expected salary and practice income, then subtracting any deductions and credits.

If your practice income reaches a level where you foresee owing more than $1,000 in tax by year‑end, you’ll likely need to make quarterly payments.

IRS offers a worksheet (Form 1040‑ES) to assist in computing these payments.

Maximizing Deductions on Practice Income

Office Space
• Rent, utilities, and office supplies may be fully deducted if the space is used exclusively 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
• Track all business mileage in a logbook or use an app. 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 are deductible.
• 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 sizable purchases, think about depreciation (MACRS) or Section 179 expensing.

Insurance
• Professional liability (malpractice) insurance premiums are fully deductible.
• Practice‑related health insurance premiums 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+).
• The employer’s matching contributions are an added benefit with no tax penalty.

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+).
• A solo 401(k) also allows a salary from your practice, potentially lowering self‑employment tax as the salary portion faces only employee payroll taxes.

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 isn’t restricted to a percentage of income and can substantially lower your AGI.

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 grant a deduction for out‑of‑state physicians meeting 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 rely solely on salary withholding to cover 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
• Physicians often overlook deductions for student loan interest, continuing‑education tuition, or charitable contributions tied 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
• Laws shift annually. Conduct an annual review of your tax strategy, particularly after 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 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: Approximately $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 delicate dance of taxation, deduction maximization, and financial planning.

By treating each stream according to its unique tax rules, staying organized with meticulous record‑keeping, 節税対策 無料相談 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 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 keep more of what you earn and focus on what matters most—providing excellent patient care.