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.

Comprehending the Two Income Streams

Employed Income

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

These deductions include federal income tax, Social Security tax, Medicare tax, and, if applicable, state and local taxes.

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

Private Practice 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 receives automatic tax withholding; practice income may need quarterly estimated tax payments.

Deductions: Practice income offers more opportunities for business deductions (office rent, equipment, supplies, 確定申告 節税方法 問い合わせ 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: 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 taxed for self‑employment, yet deductions help offset some of it.

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.

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 are fully deductible when the space is used solely 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 real expenses (gas, maintenance, depreciation) if they outstrip the standard rate.

Professional Development
• CME courses, conferences, and certifications are deductible.
• 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 sizable purchases, think about 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
• If your employer offers a retirement plan, you can 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) 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 you’re self‑employed, you can deduct 100% of your 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 feature high state income taxes and additional physician taxes. Confirm if your state levies 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
• 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
• QBI deduction offers up to a 20% cut on qualified income. Verify 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: 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.

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.