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.

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.

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.

Comprehending the Two Income Streams

Salary

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

Practice Income

Contrarily, revenue from a private practice, consulting, or other self‑employment endeavors is reported on Schedule C (or a partnership return if the practice is a partnership) and faces self‑employment tax along with income tax.

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

Key Differences to Keep in Mind

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 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: 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.

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

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 can be fully deductible 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
• Maintain a logbook or app for 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 are deductible.
• Hold receipts and ensure the courses are required or advantageous for your practice.

Equipment and Technology
• Computers, medical devices, software licenses, and even mobile phones used for patient communication are deductible.
• For major purchases, consider depreciation (MACRS) or Section 179 expensing.

Insurance
• Professional liability (malpractice) insurance premiums are fully deductible.
• Practice‑related health insurance premiums for yourself and 確定申告 節税方法 問い合わせ 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+).
• 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 is not limited to a percentage of your income and can significantly lower 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.
• 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
• Keep thorough records of all business expenses. Digital receipts, a dedicated bank account, and routine reconciliation avert 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
• 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: 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 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, 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.