Taxes are one of the most confusing and financially consequential aspects of running your own OT practice. Most OTPs start their business as a sole proprietor or single-member LLC without fully understanding how their entity choice affects their tax bill, what they can legitimately deduct, or why the IRS expects them to pay taxes four times a year instead of once.
This article won't replace a good CPA (you need one), but it will give you the foundational knowledge to have a productive conversation with your tax professional and avoid the most common mistakes new practice owners make.
Understanding Business Entity Types and Their Tax Implications
Sole Proprietorship
If you're freelancing or doing PRN work under your own name without forming an entity, you're a sole proprietorship by default. All business income flows through to your personal tax return on Schedule C, and you pay self-employment tax (Social Security and Medicare) on your entire net profit — currently 15.3 percent.
Single-Member LLC
Forming an LLC provides liability protection but doesn't change your tax situation by default. The IRS treats a single-member LLC as a "disregarded entity," meaning it's taxed identically to a sole proprietorship. You still file Schedule C and pay self-employment tax on all net profit.
S-Corporation Election
This is where things get interesting for OTPs earning above a certain threshold. An S-Corp isn't a separate entity type — it's a tax election you make with the IRS (Form 2553) that changes how your LLC or corporation is taxed.
With an S-Corp election, you pay yourself a "reasonable salary" as a W-2 employee of your own company. You pay payroll taxes (Social Security and Medicare) only on that salary. Any remaining profit is distributed to you as an "owner distribution" that is not subject to self-employment tax — only income tax.
When Does the S-Corp Election Make Financial Sense?
The S-Corp election typically starts saving money when your net business profit consistently exceeds $50,000 to $60,000 per year after expenses. Below that threshold, the additional costs of running an S-Corp (payroll processing, separate tax return filing, increased accounting fees) often offset the tax savings.
Common Tax Deductions for OTP Practice Owners
Every legitimate business expense reduces your taxable income. Here are the deductions most relevant to OTP practices.
Home Office Deduction
If you use a dedicated space in your home exclusively and regularly for business (documentation, care coordination, administrative work), you can deduct a portion of your housing costs. The simplified method allows $5 per square foot up to 300 square feet ($1,500 maximum). The regular method calculates the actual percentage of your home used for business and applies it to mortgage/rent, utilities, insurance, and maintenance.
Vehicle and Mileage
If you drive to clients' homes, facilities, or meetings, you can deduct mileage at the IRS standard rate (check the current year's rate at irs.gov) or track actual vehicle expenses. Keep a mileage log — date, destination, purpose, and miles driven — for every business trip.
Professional Development
Continuing education courses, conferences, certifications (CHT, CLIPP, CAPS), professional books and journals, and workshop fees are all deductible. This includes travel costs to attend professional conferences.
Professional Services
Fees paid to your accountant, attorney, bookkeeper, and business coach are deductible business expenses.
Insurance Premiums
Professional liability insurance, general business liability insurance, and — if you're self-employed and not eligible for an employer plan — health insurance premiums are deductible.
Technology and Software
Your EMR subscription, scheduling software, accounting software, telehealth platform, computer equipment, and phone costs (business use percentage) are all deductible.
Marketing and Advertising
Website hosting, business cards, social media advertising, networking event fees, and marketing materials are deductible.
Retirement Contributions
Contributions to a SEP-IRA, Solo 401(k), or SIMPLE IRA reduce your taxable income. A Solo 401(k) is particularly powerful for self-employed OTPs because it allows both employee and employer contributions, potentially sheltering a significant amount of income from taxation.
Quarterly Estimated Tax Payments
As a self-employed OTP, the IRS doesn't wait until April 15 to collect your taxes. You're required to pay estimated taxes quarterly if you expect to owe $1,000 or more in taxes for the year.
Quarterly Due Dates
Q1: April 15. Q2: June 15. Q3: September 15. Q4: January 15 of the following year.
How to Calculate Estimated Payments
The simplest approach is the "safe harbor" method: pay 100 percent of last year's total tax liability divided by four (110 percent if your adjusted gross income exceeded $150,000). This protects you from underpayment penalties even if your income increases.
Alternatively, you can estimate your current year's income and calculate taxes accordingly. This is more accurate but requires more work and carries penalty risk if you underestimate.
Building Your Tax Team
The cost of a good CPA ($1,000 to $3,000 annually for a small practice) is almost always less than the money they save you through proper deduction optimization, entity structure advice, and penalty avoidance. Look for a CPA who works with small healthcare practices or self-employed professionals, is proactive about tax planning (not just tax preparation), can advise on entity election timing, and is responsive to questions throughout the year (not just at tax time).
Understanding your tax obligations isn't glamorous, but it's the difference between keeping your hard-earned revenue and giving it away unnecessarily. OT Connected helps OTPs build business skills that pay for themselves.