Saving for Taxes in Private Practice

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An owner we talked with crossed $1M in revenue for the first time. Best year the practice had ever had. More clinicians, better collections, a real profit margin for once.

It was also the first year she owed money at tax time. A lot of it.

Her bookkeeper eventually got the books current, but by then it was March and there was nothing left to plan around. She ended up doing her own return, scrambling, writing a check she had not budgeted for out of the account that was supposed to cover payroll.

Here is the part worth sitting with. Nothing went wrong. The practice performed. The tax bill was the receipt for a great year. It only felt like an ambush because nobody had set the money aside as it came in.

Saving for taxes in private practice is not complicated math. It is a system you run every month so that April is a formality instead of an event. Let me walk you through the one we set up with clients.

Why a good year is exactly when this bites

More profit means more tax. That is the whole mechanism, and it catches people because the two numbers move on different schedules.

Your profit shows up in real time. You feel it in the bank account in June. The tax on that profit does not arrive until the following April, and by then you have already spent some version of it on a new office, a hire, or a distribution.

Two things make it worse in a growth year.

Your prior year is a bad guide. If you set aside based on what you owed last year, and this year's profit is up 40%, you are underfunded by roughly that same 40%. The system that worked fine at $600K quietly breaks at $1M.

Books that close late remove every option. Tax planning happens before December 31. An S-corp election, a retirement plan contribution, a timed equipment purchase, an owner salary adjustment: all of those need current numbers and runway. Books that get caught up in February tell you what happened. They cannot change it.

That gap, between bookkeeping and tax strategy, is where most surprises live. This is where saving for taxes in private practice traps most owners.

The four pieces of the system

None of these are hard on their own. It is running all four together that makes the bill a non-event.

A dedicated tax account. Separate bank account, not a mental note, not "there's usually enough in checking." If you already run Profit First in your practice, this is the tax account and you are most of the way there.
A target percentage, set with your bookkeeper, confirmed with your CPA. Not a round number you heard somewhere. Your bracket, your entity, and your state all move it.
Quarterly estimated payments. Money leaves the tax account four times a year instead of ballooning into one number in April. (Here is our plain-English walkthrough of what estimated taxes actually are.)
Books closed monthly. So your CPA can plan in October instead of reacting in March.

Turning your tax rate into an allocation percentage

This is the step that makes saving for taxes in private practice self-correcting, and almost nobody does it.

Your tax percentage is a percentage of profit. But money arrives as revenue. If you allocate a flat dollar amount each month, a growth year breaks it. If you allocate a percentage of every deposit, it scales on its own.

Here is the translation, with illustrative numbers. Use your own.

Say your practice collects $1,000,000 and nets $180,000 in profit. That is an 18% margin, right in the healthy range for a group practice. Your CPA tells you to plan on roughly 30% of profit going to federal, self-employment, and state tax combined.

30% of $180,000 is $54,000 in expected tax.
$54,000 divided by $1,000,000 in revenue is 5.4%.

So you allocate 5.5% of every dollar that hits the operating account into the tax account. Weekly, or every time you sweep. That is the number.

Here is the "so what." At $80,000 in collections that month, you move $4,400. At $110,000 in a strong month, you move $6,050. The set-aside grows exactly when your tax liability grows, without you re-deciding anything. That is what a flat $4,500 monthly transfer cannot do.

Recheck the percentage every quarter against your actual profit. If your margin climbs from 18% to 22%, the allocation needs to climb with it.

Where this gets tricky

A percentage is a plan, not a guarantee. A few places it needs adjusting.

Entity type changes the math a lot. If you are taxed as an S-corp, part of your income already runs through payroll with taxes withheld. Your allocation percentage covers the distribution portion only, so it is usually lower. Get that number from your CPA rather than borrowing someone else's.

Safe harbor protects you from penalties, not from the bill. The IRS generally waives the underpayment penalty if you have paid at least 90% of this year's tax or 100% of last year's, whichever is smaller, and the prior-year threshold goes up for higher-income taxpayers. In a growth year, paying "100% of last year" keeps the penalty away and still leaves you a very real balance due in April. Fund to your actual profit, not just to the safe harbor.

Distributions are not free. Taking money out of the practice does not reduce what you owe on a pass-through entity. If your draws have been outrunning your profit, that is worth a look before you set the percentage. It is closely tied to how you pay yourself.

Do not raid the account. The tax account funds one thing. If payroll is regularly borrowing from it, the problem is cash reserves, and it needs its own fix.

Getting current if you are behind

If you are reading this in August with books that stopped in April, the honest answer is that you cannot fix this year retroactively. You can still change how it lands.

Three steps, in order.

Get the books current. You cannot set a percentage against a number you do not have. This is the whole reason private practice bookkeeping has to run monthly rather than annually.
Estimate your year-end profit and back into the number. Take profit to date, project the remaining months, apply your rate, subtract what you have already paid in. That gap is what you need to fund between now and January.
Open the account today and start allocating. A partial year of allocations beats none. Then have the planning conversation with your CPA in October, while there is still time to act on it.

The peace-of-mind test

Here is the only question that matters.

If a tax bill arrived today, is the money already sitting in an account you have not touched?

If yes, you have solved this and you can stop thinking about it. If no, you know exactly what to build.

Saving for taxes in private practice: the short version

Saving for taxes in private practice comes down to four moving parts: a separate tax account, a target percentage set with your bookkeeper and confirmed with your CPA, quarterly estimated payments, and books closed every month so planning happens while it can still change something.

The one move most owners are missing is translating a profit-based tax rate into a percentage of every deposit. Get that number right and the system funds itself through a growth year instead of falling behind exactly when you are doing well.

Your percentage rides on your real profit, so that is where to start. The Historical Sheet tab in our free Clinician Profitability Tool shows your profit month over month, which is the number you multiply against. Pull it up, look at your actual trend, and set your allocation from that instead of a guess. Or if it would help to walk your numbers together and pressure-test the percentage, grab a consult and we will model it with you. We're here to make saving for taxes in private practice simple, rather than complicated. And remember, if you're not saving for taxes in private practice, the first thing to do is to start, even if it's a small amount you're saving.

Nate