Is it time for your business to take that next step and offer a retirement plan for you and maybe your employees? How do you sort out all the rules, the acronyms, and the different tax options? We have developed a guide that makes selecting a retirement plan for your business simple and easy.
Building a Private Practice Financial Model that Works for You
By Guli Fager, MPH, Financial Advisor
Choosing your own clients. Setting your own hours. Insurance or private pay. Private practice enables therapists to meet the unprecedented need for mental health services while ensuring that your work is compensated on your own terms. But how do you figure out what a fair compensation structure looks like when you’re your own boss?
If you’ve worked in an agency or other setting, many aspects of the business of providing mental health services might have been taken care of by other staff—scheduling appointments, answering client questions, coordinating with other healthcare providers, processing insurance claims and payments—these are all aspects of mental healthcare that someone must do. And if you’re in private practice, those tasks are essential but unbillable. So, how much client revenue does it take to ensure that the number of sessions of therapy you can bill for actually covers the full cost of your time?
One of the first tasks is to figure out how much “paying yourself” really costs. When you’re an employee, the employer covers a lot of expenses that, when you’re self-employed, you must cover on your own, so calculating the true cost of your labor is an important step. Going into private practice can seem lucrative, but it’s important to compare the value of benefits and taxes covered by an employer and how much revenue you will need to bring in match them.
Here is a very basic breakdown of compensation from two settings, a group practice or nonprofit and a government agency. The Bureau of Labor Statistics estimates that benefits cost non-government employers around 29.6% above an employee’s wages, and government employers, which tend to have more robust benefits, spend about 38.1% in addition to wages. In the example below, a therapist earning a salary of $72,000 receives more in “total compensation” when benefits are included. When considering making a move to private practice, it’s important to understand what benefits you might leave behind, whether you want to provide them for yourself, and how much it might cost to do so.
Group Practice or Nonprofit Setting | Government Agency Setting | |
Salary | $72,000 | $72,000 |
Taxes the employer pays – ½ FICA | $5,508 | $5,508 |
Average employer-paid benefits–health insurance, dental, vision, PTO, retirement, etc.1 | $21,312 (29.6%) | $27,432 (38.1%) |
Total Value of Compensation | $98,820 | $104,940 |
$72,000 | $72,000 |
1 EMPLOYER COSTS FOR EMPLOYEE COMPENSATION – SEPTEMBER 2022 from Bureau of Labor Statistics: https://www.bls.gov/news.release/pdf/ecec.pdf
Benefits included in this calculation are:
- Paid leave – vacation, holiday, sick, and personal leave; • Supplemental pay – overtime and premium, shift differentials, and nonproduction bonuses; • Insurance – life, health, short-term and long-term disability; • Retirement and savings – defined benefit and defined contribution; and • Legally required benefits – FICA [Social Security (refers to Old-Age, Survivors, and Disability Insurance (OASDI) program), Medicare], federal and state unemployment insurance, and workers’ compensation.
A note on taxes and benefits
Benefits like health insurance and contributions to a retirement plan are part of your overall compensation but you aren’t taxed on them, so they increase the value of your job without increasing the amount of income you pay taxes on. FICA tax is a 15.3% federal payroll tax that funds Social Security and Medicare; for people employed by someone else, the employer pays half and the employee pays half. When you are self-employed, you pay the entire 15.3% yourself. The income tax you pay is separate from FICA and depends on your specific tax bracket and a wide variety of credits and deductions, so after tax income will vary. Some employers offer additional benefits, like a budget for professional development that may include travel, which also adds to the “value” of your job.
The benefits package from an employer typically also includes essential pieces of protection, like health insurance, life insurance, and disability insurance (linked article previously approved). Paying for those items yourself increases the amount of revenue you need to bring in, but some of the premiums are also deductible as business expenses when you’re self-employed.
When a comparable benefits package, including time off, retirement plan contribution, life and disability insurance, and taxes are taken into account, it takes a substantial level of client revenue from a private therapy practice to reach an equivalent level of earnings and benefits received in many agency or government sector jobs. Of course, many clinicians do private practice part time, either on its own or as an additional source of income while maintaining a full time job elsewhere, and may not need to cover any benefits at all.
Now let’s compare a hypothetical income for a therapist in private practice who pays taxes and benefits on their own.
For this example, let’s use the $72,000 example above. How much does a private practice need to bring in revenue-wise to generate $6,000 per month of take home income? In this example, $12,000 per month, or $144,000 per year, results in a take-home income of about $72,000. Another question to ask yourself is how much you believe you can charge for sessions, whether you will accept insurance, how many sessions per week and how many weeks per year you want to work. All of those factors will impact how much revenue you bring into your practice.
Your business expenses will depend on factors like whether you pay to rent an office; for therapists who see clients exclusively via telehealth, this is a major expense they don’t have to pay. Other expenses include internet, advertising, EHR system, continuing education, credit card processing fees, and beyond.
Taxes will vary depending on your state, level of household income, and other factors, but in this calculation we estimate 40% to include FICA, state, and federal income taxes that are common in the DC/MD/VA area. When first starting out, it’s better to over-estimate the amount of taxes you need to pay, since you won’t have an employer withholding for you. Most self-employed people pay quarterly taxes, and setting aside about 40% of all client fee revenue will help ensure that you have enough to pay each quarter’s amount due.
In our webinar series on Financial Self-Care, (webinars previously approved) we described how self-employed people can structure personal income, retirement savings, and insurance, which are critical pieces of the “benefits package” you want to provide for yourself.
The decision to switch to self-employed private practice requires consideration of many factors, including work-life balance, flexibility, and a variety of other concerns. We are happy to help you think through whether a jump to private practice makes sense from a financial standpoint, so you can make a decision about your future with a good estimate of what your income might be.
We work with many people on financial planning, retirement and education savings, and life, disability and long term care insurance, to ensure that private practice is working for you. We are happy to meet with you for a free consultation to learn about you and how we might help!
Want to learn more? Check out our Financial Self-Care Webinar series:
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