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What Do Therapists Need to Know About Taxes in Alabama?

Alabama therapists need to watch for both state income tax and the state’s unique business privilege tax. If you're running a private practice in Alabama, the right entity setup and tax planning strategy can make a noticeable difference in how much you owe — and how much you keep.


Who this guide is for

This guide is for:

  • Licensed Alabama therapists (LPCs, LMFTs, LCSWs, psychologists, etc.)
  • Solo and group practice owners
  • Clinicians seeing clients online, in person, or hybrid
  • Therapists wanting to minimize tax bills and stay on top of deadlines

Step 1: Pick the right structure for your practice

Your legal entity affects liability, taxes, and your ongoing filing requirements.

Sole Proprietorship

  • No registration unless using a trade name (DBA)
  • No legal protection
  • All income is taxed on your personal return
  • Simpler for part-time or early-stage practices

PLLC (Professional LLC)

  • Alabama allows licensed professionals to form PLLCs
  • Provides legal separation between business and personal assets
  • Default taxation: pass-through entity (same as sole prop)
  • Can elect S Corp for tax advantages
  • Must register with the Alabama Secretary of State and notify licensing board

S Corporation

  • Helps reduce self-employment tax by splitting salary and distributions
  • Requires payroll, separate tax return, and bookkeeping
  • Becomes worth it when you’re netting ~$75K+
  • Still subject to Alabama’s Business Privilege Tax and income tax

Professional Corporation (PC)

  • Also allowed in Alabama
  • Can elect S Corp status
  • Higher admin burden — typically used for large or multi-owner practices

Step 2: Know your state tax obligations

State income tax

  • Alabama has a graduated income tax (2% to 5%)
  • Applies to all net income from your practice
  • Pass-through entities report income on your individual return (Form 40)

Business Privilege Tax

  • Applies to all business entities except sole proprietors
  • Minimum tax: $100
  • Based on net worth and taxable income
  • Must file annually using Form PPT or CPT
  • Due within 2.5 months of forming your entity, then annually

Local business licenses

  • Most cities and counties in Alabama require a business license
  • Rates vary by location and profession
  • Check with your city or county for specific licensing requirements

Step 3: Pay taxes throughout the year — not just in April

Estimated taxes

  • Required if you’ll owe $1,000+ to the IRS or $500+ to Alabama
  • Federal and state estimates due: April 15, June 15, Sept 15, Jan 15
  • Alabama estimated taxes go on Form 40ES

Self-employment tax

  • 15.3% on net income for sole props and default PLLCs
  • S Corps reduce this — only W-2 salary is subject to SE tax

Filing requirements

  • Sole prop: Schedule C + AL Form 40
  • PLLC: Annual Business Privilege Tax return + personal return
  • S Corp: 1120-S + AL Form 20S + payroll and BPT filing

Step 4: Track and claim your deductions

You can lower your tax bill by properly deducting business-related expenses.

Deductible expenses for therapists

  • Rent or qualified home office
  • EHR platforms and telehealth software
  • Malpractice and business insurance
  • CEUs, license renewals, supervision
  • Internet, phone, and tech tools
  • Marketing, directories, and advertising
  • Retirement plan contributions
  • Self-employed health insurance

Step 5: When it’s time to consider an S Corp

S Corps offer real tax advantages once your income justifies the complexity.

  • Pay yourself a reasonable salary (subject to payroll tax)
  • Take remaining profit as distributions (not subject to SE tax)
  • File payroll reports and annual 1120-S
  • Still pay Alabama Business Privilege Tax and income tax
  • Often makes sense if net income exceeds $75K annually

Step 6: Common mistakes therapists make

  • Not filing the Business Privilege Tax on time
  • Forgetting to renew their local business license
  • Staying a sole prop too long
  • Skipping estimated tax payments
  • Not running payroll after electing S Corp
  • Missing easy deductions (CEUs, supervision, software)

Step 7: Our recommendations by income level

Net Income Range

Suggested Action

Under $50K

Sole prop or PLLC is fine; track expenses and file BPT if required

$50K–$100K

Consider S Corp election; run payroll; plan for local licenses

Over $100K

Full S Corp setup; retirement planning; CPA guidance recommended

Need help figuring this out?

We help Alabama therapists choose the right entity, file their Business Privilege Tax correctly, and reduce what they owe — without the chaos.

Book a consult or email us at david@leichtercpa.com


Disclaimer: This guide is for informational purposes only and does not constitute legal, tax, or financial advice. While we make every effort to keep the content accurate and up to date, state laws and regulations can change without notice. You should consult a licensed professional in your state before making any decisions based on this information. Leichter Accounting Services is not liable for any errors or omissions, or for any actions taken based on the contents of this guide.