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What Do Therapists Need to Know About Taxes in Arizona?

Arizona therapists deal with a layered tax environment: a state income tax, required annual filings, and local business regulations. If you’re running a private practice, this guide helps you navigate your structure, stay compliant, and avoid paying more than necessary.


Who this guide is for

This resource is built for:

  • Licensed Arizona therapists (LPCs, LCSWs, LMFTs, psychologists, etc.)
  • Solo and group practice owners
  • Clinicians operating virtually, in person, or hybrid
  • Anyone looking to streamline their taxes and keep more of their earnings

Step 1: Pick the right structure for your practice

Entity structure determines how you're taxed, how much protection you have, and how many forms you need to file.

Sole Proprietorship

  • No formal registration needed unless using a DBA
  • No personal liability protection
  • All income is self-employment income
  • Easy to start but not ideal as income or legal risk grows

PLLC (Professional Limited Liability Company)

  • Arizona allows licensed professionals to form PLLCs
  • Provides liability protection
  • Taxed as a sole prop by default — or elect S Corp for better tax efficiency
  • Must register with the Arizona Corporation Commission and notify your licensing board

S Corporation

  • Allows salary + distributions setup, which reduces self-employment taxes
  • Requires payroll, bookkeeping, and separate business tax filings
  • Makes sense at ~$75K+ net income
  • Still requires Arizona business tax filings and personal income tax payments

Professional Corporation (PC)

  • Permitted but uncommon for solo therapists
  • Can elect S Corp taxation
  • Involves more formalities and is usually used by group practices

Step 2: Know your state tax obligations

State income tax

  • Arizona uses a flat 2.5% income tax rate (as of 2024)
  • Applies to all pass-through income (sole props, PLLCs, S Corps)
  • File on Arizona Form 140 (individual) or Form 120S (for S Corps)

Transaction privilege tax (TPT)

  • Arizona does not tax therapy services under TPT
  • But if you sell products, run CEU workshops, or offer non-therapy consulting, registration might be required
  • File through AZTaxes.gov if applicable

Annual reports and licensing

  • PLLCs and PCs must file annual reports with the Corporation Commission
  • Some Arizona cities require local business licenses or registration, especially for in-home offices (e.g., Phoenix, Tucson)

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

Estimated taxes

  • Required if you owe $1,000+ to the IRS or $500+ to Arizona
  • Quarterly deadlines: April 15, June 15, Sept 15, Jan 15
  • Arizona estimates filed via AZTaxes.gov using Form 140ES

Self-employment tax

  • 15.3% SE tax on all net income for sole props and default PLLCs
  • Electing S Corp helps cut this — only W-2 salary is subject to it

Filing requirements

  • Sole prop: IRS Schedule C + Arizona Form 140
  • PLLC: Annual report + personal tax return
  • S Corp: Federal 1120-S + AZ Form 120S + W-2s for salary

Step 4: Track and claim your deductions

The cleaner your records, the less you pay in taxes.

Deductible expenses for therapists

  • HIPAA-compliant software and EHR
  • Office rent or home office expenses
  • License renewals, CEUs, supervision
  • Liability and malpractice insurance
  • Marketing (Psychology Today, website, ads)
  • Phone, internet, and business software
  • Self-employed health insurance
  • Contributions to SEP IRA or Solo 401k

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

An S Corp can drastically reduce your self-employment tax if your income supports the added admin.

  • Run payroll and file W-2s
  • Pay employment tax only on the salary portion
  • Distributions are not subject to SE tax
  • Still pay Arizona's 2.5% state tax on all income
  • Works well once net income exceeds $75K/year

Step 6: Common mistakes therapists make

  • Not registering as a PLLC when required
  • Forgetting the annual report filing
  • Missing estimated tax deadlines
  • Electing S Corp but failing to run payroll
  • Not checking city rules for home office licensing
  • Commingling personal and business finances

Step 7: Our recommendations by income level

Net Income Range

Suggested Action

Under $50K

Sole prop or PLLC; track expenses and pay quarterly taxes

$50K–$100K

Evaluate S Corp; set up payroll and bookkeeping

Over $100K

Full S Corp setup; retirement contributions; quarterly tax planning

Need help figuring this out?

We help Arizona therapists set up PLLCs, run clean S Corps, and avoid paying more tax than they need to. If you’re ready to get your practice in order — we’re here.

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.