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What Do Therapists Need to Know About Taxes in California?

California has some of the strictest tax rules for therapists in private practice. Between the $800 minimum franchise tax, entity restrictions, and high personal income tax rates, getting your setup wrong can cost thousands. This guide lays out exactly what California therapists need to know to stay compliant and reduce their tax burden.


Who this guide is for

This resource is built for:

  • Licensed California therapists (LMFTs, LCSWs, LPCCs, psychologists, etc.)
  • Solo and group practice owners
  • Therapists seeing clients in person, online, or hybrid
  • Anyone tired of guessing their way through taxes or getting hit with surprise fees

Step 1: Pick the right structure for your practice

California has unique rules about what types of entities licensed professionals can form.

Sole Proprietorship

  • No legal separation between you and your business
  • Easy to start — no registration unless you use a DBA
  • All profits are subject to self-employment and state income tax
  • No liability protection

PLLC

🚫 Not allowed in California.

  • California does not allow licensed professionals to form LLCs or PLLCs
  • Your options are sole proprietorship, professional corporation, or general partnership

Professional Corporation (PC)

  • Required if you want limited liability protection
  • Must register with the California Secretary of State and licensing board
  • Can elect S Corp taxation
  • More administrative work (minutes, bylaws, corporate compliance), but it’s the only compliant option for liability protection

S Corporation

  • Most PC owners elect S Corp status for tax savings
  • Allows split between W-2 salary and profit distributions
  • Requires payroll, separate tax filings, and bookkeeping
  • Still pays $800 minimum tax annually (plus 1.5% on net income over $250K)

Step 2: Know your state tax obligations

State income tax

  • California has a progressive tax rate, starting at 1% and going up to 13.3%
  • All practice income (even from pass-through entities) is taxed at the personal level
  • File on CA Form 540 (individual) and 100S (if S Corp)

Franchise tax

  • Every corporation must pay a minimum $800/year to the state — even if no income
  • PCs and S Corps are subject to this
  • S Corps pay an additional 1.5% on net income over $250,000

City-level taxes and business licenses

  • Most California cities require a local business license and may charge gross receipts tax
  • San Francisco and Los Angeles have strict local compliance rules
  • Some counties require zoning permits for in-home offices

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 California
  • Due quarterly: April 15, June 15, Sept 15, Jan 15
  • California uses Form 540-ES for individuals and 100-ES for corporations

Self-employment tax

  • 15.3% applies to net income from sole props
  • PCs with S Corp election can avoid this on profit distributions (only salary portion is taxed)

Filing requirements

  • Sole prop: Schedule C + CA Form 540
  • PC: File Statement of Information + CA Form 100 (or 100S) + pay franchise tax
  • S Corp: IRS 1120-S + CA 100S + W-2s and payroll returns

Step 4: Track and claim your deductions

In a high-tax state, tracking every deductible expense makes a huge difference.

Deductible expenses for therapists

  • EHR platforms and telehealth software
  • Malpractice and liability insurance
  • Rent or home office (if compliant with local zoning)
  • CEUs, supervision, license renewals
  • Marketing, directory listings, and ads
  • Phone, internet, software subscriptions
  • Self-employed health insurance
  • Retirement contributions (Solo 401k or SEP IRA)

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

If you're netting $75K+ annually, electing S Corp can start saving you real money.

  • Must be a Professional Corporation to elect
  • Pay yourself a reasonable W-2 salary
  • Distribute the rest as profit (not subject to SE tax)
  • Still pay $800 franchise tax + 1.5% on higher net income
  • More admin, but often worth it

Step 6: Common mistakes therapists make

  • Trying to form an LLC/PLLC (California doesn’t allow it for licensed therapists)
  • Not paying the $800 franchise tax on time
  • Skipping local business license requirements
  • Electing S Corp but failing to run payroll
  • Forgetting quarterly estimated payments
  • Not tracking CEUs or home office expenses

Step 7: Our recommendations by income level

Net Income Range

Suggested Action

Under $50K

Operate as a sole prop; register local business license; track expenses

$50K–$100K

Consider forming a PC and electing S Corp; run payroll

Over $100K

Full S Corp setup; maximize deductions; plan around franchise tax and retirement

Need help figuring this out?

We work with California therapists to clean up their tax situation, avoid penalties, and pick the right structure for growth. You focus on your clients — we’ll handle the filings.

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.