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What Do Therapists Need to Know About Taxes in Colorado?

Colorado offers a relatively simple tax structure, but if you're running a therapy practice, there's still plenty you need to track — especially around entity setup, local licenses, and paying estimated taxes on time. This guide walks Colorado therapists through what matters most when it comes to taxes and business structure.


Who this guide is for

This guide is for:

  • Licensed Colorado therapists (LCSWs, LPCs, LMFTs, psychologists, etc.)
  • Solo and group practice owners
  • Therapists offering in-person, virtual, or hybrid services
  • Anyone trying to avoid IRS issues, missed deadlines, and overpaid taxes

Step 1: Pick the right structure for your practice

Your legal entity will impact how you're taxed and how protected your personal assets are.

Sole Proprietorship

  • No formal registration unless using a trade name
  • No liability protection
  • Profits taxed on your personal return
  • High risk, low paperwork

PLLC (Professional Limited Liability Company)

  • Colorado allows licensed professionals to form PLLCs
  • Offers liability protection
  • Default tax treatment is pass-through
  • Can elect S Corp status later to reduce self-employment tax
  • Must be registered with the Colorado Secretary of State and your licensing board

S Corporation

  • Reduces self-employment tax by splitting income into salary and distributions
  • You must run payroll, file W-2s, and maintain corporate compliance
  • Generally cost-effective once net income is $75K+
  • Requires IRS Form 2553 and additional state filing

Professional Corporation (PC)

  • Permitted in Colorado
  • Less common for solo practices
  • Can elect S Corp taxation
  • More admin, more rigid structure

Step 2: Know your state tax obligations

State income tax

  • Colorado has a flat 4.4% state income tax rate (as of 2024)
  • Applies to all pass-through income from sole props, PLLCs, and S Corps
  • Reported on the DR 0104 form along with your federal return

Business licensing

  • Colorado does not require a state license to operate as a therapist in private practice
  • But cities and counties (especially Denver, Boulder, and Colorado Springs) may require local business licenses
  • Zoning approval is often required for in-home practices

Sales tax

  • You generally do not owe sales tax on therapy services
  • But if you offer workshops, CEUs, or sell products, you may need to collect and remit sales tax
  • Register via the Colorado Department of Revenue

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

Estimated taxes

  • Required if you expect to owe $1,000+ to the IRS or $1,000+ to Colorado
  • Quarterly deadlines: April 15, June 15, Sept 15, Jan 15
  • Payments go to both the IRS and Colorado Department of Revenue (Form DR 0104EP)

Self-employment tax

  • 15.3% applies to sole props and default PLLCs
  • Electing S Corp helps reduce this by running payroll on only your salary

Filing requirements

  • Sole prop: Federal Schedule C + Colorado DR 0104
  • PLLC: Annual state report + pass-through income reported on personal return
  • S Corp: Federal 1120-S + Colorado DR 0106 + W-2s for payroll

Step 4: Track and claim your deductions

Good bookkeeping = lower taxes. Track every business expense you legally can.

Deductible expenses for therapists

  • EHR platforms, HIPAA-compliant telehealth tools
  • Office rent or home office %
  • CEUs, license renewal, and supervision fees
  • Malpractice and business insurance
  • Marketing and advertising
  • Phone, internet, software subscriptions
  • Health insurance (if self-employed)
  • Contributions to Solo 401k or SEP IRA

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

S Corp status makes sense once your practice is profitable enough to justify the added paperwork.

  • Pay yourself a salary and take additional income as profit distributions
  • Only the salary portion is taxed for Medicare/Social Security
  • More admin, but worth it once net income hits $75K
  • Still subject to Colorado’s 4.4% state income tax

Step 6: Common mistakes therapists make

  • Not electing S Corp when they should
  • Forgetting local business license or zoning rules
  • Missing estimated tax payments
  • Commingling personal and business expenses
  • Forming a regular LLC instead of a PLLC
  • Offering workshops without collecting sales tax (if required)

Step 7: Our recommendations by income level

Net Income Range

Suggested Action

Under $50K

Sole prop or PLLC is fine; make estimated payments and stay lean

$50K–$100K

Evaluate S Corp; set up payroll; clean up expense tracking

Over $100K

Full S Corp setup; contribute to retirement; do quarterly tax reviews

Need help figuring this out?

We help Colorado therapists set up their practices right, reduce their taxes, and avoid the pitfalls that lead to IRS letters and overpayments. If you want your books clean and your taxes dialed — we’re ready.

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.