Why You Owed on Your Taxes This Year

If you own a practice and owed money on your taxes last year (or worried about owing this year), this article is for you!

The reason why you owed money is simple. You didn’t pay enough tax during the year to cover what you actually owed. Maybe your estimated payments fell short. Maybe withholding from a W-2 job wasn’t calibrated correctly. Maybe both.

Dissecting each of those components gets more complex, of course. But the broad strokes are that you owed because not enough was paid along the way.

If you’re reading this shortly after April 15th and you’re one of the people who owed…take a breath. Owing money on your taxes doesn’t mean you did something wrong. It doesn’t mean you’re bad with money. And it certainly doesn’t mean you’re alone. I’ve taken dozens of phone calls from private practice owners in just the last few weeks who are asking some version of this exact question.

It’s fixable. And the fix is almost always simpler than people think.

Why Estimated Tax Payments Miss the Mark

Most practice owners I speak with believe the solution is somewhere inside their estimated tax payments. That if only they had paid a little more in April, June, September, and January, none of this would have happened.

Here’s the thing. Estimated tax payments aren’t really a solution. They’re a guess.

When your CPA gives you estimated tax vouchers, those vouchers are based on the year that just ended. Your CPA looks at what you earned last year and projects it forward, because that’s the only information available. But as a private practice owner, you already know that what you earned last year isn’t necessarily what you’re going to earn this year. Maybe you took a few weeks off for a family matter. Maybe you added a clinician to your practice. Maybe insurance reimbursements came in slower (or faster) than they did the year before. Maybe you raised your rates.

The point is this: nobody, including your CPA, including you, actually knows what you’re going to earn this year. So the estimates you were handed are just guesses rooted in stale data. Some years the guess lands close. Some years it’s way too high. Other years it’s way too low. Trying to calculate your estimated taxes accurately is a little like trying to hit a moving target, because that’s exactly what it is.

This is the structural problem underneath nearly every “why did I owe?” conversation I have. Saving for and paying estimated taxes is an exercise that sits at the intersection of anxiety and ambiguity. It’s not that you failed at the estimates. It’s that the estimates themselves were never built to be accurate.

The Once-a-Year Problem

There’s a related issue that compounds the problem. In most CPA/client relationships, the only meaningful conversation that happens all year is the tax-filing conversation, sometime between February and April. That’s not a “how’s the practice going?” conversation. That’s a “here are your documents, please tell me how much I owe” conversation.

Which means if you’re only talking to your CPA once a year, and the conversation happens after the tax year is already over, there’s no opportunity to course-correct. Your practice grew. Your CPA doesn’t know. Your income dipped. Your CPA doesn’t know. You took maternity leave, brought on a second clinician, moved states, raised rates, opened a second office. Your CPA doesn’t know.

You can’t steer a ship you only look at after it’s already arrived at the destination.

The Other Culprit: Under-Withholding on a W-2

A second common reason for owing money has nothing to do with your practice at all.

Many therapists are working in more than one capacity. Maybe you have an adjunct professor role at a local university that sends you a W-2. Maybe you still work part-time for a larger group practice even though the bulk of your income comes from your own practice. Or maybe it’s the other way around, and your private practice is still what you’d consider side income.

Whatever the configuration, here’s what frequently happens. The W-2 job withholds taxes based on the assumption that it’s your only job. They have no idea you also have a private practice generating income. So the withholding from the W-2 is calibrated for a tax bracket far lower than the one you’re actually in. And because the withholding looks normal on every paycheck, there’s no warning sign until you file.

Combine under-estimated practice income with under-withheld W-2 income, and you don’t get a small surprise in April. You get a meaningful one.

So What Actually Works?

Here’s where I’d like to reframe the whole exercise.

Stop thinking about estimated tax payments as the goal. Start thinking about tax savings as the goal.

The difference matters. Estimated tax payments are money you send to the government at specific times of year, on specific due dates, in amounts somebody projected months or years earlier. Tax savings is money you set aside for taxes as you actually earn it, regardless of what the government’s calendar says.

The practice owners I work with who never owe again at tax time do essentially the same thing. They open a separate business savings account earmarked exclusively for taxes. Every time they pay themselves, a fixed percentage goes directly into that tax savings account. Then it stays there. It isn’t “business money” anymore. It isn’t “personal money” either. It’s the government’s money, and you’re just holding it in a separate account temporarily.

When tax time comes, the money is there. If last year’s estimates were off, the savings account absorbs the difference. If they were close, the account is still there… and probably earned a little interest along the way. Either way, there’s no April surprise.

The percentage you set aside depends on your income, your state, and a few other factors. Ask your CPA for a number. If your CPA can’t give you a percentage with reasonable confidence, that’s useful information about your CPA. A decent ballpark for most private practice owners falls somewhere between 20% and 35%, but your specific number could fall outside that range in either direction.

An Even Better Fix

If there’s one takeaway from all of this, it’s that owing money at tax time is usually a symptom of a once-a-year relationship with your CPA, not a symptom of bad math.

A CPA who only talks to you at tax time can only react. But a CPA who is in the mix all year can actually help, because they can advise while there’s still time left in the year to do something about it.

You don’t have to become an expert in the tax code. You don’t have to love numbers, or care about accounting software, or spend your evenings reading the IRS website. You need two things: a bank account that is exclusively for taxes, and a CPA who’s willing to talk to you more than once a year.

If you owed this year, you didn’t fail. You were operating inside a system designed to look backward, and it behaved exactly the way backward-looking systems behave.

Next year can be different. Open the tax savings account ASAP. Ask your CPA to keep an eye on things during the year. Proactivity will always leave you better than reactivity.