If you run your own therapy practice, the safe harbor rule can save you from accidentally underpaying your taxes and being charged IRS penalties.

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Bonus: Provided your net income doesn’t change drastically from one year to the next, safe harbor is a simple rule of thumb for calculating and paying your quarterly taxes.

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Key takeaways:

• Qualifying for safe harbor saves you from being charged interest on unpaid taxes in the event you underpay the IRS.
• To qualify for safe harbor, you must pay either the equivalent of 100% of the taxes you owed the previous year (110% if your AGI is over $150,000), or 90% of the total amount you owe in the current year—whichever amount is smallest. 
• It always benefits you to pay your taxes as accurately as possible, so you both avoid underpaying (possibly incurring penalties) and overpaying (giving the IRS an interest-free loan).
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What is the safe harbor rule?

The term “safe harbor” is used in different financial and legal contexts to mean different things. But you can think of it as shorthand for “clever financial move that prevents you from possibly having to pay extra fees or penalties.”

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In the context of your therapy practice’s taxes, safe harbor refers to the quarterly taxes. When you qualify for it, safe harbor saves you from being penalized if you underpay your taxes.

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That’s good news, because if your therapy practice is new, it can be tricky anticipating how much you’ll earn in a particular year—and, in turn, difficult to determine how much you’ll owe in taxes.

Do therapists need to pay quarterly estimated taxes?

If you expect to owe $1,000 or more in federal taxes, then you’re generally required to pay quarterly taxes.

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You’re also required to pay quarterly estimated taxes if your practice elects S corporation status.

What happens if you underpay taxes for your therapy practice?

If you pay your quarterly estimated tax installments for the year, and it turns out you paid less than you owe, the IRS will charge a penalty on the unpaid amount. 

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Keep in mind, this only applies if you fail to qualify for safe harbor by following the safe harbor rule.

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The penalty is 0.5% of the taxes owed, calculated monthly, to a maximum of 25%.

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In the event you underpay and you don’t qualify for safe harbor, the best strategy is to pay the taxes owed as soon as possible.

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If you underpay your taxes but you qualify for safe harbor, you’ll still need to pay the difference. That is, if you owed $12,000 in taxes for the year, but you only paid $10,000, you’ll be required to pay the IRS the remaining $2,000. 

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But you won’t be penalized—meaning, even if you delay paying the $2,000, you won’t accrue interest on the amount owed. That can be helpful if you don’t have enough savings and you need time to earn more income before you can pay your back taxes.

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For more info, check out IRS Penalties for Therapy Practices.

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What happens if you overpay taxes for your therapy practice?

If you overpay the IRS, you won’t be penalized. The IRS will return the extra amount you paid as a tax refund.

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A tax refund may feel like a windfall, particularly when you’re well past tax season and last year’s quarterly payments. But really, in effect, it’s a free loan to the IRS.

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Think of it this way: If you end up owing the IRS $12,000, but over the course of the tax year you pay them $15,000, you’ve given the IRS an extra $3,000 to hold. While they’re holding it, the money isn’t accruing interest for you, or doing anything useful—it just sits there.

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In the meantime, you could be using that $3,000 to pay your bills, reinvest in your business, or even cut yourself a nice end-of-year bonus. Or you could be investing it in a retirement account or an HSA, where it can earn you more money by accruing interest.

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You miss out on that interest—or all the other useful things cash may be used for—when it’s in the hands of the IRS. So it’s always in your best interest to estimate your taxes as accurately as possible.

How can therapists qualify for the safe harbor rule?

There’s nothing your therapy practice needs to do to qualify for the safe harbor rule. 

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As long as your total tax payment for the year (in four quarterly installments) adds up to the safe harbor limits, you automatically qualify, and the IRS will refrain from charging you underpayment penalties.

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How to use the safe harbor rule

To meet safe harbor requirements, your total tax payment for the year must be:

• At least 100% of the prior year’s tax bill (110% if your AGI is over $150,000), or
• 90% of the current year’s tax bill 

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whichever amount is smallest.

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Example #1: For 2024, you ended up owing $20,000 in federal taxes, which you paid. In 2025, you earn a higher net income for the year, and your tax bill comes to $25,000. However, over the course of 2025, you paid $20,000 in quarterly installments. That’s equal to 100% of your 2024 tax bill, so you qualify for safe harbor. You’ll still owe the IRS $5,000 when you file, but you won’t be penalized.

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Example #2: For 2024, you ended up owing $20,000 in federal taxes, which you paid. In 2025, you earn the same amount as the year previous, and end up owing $20,000. However, due to a miscalculation, you pay only $18,000 in quarterly taxes for 2025. Even though you didn’t pay the equivalent of 100% of last year’s tax bill, it’s okay: $18,000 is 90% of $20,000, the current year’s tax bill, meaning you paid the (smaller) amount of the safe harbor limit.

When not to pay 100% of last year’s bill

If you anticipate that, over the course of the coming year, you will earn significantly less than you did the year previous, you may want to adjust your tax payments. Otherwise, by paying the IRS the equivalent of 100% of last year’s bill, you could end up overpaying and tying up funds that might be used otherwise.

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For instance, if you’re expecting to give birth in the coming year, and have planned to take six months’ maternity leave—and earn only half of your usual annual income as a result—you should create a financial projection and pay quarterly taxes on what you expect to earn in the new year rather than paying the same amount you paid the year previous.

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In that situation, it would be wise to consult with an accountant or your team at Heard. They can help guide you in creating accurate financial projections for the year ahead, so you can pay quarterly estimated taxes as accurately as possible.

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First time paying estimated taxes? Check out our article on quarterly estimated taxes for therapists.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.‍

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