therapist pay

Therapist pay in private practice

Posted in Money in Practice

In private practice, therapist pay is rarely based on a salary. Rather all private practices sell a service, usually psychotherapy or psych testing, to the public and collect payment for that sale.

Typically both the client and often an insurance company pay part of the fees. Sometimes other income sources contribute, perhaps from a church or family member who is paying for some of the cost of the psychotherapy.

What happens to the money?

Private practices have two ways of managing the money from there. In some cases, the income from all sources is deposited by the therapist into the therapist’s bank account. Expenses and rent then are paid from that income. This is a typical “independent contractor” scenario. It is the simplest organizational structure and is quite common.

In other cases, the income is collected by the organization where the therapist is employed. The organization then pays the clinician either a “percentage of collections” or a flat hourly fee for the work that was done. The organization can choose whether to pay the clinician as an “independent contractor” or as an “employee.”

It is essential to understand the differences between an independent contractor or a W-2 employee when comparing different possible pay structures. Let look at that now.

Taxes: Independent contractors or employee

The Internal Revenue Service allows for two types of employees: independent contractors and regular W-2 employees. (See Independent Contracting vs Employing and the IRS website for more on this topic.) This decision determines who pays which taxes.

The IRS requires independent contractors to pay 100 percent of their Social Security and Medicare taxes. This adds 7.65 percent to the independent contractor’s tax bill over a regular W-2 employee’s tax liability. But if the employer decides to pay the therapist as a regular W-2 employee, then the company, rather than the individual, pays that 50% of the employee’s Social Security and Medicare taxes.

To summarize then, an independent contractor will pay 15.3 percent of income toward social security taxes. And a W-2 employee will pay 7.65 percent of income toward social security taxes, and the company will pay 7.65 percent toward the employee’s social security taxes. The IRS always gets their money in one way or another. Independent contractors pay all of it. Employees pay half of it with the employer paying the other half.

A simple example

Let’s compare two separate compensation plans. The first is an independent contractor. The second is a W-2 employee. How do we make them equal?

  • If the Independent contractor’s arrangement is for 57.65 percent of the collections to come to the therapist, this plan equals
  • A W-2 employee’s agreement for 50 percent of the collections

Taxwise, these are equal deals.

Recognizing how taxes are handled allows us to compare independent contractors and employees.

The split: How much goes the practice, and how much to the employee?

The most common way that organizations handle things is to calculate pay based on a “percentage of collections.” The practice collects the fees and divides them between the therapist and the practice using a formula to determine actual amounts. And this is called productivity-based pay and is perfectly legal.

Actual percentages vary quite a bit. In most areas of the country, employee percentages range from a 40/60 to 60/40 split for W-2 employees. In other words, the therapist gets 40 to 60 percent of the collections. The organization gets the remainder.

Usually, independent contractors get about 10% higher to cover the additional taxes we talked about earlier.

The exact split may have to do with regional differences as well as various incentives that employers build into their formulas. In the practice I owned, we had a set of graduating percentages that gave busier and more experienced clinicians a greater portion of collections.

As a side note, most practices make no pay distinctions between psychologists, social workers, mental health counselors, and marriage and family therapists. Occasionally practices pay psychologists a higher percentage. I discourage this. Why? Because social workers, mental health counselors, and MFTs get a lower reimbursement rate from insurance companies anyway. Hence I encourage all practices to pay everyone with the same formula.

When practice owners are in a partnership, there may also be a partnership profit-sharing disbursement toward the end of the year. But of course, this can only happen if there was a profit.

Other factors

The last set of factors to consider is harder to quantify. Yet these factors can make a difference in the employee’s experience and income. For example:

  • How many referrals will the employer be providing? This has significant ramifications for the pace of growing a caseload and, therefore, the income that you take home. Obviously, the more the practice is helping build the caseload, the more valuable it is to join them. (See How many referrals does it take to get 1000 sessions per year?)
  • What kind of reputation does the organization have in the community? This can have enormous ramifications for how easy it will be for you to build a solid reputation in the community.
  • How will that reputation enhance your marketing efforts? 
  • How much is the organization providing to you for marketing, supervision, technology, and back-office support? (See Marketing favorites that are not a big stretch.)
  • Are their other benefits that the organization is offering? Some practices make contributions or payments for retirement benefits, health insurance, continuing education contributions, licensing fees, and malpractice insurance. These exist in some larger and more established private practices. Not in most. Assuredly, these benefits add value to an offer.

All these non-quantifiable factors have some monetary value. Yet it is difficult to calculate to the penny. In short, the more the organization is providing, the valuable the offer is. This translates into a more comfortable professional life for you. All these factors should count for something.

The whole therapist pay package

In the end, it is the entire package should be considered. And when looking for a job, the more benefits, the better.

Also, read this:

Calculating psychotherapist pay in private practice [Income Calculator included]

Estimating your private practice income

Wealth in Mental Health – Where are the good-paying jobs?

Why create another mental health practice

Independent Contracting vs Employing

Types of organizations employing mental health providers

Enjoying this article? Share your thoughts.

  1. Patrick says:

    Is a W-2 employee paid based on a percentage split of collections by default always going to be a non-exempt employee since they have no base salary? Since the individual employee therapist generally manage most day to day details is there a way to classify them as exempt employees?

    1. David Norton says:

      Hi Patrick. The IRS has a list of criteria used for determining if whether an employee is an independent contractor or an W-2 employee. See this page for more details: Management of day to day details is just one of the many criteria. You may want to go over it with your attorney. I talked with a couple of attorney friends and one that I hired and they all said it was safest for me to treat them as W-2 employees, especially as we got larger and therefore attracted more attention. For us the big factor was that our therapists were dropping all other work to work exclusively with us. That made it harder to claim that they were an independent contractor, especially when we had meetings together and worked together on marketing ourselves.

  2. Katie says:

    Hello, I am working in a group private practice and my reimbursement rate is 50% of “collected revenue for services provided” (per my employee contract). I recently learned that the practice collects 100% of no-show fees ($150) and does not distribute any percentage of this revenue to the clinician. Is this typical for group private practices? It seems unusual for the practice to collect 100% and the clinician gets 0% regardless of admin tasks and time connected to these no shows. Please offer any insight you have around this issue. Thank you!

    1. David Norton says:

      Hi Katie. I agree that something is off here. We used the same percentages for any money that came in. Any fees collected from insurance, client, or occasionally another party ran through the same formula. Therapy fees, psych testing fees, no show fees all are treated the same. I’m not sure what the rationale would be for treating some fees differently. I would at least ask what the justification is. The therapist (you) were the one who scheduled the appointment only to have the client not show. Yes you could recoup some of the time by doing other things, but not other things that generated income.

  3. Paul Feldman says:

    I’m just about to finish up my associateship from my PsyD and I’m looking for clinical job. I’ve heard most jobs pay only a percentage with no guaranteed salary. Is this so?

    1. David Norton says:

      Hi Paul. You are correct if you are looking at a private practice job. There are a few large practices who may provide a “draw against future earnings” sort of payment system that would give you a small-ish salary that would be paid back by future earnings. Otherwise private practices usually pay clinicians by a percentage of collections which means a slow build-up in salary. It takes a while, i.e. months to a couple years, depending on the practice and how many referrals they are providing to get you started. Most not-for-profit, hospital, government jobs are salaried right from the start. I have a brief discussion of this here: Types of organizations employing mental health providers

  4. Loryn Cummins says:

    Do you have an example of the graduating percentages depending on income brought in by a clinician?

    1. David Norton says:

      Hi Loryn,
      So we had 3 levels based on collections in a given month. So say you collected $XXX in a month–that would mean one percentage. If you collected $XXXX in a month that would mean the clinician would get about 5% more. Another 5% bump if one collected > $XXXXXX in a month. What this is saying is that the “more activity gets the clinician a greater percentage”. My example here is actually simpler than we actually used because we had one set of percentages for the first year one was one our staff and then once they were promoted to Senior Staff. That promotion could happen after 12 months and plus meeting several criteria, a list of about 10 items. As for where that base percentage was, that seems to be highly regional. In our area, most private practices are paying clinicians 50% of collections. We paid the clinicians higher than that but since I am no longer the owner, it not for me to say exactly what those percentages are. The goal was to stay competitive with our therapist market while being as generous as we could.

  5. Moe says:

    I am going to be a w-2 employee as a licensed clinician with a group. we have a group EIN for insurance companies, but it sounds like I am going to be billing insurance with my own tax ID as the provider and everything. I have filled out a w-9 for the insurance company as a sole proprietor. is this incorrect? all checks will be going to the group, and I am paid my percentage split from total collected from sessions per month. any information would be helpful. thanks.

    1. David Norton says:

      Hi Moe,
      So let me take this a bit at a time and see if I understand. First off, when you form a group, i.e. a legal entity, a company, you will always need an EIN whether you bill with it or not. This is for employment tax purposes and the IRS requires it.
      Then if you are billing insurance as an individual, then yes you need a W-9 for each insurance company you are billing. The insurance company will require the W-9 before they will send you a check.
      Then you say the checks will come to the group. I think you mean that checks in your name will have the group address. This is also fine. The group then will calculate the percentages and you will get your paycheck each month. This is not an unusual setup and works fine.
      Let me just say that there can be advantages to billing as a group. We have been able to negotiate higher reimbursement rates as a group than as individuals. Apparently insurance companies prefer to work with larger groups than with a bunch of individuals so they kind of tip the scales in that direction. I would not worry about that if your group is less than 10 people but if it gets larger, billing as a group and then negotiating higher rates will be the way to go.

  6. Christine says:

    I run a nonprofit mental health agency. We offer contract therapists a percent split in terms of the revenue received. We offer full staff support and the infrastructure (office space, software for maintaining and billing, back offfice and front desk support, voicemail, among other things). What should the percent split be since we are covering 100% of the overhead?

    1. David Norton says:

      Hi Christine,
      You would think this would be a straight-forward question but it is not. So here is how I would think about it.
      As a nonprofit, you doubtless have several different payers–insurance companies, private pay, money coming through foundations and maybe a benevolence fund of some sort that gets funded from other sources. So the question I would be asking as a provider is “What is the average collection rate for each hour of therapy?” i.e the actual amount that is collected on average for each hour.
      I know from my practice that private practices collect from $100 to $125 per hour, on average. That average includes all sessions include low paying insurances and all the other payers and even the no-show sessions. That said, then if your collection rate is in that range, then therapists usually get from 60% to 70% of collections, as independent contractors. If they are paid as a W-2 employee than they get 50% to 60% of collections…usually, that is. If you are taking them right out of graduate school and therefore providing supervision, then maybe they are being a 5% to 10% reduction to cover the additional costs to support them. (BTW I cover the differences between independent contractors and employees here here.)

  7. Sheila says:

    Hello, I work in a private practice as a W-2 employee. I am paid 50% of collected insurance payments. But some clients have never had their insurance billed, and others have had bills out for 90 days without payment. Is this the normal course of this business?

    1. David Norton says:

      Hi Sheila,
      This is NOT a typical way for billing to be handled. The usual course is this: verify the client’s insurance benefits, the session occurs, collect copays and co-insurance from the client. Then after the session, the agency bills the insurance company for the session and collects payment for the session. Then both the payments from clients and insurance companies become the basis for determining the “gross collections” for the month and then the formula is applied to determine wages for the therapist. If that is not happening, then both the agency and the therapist are leaving “money on the table” so to speak and are not getting all that they have due. Only the insurance company benefits from this lapse.
      I would talk to your employer and see how this might be corrected.

  8. DRZANE says:

    I’m just starting my practice and need to hire a 1099 therapist to share the load: where can I go to get an appropriate contract drawn up? Ideally, I’d like an editable PDF I can reuse when/if I hare someone else… Where do you all get your paperwork from?

    1. David Norton says:

      Hi Dr. Zane,
      I am unaware of a preformatted contract like you are asking for. I have always used an attorney to help me draw up this sort of document. While there was some cost, it was customized to my needs and interests. Some legal websites might have something. I know there are some advertising simple contracts. Might be a cost there too.

  9. Dan says:

    Is it normal for an individual contract therapist to also pay rent to the agency? For example, if there is a $600/mo rent paid to the agency for the office space, along with a 70/30 split.

    1. David Norton says:

      This is an unusual arrangement. More typical is either renting space, at some agreed amount each month, OR a percentage of collections. Though unusual, I can see the need for paying for services that the practice may provide on your behalf. But in my view, 30% seems high for billing, phones, an internet connection, etc., especially since you are already paying for space.

  10. Anne Adams says:

    I’m looking to bring on an independent contractor due to the amount of referrals I’m getting. I’m curious to learn how I am able to track the contractors appointments so that I am getting paid for each session that takes place. How will I know if the contractor sees them 2x a month vs weekly if they are using their own scheduling system? Thanks for your time.

    1. David Norton says:

      If you are not planning on using a joint scheduling and/or billing system, then think carefully about the arrangement. Some choose an arrangement that rents space in 4-hour blocks. For example, maybe your arrangement is that the independent contractor rents your office space in 4-hour blocks, say, X dollars for weekly times on Tuesday evenings from 5 pm to 9 pm and Weds afternoons from 1 pm to 5 pm. You are really just keeping track of the space and not the contractor’s schedule. If the contractor then has only 3 people show up, that is on the contractor. You can make this approach attractive for the contractor by keeping the rent low.

      Having said this, I would want you to think a little further out. An independent contractor may help with immediate needs but are will you not continue to grow and then need more help? If so then eventually you may be looking at more staff and more management. I have quite a few posts on these decisions but consider reading these: The dilemma of success: Do it myself or delegate and Growing pains: Hiring new clinicians

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