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.
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]