How to Start a Private Pay Therapy Practice

Key Takeaways:

• Target your marketing to clients with out-of-network benefits.
• Draft intake documents that specify how you accept out-of-network benefits.
• Choose a business entity type, build a budget, and set up your back-office admin.

To launch a private pay therapy practice, you’ll need to create a marketing strategy targeting clients with out-of-network (OON) benefits and draft intake documents specifying you’re not in-network with insurance companies. 

That’s on top of the usual steps for launching a private practice—like deciding how you’ll get paid, planning your startup budget, choosing a legal entity, and registering your business.

Here are the basics of starting your own therapy practice, with an emphasis on what to do if your practice is private pay only.

What is a private pay therapy practice? 

A private pay therapy practice is not in-network with insurance companies. In other words, private pay therapists do not accept insurance. 

Private pay is also sometimes called self pay, cash pay, direct pay, out-of-network, or fee-for-service. They all mean the same thing. There are pros and cons to being a private pay therapy practice. 

Pros of private pay 

• Higher and more predictable income: You set your own fees and you don’t have to wait for payment from insurance companies. 
• Less administrative burden: No prior authorizations, treatment plan audits, or insurance claim denials. 
• More clinical autonomy: No diagnosis required and you have the ability to adjust session length and frequency.

Cons of private pay

• Access and equity concerns: Private pay fees can exclude lower income clients.
• More marketing required: You can’t rely on insurance directories for referrals. 
• Out-of-network reimbursement complexity: Clients may not understand their benefits and how the process works. 

How do private pay therapists get paid?

Insurance companies reimburse in-network therapists at a fixed rate. Private pay (out-of-network) therapists are paid directly by their clients. Depending on their plans, clients may be partially reimbursed for out-of-network services or not reimbursed at all.

How to accept payments as a therapist

There are four ways to accept payments as a therapist:

1. Insurance reimbursements. You file a claim with a client’s insurance provider and the company reimburses you. This only works if you’re credentialed with the insurance company (i.e. you’re in-network).
2. Out-of-network benefits. If a client has out-of-network benefits, the client pays 100% of your fee upfront. You provide a superbill to them, which they send to their insurance provider. The client is partially reimbursed after they hit their annual deductible.
3. Cash pay. A client pays 100% of your fee using a HIPAA-compliant payment processor like Thrizer. They’re not reimbursed by insurance—either because they don’t have insurance, or because their insurance doesn’t provide out-of-network benefits.
4. Thrizer Pay. Once your client has met their annual deductible, they only pay their co-pay. Thrizer floats for the remainder and waits for reimbursement from the insurance company.

How to bill clients as a private pay therapist

When you’re a private pay therapist—meaning you’re not credentialed with any insurance companies—you have four options for billing clients.

1. A HIPAA-compliant payment processor like Thrizer. Any platform you use to bill clients must be HIPAA-compliant. Thrizer lets you bill clients directly, while also offering payment options making it easier for clients to be reimbursed. Popular payment processors like Venmo and CashApp are not HIPAA-compliant.
2. Built-in EHR tools. Many electronic health record (EHR) and practice management tools provide integrated HIPAA-compliant billing options.
3. Electronic funds transfer. You can accept an electronic funds transfer via an automatic clearing house (ACH). You’ll need to set up an ACH account and ensure the ACH service is HIPAA-compliant.
4. Cash or check. Some clients still prefer to pay this way, and some therapists still accept these forms of payment. But the popularity of cash and check payments is declining.  

You can also use a combination of the methods above, adapting as needed to meet your clients’ needs.

How do you create a startup budget for a private pay therapy practice?

To create a startup budget for your therapy practice: 

• Create a list of expenses you’ll need to pay to get your new practice off the ground.
• Estimate the total amount of each expense.
• Set aside funds for each expense.
• As you pay for expenses, update your budget—report how much you actually paid vs. how much you estimated.
• Once you’ve launched your practice, assign any leftover funds to your operating budget.

Common therapy practice startup expenses

The most common startup expenses for new therapy practices are:

• Business entity formation: If you’re registering a limited liability company (LLC), plan to pay $50 – $200 to file Articles of Organization with your state.
• Liability insurance: Most state licensing boards require you to register for liability insurance. Premiums range from $400 – $1,000 per year.
• Business license: In most cities and municipalities, a business license costs from $80 – $200.
• HIPAA-compliant email: Google Workspace includes HIPAA-compliant email. You can make your Gmail account HIPAA-compliant for $7 per month. 
• EHR software: For HIPAA-compliant client records storage, plan to spend at least $30 per month. You can often save money by paying for an annual plan.
• Professional website: Hosting plans for a professional website start as low as $5 per month, but a new website can cost several thousand dollars if you hire a designer.
• Office rent: Your lease may specify a damage deposit you need to pay, plus a requirement to pay rent for the first and last month of the lease.
• Furnishings: Set aside funds for furnishing your office with a desk, waiting room items, and a comfortable couch or chair for clients.

Other optional expenses include bookkeeping and accounting solutions, online directory listings, and a business phone. These business expenses are tax deductible. 

What legal entity is best for a private pay therapy practice?

In most cases, an LLC or professional limited liability company (PLLC) is the best legal entity for a small to medium sized private pay therapy practice. It offers more liability protection than a sole proprietorship, plus flexibility in terms of how your practice is taxed by the IRS.

The most common business types for new therapy practices are sole proprietorship, LLC, and S corporation:

Sole proprietorship

As soon as you start earning self-employment income, the IRS considers you a sole proprietor. Your person and your business are identical for legal and tax purposes. 

Pros

• Simple tax filing: You file Form 1040 (an individual tax return) annually, including Schedule C to report business income and losses.
• Minimum paperwork: Besides Schedule C and Schedule SE (for calculating self-employment tax), you don’t need to file any additional forms to be treated as a sole prop.
• Low cost: There’s no fee to register as a sole prop. And of all the business types available, accountants charge the lowest fees for filing sole prop tax returns.

Cons

• No liability protection: Your person and your business are identical, so your personal assets are not protected from liens or legal proceedings.
• Self-employment tax: You pay 15.3% self employment tax on 100% of your earnings. An S corp, in contrast, may limit the amount of your income subject to self-employment tax.
• No partners or shareholders: A sole prop is suited to solo practices. It doesn’t include options for bringing on partners or shareholders.

LLC or PLLC

You register your LLC or PLLC by filing Articles of Organization with your state. Once it’s formed, you can choose how your business is taxed at the federal level—either as a partnership, an S corporation, or a disregarded entity (similar to a sole prop).

Most states require therapy practices to register as PLLCs rather than LLCs. PLLCs come with requirements for liability insurance, protecting both the practitioner and their clients.

Pros

• Liability protection. Provided you keep your personal and your business finances separate, your personal assets are protected from liens and legal proceedings.
• Flexibility. You can elect different tax statuses, adapting your practice as it grows.
• Multiple partners or shareholders. An LLC can elect to be treated as a partnership or an S corporation, so multiple individuals can share ownership.

Cons

• Added cost. You’ll need to pay fees to form your LLC, plus franchise tax to maintain it year to year. Costs vary by state.
• Filing fees. Accountants may charge more to file LLC tax returns than to file sole prop tax returns.
• Paperwork. You’ll need to prepare documents to register your LLC and comply with reporting requirements in your state.

S corporation 

An S corporation is not a legal entity—it’s a tax status. An LLC can choose to elect S corp status, affecting how it is taxed by the IRS. 

Pros

• Tax reduction. As the owner, you only pay self-employment tax (15.3%) on the earnings you receive from your S corp as employee compensation. Other funds you take out (in the form of distributions) are not charged self-employment tax.
• Multiple shareholders: Your S corp may have one shareholder (you, the owner) or multiple. 
• Pass-through entity: Income is passed through to shareholders based on their ownership of the S corp and taxed individually. Unlike a C corporation, your S corp does not pay tax on its own income (sometimes referred to as “double taxation”).

Cons

• Payroll: You’ll have to set up payroll in order to pay yourself as an employee of your S corp, which creates more administrative burden.
• Operational costs: Increased accountant fees, plus payroll, take a bite out of your tax savings as an S corp. In most cases, an S corp only makes sense once your practice is earning $80,000 – $100,000 net annual income.  
• Complexity: Filing requirements for employee tax withholdings and shareholder distributions, plus LLC reporting requirements at the state level, mean an S corp takes more work to run.

What does a private pay therapist need in order to form a business?

Regardless of your business entity type, there are three important registrations you need to complete in order to operate your business: An Employer Identification Number (EIN), a National Provider Identifier (NPI), and a doing business as name (DBA).

Getting an EIN 

Whether or not you plan to hire employees, you should register an EIN. Without it, you may be unable to open a business bank, and you can’t register an LLC.

An EIN acts like an SSN for your business, and the IRS uses it to track your tax returns. You’ll include it on all tax forms where your business is identified.

Registering is free, and you can apply for an EIN online.

Getting an NPI

Your NPI is a ten-digit code that allows insurance companies to identify you. You need an NPI even if you don’t plan to become credentialed with insurance companies. It’s essential for preparing superbills for clients or using an out-of-network payment solution like Thrizer.

‍Apply for an NPI online.

Getting a DBA

You may not actually need a DBA. If you intend to operate under your own name (e.g. “Bryce Warnes), there’s no need to register one. But if you plan to operate under any other name (e.g. “Bryce Warnes Counseling”), you will.

You apply with your state to register for a DBA. The process for applying and the cost of registering one varies by state. Visit your Secretary of State’s website for information.

Does a private pay therapy practice need a business license?

In most cases, your therapy practice will need a business license in order to operate. The cost of your license and the process for acquiring it depends on your location. 

• Where to buy: You purchase a business license from the municipality or city where your practice operates.
• Cost: You can expect a business license to cost $80 – $200, and you will need to renew it each year.
• Application: Expect to provide details about your business, including its location and your contact information.

For more information on buying a business license, visit your Secretary of State’s website or contact the local branch of the Small Business Administration.

Does a private pay therapy practice need insurance?

Your state licensing board requires you to purchase professional liability insurance in order to operate as a therapist. 

Also referred to as malpractice insurance, this type of coverage protects you in the event of lawsuits from clients. It also covers the cost of defending your license if a complaint is brought before the licensing board.

You may choose to purchase other types of insurance to cover your practice. 

Types of insurance

Many insurers offer business owner plans (BOP) bundling together general liability and commercial property insurance. It usually costs less to buy a BOP than general liability insurance and commercial property insurance separately.

Professional liability insurance is typically purchased separately.

• General liability insurance protects you from claims brought against your practice involving bodily injury, property damage, or personal or advertising injury.
• Commercial property insurance covers business property in the event of damage or loss. That includes business items like computers, furniture, and signage. 
• Professional liability insurance only applies in the event you are sued for malpractice or complaints against you are brought before the licensing board.

Insurance cost

Insurance premiums vary according to your location, the size of your practice, and the assets you need to protect.

• General liability insurance: $300 – $800 per year.
• Commercial property insurance: $300 – $1,000 per year.
• Professional liability insurance: $400 – $1,200 per year.

A bundled BOP typically ranges from $500 – $1,800 per year. 

What is the best kind of bank account for a private pay therapy practice?

In most cases, a low-fee business checking account is the best option for your therapy practice.

You should keep your personal and business accounts separate. That makes bookkeeping and accounting simpler and more straightforward. And if you have an LLC, it’s absolutely essential for meeting the conditions needed to protect your personal assets.

How to open a checking account for your private pay therapy practice

Follow these steps to open a business checking account:

1. Register an EIN.
2. Gather necessary business documents including your business address and contact info, Articles of Organization and Operating Agreement (if you have an LLC), and DBA (if applicable).
3. Apply online (the fastest option) or in person at a local branch.
4. Make an opening deposit (different accounts have different minimums, ranging from $0 to $500).
5. Transfer funds to your account.
6. Order a debit card and checks if necessary.
7. Set up your online banking account.

Once your account is open, use it exclusively for business income and expenses. You can make this easier by linking it to your accounting or bookkeeping software and by linking it to a billing platform like Thrizer.

How does a private pay therapy practice handle client intake?

During new client intake, the most important information you need to provide new clients is:

• The fact that you do not accept insurance.
• Their options for paying out-of-network.
• Registration details if you’re using an out-of-network billing platform like Thrizer.

Client intake forms and documents

These are the forms and documents you should be prepared to provide each new client, with emphasis (*) on paperwork involving out-of-network billing. Your client will need to sign each form.

• Authorization for Release of Information: Authorizing you to share information from your sessions with the outside individuals or institutions listed.
• *Client Financial Responsibility: Agreeing to pay your fees in a timely manner using out-of-network payment procedures.
• Consent for Telehealth Consultation: Confirming that they assent to online telehealth sessions.
• Credit Card Authorization: Providing credit card information for billing and authorizing you to charge it.
• *Estimation of Benefits: Agreeing to the amount of out-of-network reimbursement provided by their insurance, and to cover the deductible or copay themselves.
• *Good Faith Estimate: Agreeing to the cost you have estimated for their treatment, including your hourly fee and services offered.
• Informed Consent for Psychotherapy: Recognizing what therapy entails, the potential risks, the level of confidentiality you provide, the circumstances under which you might provide anonymous information to third parties, and expectations for any interactions outside of therapy.
• Intake Questionnaire: Providing essential information to help you provide treatment.
• *Official Practice Policies: Agreeing to the policies you set around appointment and cancellations, billing, phone accessibility, electronic communications, confidentiality, etc.
• *Statement of Reimbursement: The therapist’s template for creating superbills.
• Termination Summary Form: The therapist’s template for a report on each client who ends treatment with them.

How does a private pay therapist set their fees?

In addition to the factors affecting most therapists’ fees—including experience level, location, and competitors’ rates—a private pay therapist also needs to take into account out-of-network reimbursement rates and affordability.

Factors affecting therapy fees

These factors affect the fees you set for your practice, with emphasis (*) on those impacting private pay therapists.

• Experience, credentials, and certifications: How long you have been in practice, your credentials (including degrees and designations), and any extra continuing education certifications (e.g. for certain modalities or treatment methods).
• Location: If you are in a location with a high demand for therapists, you may be able to set higher fees. If demand is low, on the other hand, you may need to set your fees lower to remain competitive.
• Competitor fees: The amount charged by other therapists in your area with similar experience and credentials.
• Operating expenses: Your fees should allow you to cover operating expenses, including your personal salary, while building up retained earnings.
• *Client budget: Because you are only targeting clients out-of-network, you may need to adjust your fees to make your services an affordable alternative to seeing an in-network therapist.
•  *Client coverage: Take the time to research typical out-of-network insurance coverage for your target demographic. Reimbursement rates, deductibles, and copays will affect their ability to pay for your services.

How do you get clients for private pay therapy?

To attract new clients to your private pay practice: 

• Direct your marketing at prospects who have out-of-network benefits.
• Be clear in your messaging about your status as an out-of-network therapist.
• Highlight an out-of-network billing solution like Thrizer that makes paying for therapy easier and more affordable for potential clients.

Here’s a quick crash course on marketing your new practice.

Create a marketing plan

First, put together a plan for how you’ll market your services, including:

• Your niche: The type of client you aim to attract, and the services you’re able to offer them.
• Your voice and tone: How you’ll address potential clients in all your marketing materials, with a focus on warmth, humility, and approachability.
• Your channels: How you’ll reach potential clients, whether it’s through referrals, local networking, or online ads.

Launching your practice, you should plan to have these assets prepared:

• Professional headshot: A clear, welcoming, and professional photo builds trust, and it’s essential for your website and directory listings.
• Website: Your website makes you searchable and provides essential information about your practice. You can link it to your Google Business listing and include options for booking free consultations online.
• Directory listing: A listing in Psychology Today is the first step most therapists take towards establishing their marketing, making it easier for potential clients to find them and learn about their practices.

Build your marketing budget

Your marketing budget ensures you have the funds you need to cover marketing expenses, while giving you a means to track how much you actually invest in marketing.

Some common budget items:

• Webhosting
• Directory listing
• Social media ads
• Local newspaper ads
• Networking events
• Fliers and business cards

Be clear about payment methods

By being upfront about how you charge clients, you’ll filter out potential clients who are unwilling or unable to get treatment from an out-of-network therapist. At the same time, highlighting a solution like Thrizer can overcome objections and make out-of-network therapy a more attractive option.

Provide payment method details on:

• On your website
• In your directory listing
• In your social media profile
• In brochures and fliers

Test different marketing channels

Often, success marketing your practice comes from unexpected places.

Track how different marketing channels perform, compare the cost of each channel with the number of new clients it brings you, and experiment with new means of reaching clients:

• If online ads aren’t working, consider introducing yourself to local professionals to build up a referral network.
• If visitors to your website aren’t booking consultations, consider launching a newsletter to nurture them over the long term.
• If you’re struggling to reach a wider audience, consider applying to be a guest on therapy-focused podcasts.

Marketing is an area of your practice where imagination and a willingness to experiment pay off. Investing time early on can help you build up a steady stream of new private pay clients and develop a thriving practice.

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Summary

• To launch a private pay practice, tailor your marketing and intake to clients who have out-of-network benefits.
• A sole proprietorship is the most straightforward choice in terms of business structure, but an LLC or PLLC provides liability protection.
• Electing S corp status can reduce your tax burden once your annual net income is $80,000 to $100,000.
• Registering for an EIN is free, and it sets you up to register as an LLC and open a business checking account.
• Create a startup budget for all the expenses you need to get your practice off the ground—including business formation, rent, insurance, and a website.
• Professional liability insurance is essential, but general liability and commercial property insurance provide added protection.
• Open a low-fee business checking account to keep your finances organized and—if you’re an LLC—protect your assets.

For an in-depth guide to growing your private pay caseload, check out How to Get Private Pay Clients for Therapy.  

This blog post is provided for informational purposes only and is not intended as legal, business, medical, or insurance advice. Laws relating to health insurance and coverage are complex, and their application can vary widely depending on individual circumstances and state laws. Similarly, decisions regarding mental health care should be made with the guidance of qualified health care providers. We strongly recommend consulting with a qualified attorney or legal advisor, insurance representative, and/or medical professional to discuss your specific situation and how the laws apply to you or your situation.