Differences in the Financial Risks for Employees, Contractors and Entrepreneurs
Financial Risks of Being an Employed Therapist
Choosing to work as an employed therapist comes with many benefits, such as stability, benefits, and administrative support. However, it’s important to recognize the financial risks that come with this career path. Unlike self-employment, where your income can grow based on the number of clients you take on, being an employee means your earning potential is largely determined by your employer. Understanding these financial limitations can help you make informed decisions about your career and financial future.
Limited Earning Potential
One of the biggest financial risks of being an employed therapist is limited earning potential. While self-employed therapists can increase their rates, take on more clients, or expand their services, employees are typically paid a set salary or hourly wage. Even if you work more hours, your income is restricted by your contract and company policies. Over time, this can become frustrating, especially if you feel that your skills and experience warrant higher pay.
Dependence on Employer Decisions
As an employee, your salary increases and job security are in your employer’s hands. Raises and promotions are often tied to budgets, performance reviews, and organizational policies. Even if you excel in your role, you may not have much control over when or how your salary increases. Some organizations offer annual cost-of-living raises, while others may freeze wages due to financial constraints.
Vulnerability to Budget Cuts and Restructuring
Another financial risk of employment is job instability due to budget cuts or restructuring. Many therapy positions are funded by grants, insurance reimbursements, or government programs, which can change over time. If an organization experiences financial difficulties, they may reduce hours, cut benefits, or even lay off staff. Even in a secure job, there’s always the possibility that your employer could make changes that affect your income or workload. This unpredictability can create stress.
Financial Risks of Being a Contract Therapist
Working as a contract therapist offers flexibility and higher earning potential, but it also comes with financial risks that employees don’t have to worry about. Unlike salaried positions, contract work doesn’t come with a guaranteed salary, employer benefits, or job security. If you’re considering becoming a contractor, it’s essential to understand these financial risks.
No Guaranteed Pay: Income Fluctuates Based on Client Load
One of the biggest financial risks of contracting is that your income is entirely dependent on your client load. Since you’re only paid for the sessions you complete, slow periods—whether due to seasonal trends, cancellations, or lower demand—can significantly impact your earnings. Unlike an employee who receives a salary, you must prepare for fluctuations in income. Some months may be highly profitable, while others may fall short of your financial needs. To manage this uncertainty, having a financial cushion and budgeting carefully are crucial.
Responsible for Self-Employment Taxes and Business Expenses
As a contractor, you’re also responsible for self-employment taxes, which are higher than those of traditional employees. While employees have taxes automatically deducted from their pay, contractors must set aside money for taxes, which can be around 15% or more of your earnings. If you don’t plan properly, tax season can be a stressful financial burden.
In addition to taxes, you must cover all business-related expenses. This includes liability insurance, continuing education, professional memberships, office supplies, and even rent if you work in a physical office. Many contractors also invest in marketing and administrative tools to manage their practice efficiently. These costs add up quickly, so keeping track of expenses and planning for deductions is essential for financial success.
Potential for Contract Termination Without Long-Term Job Security
Another major financial risk of contract work is the lack of long-term job security. Most contract positions do not guarantee steady work, and an organization can terminate your contract with little notice. If an agency or private practice you work with experiences financial difficulties, shifts its focus, or restructures its team, you may suddenly find yourself without income. This unpredictability can make it challenging to plan for long-term financial stability.
To mitigate this risk, many contractors diversify their income sources by working with multiple agencies, private practices, or telehealth platforms. Having different revenue streams reduces the impact of losing one contract. Building a strong professional network and maintaining a steady client base can also help you stay financially secure even if one opportunity disappears.
Financial Risks of Running a Private Therapy Practice
Owning a private therapy practice can be incredibly rewarding, offering full autonomy and the highest earning potential in the long run. However, with that freedom come financial risks that employees and contractors don’t face. As a private practice owner, you are responsible for generating your own income, managing business expenses, and navigating financial fluctuations. Understanding these risks and preparing for them can help you build a stable and sustainable practice.
No Guaranteed Income: You Must Generate Your Own Clients
Private practice owners must consistently attract clients to maintain income. In the early stages, this can be particularly challenging as you work to build a reputation and client base. There may be months when your schedule is full and others when referrals slow down. If you don’t have a solid marketing plan or referral network, financial instability can become a major concern.
Responsible for Business Expenses: Rent, Software, and Marketing
Running a private practice means covering all business expenses yourself, including office rent, therapy software, website maintenance, and marketing costs. These expenses can add up quickly, especially if you operate out of a physical office rather than a home-based or virtual setting. Even online practices require investment in scheduling software, telehealth platforms, and advertising to attract clients. Unlike an employee who benefits from an employer’s resources, you must budget carefully to ensure your practice remains financially sustainable.
Risk of Client Cancellations and Seasonal Income Fluctuations
Another financial risk is client cancellations and seasonal slowdowns. Some months, particularly during holidays or summer, may see fewer clients booking sessions, leading to a drop in income. Additionally, last-minute cancellations and no-shows can disrupt cash flow, especially if you don’t have a clear cancellation policy in place. To protect yourself financially, consider diversifying your income streams through workshops, group therapy, or digital products. Having a financial reserve can also help you weather slow periods.
The Reward: Full Autonomy Over Your Practice
Despite these financial risks, one of the greatest advantages of private practice ownership is full autonomy. You have the freedom to set your own fees, choose your ideal clients, and design your therapeutic approach without restrictions from an employer. You have the power to shape your practice in a way that aligns with your values and passions. This level of control allows for deep professional fulfillment and the opportunity to create a business that reflects your vision.
Managing Financial Risks and Thriving in Private Practice
While private practice carries financial risks, there are strategies to make it more secure. Learning basic business skills, tracking expenses, and seeking mentorship from experienced private practice owners can provide valuable insights. By taking proactive steps, you can minimize financial stress and focus on growing a fulfilling and profitable practice.
