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Should Your Therapy Practice Be an S Corp?
For many therapists with steady income, an S corporation election lowers self-employment tax. For others, the added costs outweigh the savings. Here's how it works, what it really costs, and how to know which group you're in.
How an S Corp Saves Money
As a sole proprietor or single-member LLC, nearly all of your practice profit is subject to self-employment tax: 15.3% up to the Social Security wage base, and 2.9% for Medicare above it. That's in addition to income tax.
With an S corporation, you become an employee of your own practice. You pay yourself a reasonable salary through payroll, and payroll taxes apply to that salary. The rest of the profit can be taken as distributions, which aren't subject to those payroll taxes.
An example. Say your practice earns $120,000 in profit, and a reasonable salary for your role is $70,000. As an S corporation, payroll taxes apply to the $70,000 salary rather than the full $120,000. The remaining $50,000 comes to you as a distribution. Your income tax still applies to the whole $120,000.
What It Costs
The savings are real, but so are the added costs and responsibilities:
- Payroll. You'll run payroll for yourself, file quarterly payroll returns, and issue yourself a W-2.
- A separate business tax return. The S corporation files Form 1120-S each year, in addition to your personal return.
- State taxes and fees. Some states tax S corporations directly. California, for example, charges 1.5% of net income with an $800 minimum.
- More bookkeeping discipline. Personal and business money must stay fully separate, and reimbursements need to run through a proper plan.
The Salary Question
The IRS requires S corporation owners who work in the business to pay themselves reasonable compensation before taking distributions. Paying yourself too little is one of the most common S corporation audit issues. We document a salary based on your license, hours, caseload, and local market, so you have support for it if it's ever questioned.
What People Often Miss
- The qualified business income deduction. Your salary affects this deduction, and higher-income therapists can lose it entirely. The trade-offs need to be calculated, not guessed.
- Timing. An election generally must be filed within two months and 15 days after the start of the tax year it applies to. Late-election relief is often available, but it's better to plan ahead.
A Calculation, Not a Slogan
You've probably heard that every therapist making six figures should be an S corp. Sometimes that's true, and sometimes it isn't.
Our S Corp Analysis analysis runs the numbers for your practice and gives you a clear, straightforward answer. If the election makes sense, we file it and set up payroll. If it doesn't make sense yet, we'll tell you why and what would change that.
Book a free discovery callWhat the Analysis Covers
- Projected self-employment tax at your current structure versus an S corp
- Reasonable compensation for your license, hours, and market
- Payroll, state, and compliance costs of the election
- Timing: when to file Form 2553 and whether a late election is available
- The income level where the election starts to pay for itself
Every analysis is a written document you keep, prepared and reviewed by a CPA.
S Corp Questions
When Should a Therapist Become an S Corp?
The break-even point is generally between $60,000 and $80,000 in net profit, but it depends on your unique situation, including your state and the salary you'd need to pay yourself. A S Corp Analysis analysis gives you the actual answer for your practice.
Can I Pay Myself a Very Low Salary to Save More?
No. The IRS requires S corporation owners who work in the business to pay themselves reasonable compensation before taking distributions, and an unreasonably low salary is a common audit issue. We document a salary that fits your license, hours, and market, which protects you if it's ever questioned.
Is It Too Late to Elect S Corp Status This Year?
Maybe not. An election generally must be filed within two months and 15 days after the start of the tax year it applies to, but the IRS offers late-election relief in many situations under Revenue Procedure 2013-30. We'll tell you whether it's available to you.
Do I Need to Form an LLC First?
You need an entity, such as an LLC, a PLLC, or a professional corporation, that can elect S corporation status. Many states require licensed mental health professionals to use a professional entity, so we'll confirm what your state and board require before anything is filed.
Find Out Whether an S Corp Would Help You
Book a free 20-minute discovery call. You'll talk with a CPA, get straight answers, and leave knowing where you stand.