S-Corp vs LLC for New Functional Medicine Practices: Which Saves More on Taxes?

2026-08-21

Compare S-corp and LLC tax structures for new functional medicine practices. See real cost differences, payroll, and steps to choose the best option.

For a new functional medicine practice, the choice between an S-corp and an LLC comes down to one question: which saves more on taxes? The short answer: an S-corp often saves more once your net income exceeds about $40,000 to $60,000 per year, because it lets you split income into a reasonable salary and distributions that avoid self-employment tax. Below that threshold, an LLC is simpler and cheaper to run. Here is the concrete breakdown.

How LLCs and S-corps differ for tax purposes

A single-member LLC is a disregarded entity by default. You report business income on Schedule C of your personal tax return, and you pay self-employment tax (Social Security and Medicare) on 100% of the net profit. The self-employment tax rate is 15.3% on the first $168,600 (2026 limit), plus 2.9% Medicare on income above that.

An S-corp is a corporation that elects pass-through taxation. The business itself pays no federal income tax. Instead, you, as the owner-employee, must pay yourself a “reasonable salary” (W-2 wages). You pay payroll taxes (Social Security and Medicare) on that salary, but you do not pay self-employment tax on the remaining distributions. Those distributions are taxed at your ordinary income tax rate, but they avoid the 15.3% self-employment tax.

When an S-corp saves you money

The key is the salary you set. The IRS requires that your salary be reasonable for the work you do. For a functional medicine practitioner, a reasonable salary might range from $80,000 to $150,000, depending on your location and patient volume. If your practice nets $120,000, and you set a salary of $80,000, you save self-employment tax on $40,000. That is a savings of $40,000 × 15.3% = $6,120 per year.

But you also have additional costs: payroll processing, unemployment insurance, and accounting fees. These typically run $1,500 to $3,000 per year. So the net savings might be $3,000 to $5,000 per year.

If your net income is only $30,000, the math changes. An S-corp requires you to pay yourself a reasonable salary, which might be $25,000. You would pay payroll tax on that, and the savings on the remaining $5,000 is only $765, which is less than the extra administrative costs. In that case, an LLC is cheaper.

Comparison: LLC vs S-corp for a new practice

Factor	LLC (single-member)	S-corp
Setup cost	$50-$500 (state filing)	$100-$800 (filing + election)
Annual compliance	Minimal, often just a state report	Payroll filings, unemployment, corporate minutes
Payroll costs	None (unless you have employees)	$1,200-$2,500/year for payroll service
Tax on profits	Self-employment tax on 100% of net income	Payroll tax on salary only; distributions avoid SE tax
Self-employment tax savings	None	15.3% on the amount of distributions
Administrative burden	Low	Moderate to high
Best for net income	Under $40,000	Over $60,000

Steps to decide and implement this week

Estimate your net income for the year. Use your current revenue minus all business expenses. If you are just starting, project for the next 12 months.
Run the numbers. Calculate the self-employment tax you would pay as an LLC on that net income. Then estimate an S-corp scenario: set a reasonable salary (use the low end of the range for your specialty), calculate payroll taxes on that salary, and add $1,500-$3,000 for compliance costs. Compare the totals.
If the S-corp saves you more than $2,000 per year, consider it. If not, stay with an LLC for now.
If you decide on an S-corp, file Form 2553 with the IRS. You must file within 75 days of forming the corporation or by March 15 of the tax year you want the election to take effect.
Set up payroll. Use a service like Gusto or ADP, which costs $40-$100 per month. They handle payroll tax deposits and filings.
Work with a CPA. A tax professional who knows functional medicine practices can help you set a defensible salary and avoid IRS penalties.

Common pitfalls to avoid

Setting an unreasonably low salary. The IRS can reclassify distributions as wages, and you may owe back taxes plus penalties. A good rule of thumb: your salary should be at least 60% of your net income, or comparable to what you would pay an employee to do your job.
Forgetting payroll tax deposits. If you miss a deposit, you face penalties of up to 10% of the amount.
Ignoring state taxes. Some states, like California, impose an $800 minimum franchise tax on S-corps, which can eat into savings. Check your state’s rules.
Not accounting for retirement plan contributions. S-corp owners can contribute to a solo 401(k) based on W-2 wages, which may be lower than Schedule C net income. This can reduce your retirement savings capacity.

FAQ

Can I convert my LLC to an S-corp later? Yes, you can file Form 2553 at any time, but the election must be effective at the start of the tax year or within 75 days of forming the corporation. You can also form a new corporation and merge the LLC, but that is more complex.

What is a “reasonable salary” for a functional medicine practitioner? The IRS does not set a fixed number. Look at what you would pay a non-owner practitioner with similar experience and duties. For a solo practitioner, that often falls between $80,000 and $150,000, but it depends on your region and patient load.

Do I need to pay myself a salary if my practice is losing money? No. If the S-corp has no net income, you do not have to pay yourself a salary. But if you have profits, you must pay a reasonable salary.

Are there any tax credits for new practices? Yes, you may qualify for the Qualified Business Income (QBI) deduction, which allows you to deduct up to 20% of your qualified business income. This applies to both LLCs and S-corps, but the calculation differs. An S-corp’s QBI is based on distributions, while an LLC’s is based on net profit. Your CPA can help you maximize this.

The bottom line

For a new functional medicine practice, the S-corp saves more on taxes once your net income exceeds roughly $60,000 per year. Below that, the LLC is simpler and cheaper. Run the numbers with a CPA, set a realistic salary, and remember that the S-corp’s administrative costs are real. If you are just starting and expect modest income, start with an LLC and revisit the decision after your first profitable year.