S-Corp vs LLC for New Midwifery Practices: Which Saves More on Taxes?
Compare S-Corp and LLC tax structures for new midwifery practices. Learn which saves more on taxes with real numbers and practical steps for 2026.
Choosing between an S-Corp and an LLC is one of the first major tax decisions for a new midwifery practice. The answer depends on your income, how you pay yourself, and your long-term plans. For most new midwifery practices earning under $60,000 in net profit, a simple LLC is cheaper and easier. Once your practice consistently clears $60,000 to $80,000 in net profit, an S-Corp can save you thousands in self-employment taxes. This guide breaks down the numbers, the steps, and the trade-offs so you can decide with confidence.
How LLCs and S-Corps Tax Differently
A single-member LLC is a pass-through entity by default. All profit flows to your personal tax return, and you pay both income tax and self-employment tax (Social Security and Medicare) on the entire amount. The self-employment tax rate is 15.3% on the first $168,600 of net earnings (2026 limit), plus 2.9% on anything above that.
An S-Corp is also a pass-through entity, but it lets you split your income into two streams: a reasonable salary and distributions. You pay payroll taxes (Social Security and Medicare) only on the salary, not on the distributions. This can reduce your self-employment tax burden significantly.
When an LLC Is the Better Choice
For a new midwifery practice just starting out, an LLC is almost always the right move. Here is why:
- Lower startup costs: Forming an LLC costs $50 to $500 depending on your state. An S-Corp election adds no extra filing fee, but you will need to file Form 2553 with the IRS.
- Simpler administration: An LLC has no payroll requirements. You pay estimated taxes quarterly, but you do not have to run payroll or file payroll tax returns.
- No reasonable salary requirement: With an LLC, you pay self-employment tax on all profit, but you avoid the headache of determining a “reasonable salary” and the associated payroll paperwork.
- Flexibility: You can switch to an S-Corp later without penalty, as long as you meet the IRS requirements.
When to choose an LLC: If your net profit is under $60,000, the tax savings from an S-Corp are minimal, often less than the cost of payroll processing and accounting. For example, on $50,000 of net profit, the self-employment tax difference is about $2,000, but payroll services and extra accounting fees can eat $1,500 to $2,500 of that.
When an S-Corp Saves More
Once your practice is established and net profit exceeds $60,000 to $80,000, an S-Corp can deliver real savings. Here is how the math works:
- Example: Net profit of $100,000. As an LLC, you pay self-employment tax on the full $100,000: $15,300. As an S-Corp, you pay yourself a reasonable salary of $60,000 (a common range for midwives in 2026). Payroll taxes on $60,000: $9,180. The remaining $40,000 is distributions, which are not subject to self-employment tax. That is a savings of $6,120.
- Payroll costs: You will pay for payroll processing, typically $40 to $100 per month, plus the employer share of payroll taxes (which is included in the $9,180 above). Even with payroll costs, the net savings are substantial.
- Reasonable salary: The IRS requires that your salary be “reasonable” for your field. For midwives, that often ranges from $55,000 to $85,000 depending on location and experience. You cannot pay yourself $20,000 and take $80,000 in distributions; that invites an audit.
When to choose an S-Corp: If your net profit is consistently above $80,000, and you are willing to manage payroll and file additional forms, the S-Corp will save you $4,000 to $8,000 per year in taxes.
Comparison Table: LLC vs S-Corp for a New Midwifery Practice
| Factor | LLC (Single-Member) | S-Corp |
|---|---|---|
| Startup cost | $50-$500 (state filing) | $50-$500 (state filing) + $0 for Form 2553 |
| Annual compliance | $0-$300 (state annual report) | $0-$300 (state annual report) + payroll setup |
| Payroll processing | Not required | $40-$100/month (service fee) |
| Self-employment tax | 15.3% on all net profit | 15.3% on salary only, 0% on distributions |
| Tax savings on $100k profit | $0 (baseline) | $4,000-$8,000 after payroll costs |
| Complexity | Low | Medium (payroll, quarterly filings) |
| Best for | Net profit under $60k | Net profit over $80k |
Steps to Decide and Implement This Week
- Project your net profit: Use your last 12 months of income and expenses to estimate your net profit for 2026. If you are new, use your business plan projections.
- Run the numbers: Use the table above or a tax calculator. If your net profit is under $60,000, stick with an LLC. If it is over $80,000, seriously consider an S-Corp.
- Talk to a tax professional: A CPA or enrolled agent who works with midwifery practices can help you estimate your reasonable salary and confirm the savings. This consultation costs $150 to $400, but it is worth it.
- If you choose an S-Corp: File Form 2553 with the IRS within 2 months and 15 days of the start of your tax year (or within 75 days of forming your LLC). Set up payroll through a service like Gusto or ADP, and determine your salary with your accountant.
- If you stay an LLC: Make sure you are paying quarterly estimated taxes. Use IRS Form 1040-ES and set aside 25% to 30% of your profit for taxes.
FAQ
Can I switch from an LLC to an S-Corp later? Yes. You can file Form 2553 at any time, but the election must be made no later than 2 months and 15 days after the start of the tax year you want it to take effect. If you miss the deadline, you may have to wait until the next tax year.
What is a reasonable salary for a midwife in 2026? For a full-time midwife, reasonable salaries range from $55,000 to $85,000 depending on location, experience, and patient volume. Your accountant can help you benchmark against local data.
Do I need to pay myself a salary if I am an LLC? No. As a single-member LLC, you are not an employee. You take draws from the business, and you pay self-employment tax on the total net profit.
What if my income fluctuates? If you have a good year followed by a slow year, the S-Corp still works, but you may need to adjust your salary. If you drop below the $60,000 threshold, you might consider revoking the S-Corp election, but that is a complex decision. Consult your tax advisor.
The Bottom Line
For new midwifery practices, start with an LLC. It is cheap, simple, and flexible. Once your net profit consistently exceeds $80,000, revisit the S-Corp decision. The tax savings are real, but they come with added complexity. Run the numbers, talk to a professional, and make the choice that fits your practice’s stage and goals.