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

For a new occupational therapy (OT) practice, the choice between an S-Corp and an LLC often comes down to tax savings. In most cases, an S-Corp saves more on self-employment taxes once your net income exceeds roughly $40,000 to $60,000 per year. Below that, an LLC (taxed as a sole proprietorship or partnership) is simpler and cheaper to run. This guide breaks down the numbers, the trade-offs, and the steps you can take this week to make the right call.

How LLC and S-Corp Taxes Differ

A single-member LLC is taxed as a sole proprietorship by default. You report business income on Schedule C of your personal tax return. All net profit is subject to self-employment tax (Social Security and Medicare), which is 15.3% on the first $176,100 (2026 figure) and 2.9% above that. You pay this on the entire profit, even if you leave money in the business.

An S-Corp is a corporation that elects pass-through taxation. You must pay yourself a “reasonable salary” as a W-2 employee, and that salary is subject to payroll taxes (Social Security, Medicare, unemployment). Any remaining profit is distributed to you as a shareholder, and those distributions are not subject to self-employment tax. This is the core tax advantage: you split your income into salary (taxed) and distributions (not taxed on self-employment).

When an S-Corp Saves More: The Break-Even Point

The savings from an S-Corp come from reducing the 15.3% self-employment tax on the portion of income you take as distributions. But the S-Corp has extra costs: payroll processing, unemployment insurance, and additional tax preparation. These typically run $1,500 to $3,000 per year in fees and payroll services.

Let’s compare two scenarios for a new OT practice in 2026:

Net Profit	LLC Tax (Self-Employment)	S-Corp Tax (Salary + Distributions)	S-Corp Savings
$30,000	$4,590	$4,590 (all salary)	$0
$50,000	$7,650	$6,885 (salary $40k, dist $10k)	$765
$80,000	$12,240	$9,180 (salary $60k, dist $20k)	$3,060
$120,000	$18,360	$12,240 (salary $80k, dist $40k)	$6,120

Note: Salary must be “reasonable” for an OT, typically $70,000 to $100,000 in most markets. The table assumes a lower salary for illustration. In practice, if you pay yourself a higher salary, the savings shrink. For example, at $120,000 profit with a $90,000 salary, the savings drop to around $2,700.

After subtracting the $1,500 to $3,000 in extra S-Corp costs, the break-even point is roughly $50,000 to $60,000 in net profit. Below that, an LLC is cheaper. Above that, an S-Corp starts to save real money.

The Hidden Costs of an S-Corp

Before you rush to elect S-Corp status, consider these costs:

• Payroll setup and processing: $50 to $150 per month for a service like Gusto or ADP. That’s $600 to $1,800 per year.
• Unemployment insurance: Varies by state, but budget $200 to $500 per year.
• Corporate filing fees: $100 to $300 annually, depending on your state.
• Additional tax preparation: An S-Corp requires a separate corporate tax return (Form 1120-S), which costs $500 to $1,500 more than a sole proprietorship return.
• Quarterly payroll tax filings: You or your accountant must file Form 941 each quarter, adding administrative burden.

These costs eat into the tax savings. For a new practice bringing in $40,000, the S-Corp might save $1,500 in self-employment tax but cost $2,000 in extra fees. That’s a net loss.

Other Tax Considerations for OT Practices

Beyond self-employment tax, both structures allow the same deductions: home office, continuing education, equipment, and health insurance premiums. However, there are two differences that matter:

• Health insurance premiums: In an S-Corp, if you own more than 2% of the company, your health insurance premiums are added to your W-2 wages and then deducted on your personal return. In an LLC, you deduct them directly on Schedule C. The tax effect is similar, but the S-Corp adds paperwork.
• Retirement plan contributions: Both allow SEP-IRAs or solo 401(k)s. The S-Corp’s salary basis may limit contributions if your salary is low. For example, if you pay yourself $50,000, your SEP contribution is capped at 25% of that, or $12,500. With an LLC, you can contribute up to 25% of net profit, which might be higher.

Practical Steps to Decide This Week

1. Estimate your net profit for the next 12 months. Use your current revenue minus expenses. If you’re just starting, project conservatively.
2. Run the break-even calculation. Use the table above or a simple formula: multiply your net profit by 15.3%. Compare that to the S-Corp cost of $2,000 to $3,000. If the tax is less than $5,000, an LLC is likely better.
3. Talk to a CPA who works with small practices. They can run a precise comparison based on your state and situation. Ask for a “cost-benefit analysis of S-Corp election.”
4. If you choose an S-Corp, file Form 2553 with the IRS. You must file within two months and 15 days of the start of your tax year, or by March 15 for the current year. Late elections are possible but require IRS approval.
5. If you choose an LLC, set up a separate business bank account and track expenses. You can always elect S-Corp status later when your income grows.

FAQ

Can I change from an LLC to an S-Corp later? Yes. You can elect S-Corp status at any time, but the election must be filed by March 15 of the year you want it to take effect. You’ll need to file Form 2553 and meet the eligibility requirements (e.g., no more than 100 shareholders).

What is a “reasonable salary” for an OT practice owner? The IRS requires that S-Corp owners pay themselves a salary comparable to what an employee in the same role would earn. For an OT, that’s typically $70,000 to $100,000 per year, depending on location and experience. Paying too low a salary can trigger IRS penalties.

Does an S-Corp save on income tax? No. Both LLCs and S-Corps are pass-through entities, so your business income is taxed at your personal income tax rate. The savings come only from reducing self-employment tax on distributions.

What if I have a partner? If you have a partner, a multi-member LLC is taxed as a partnership by default. You can still elect S-Corp status, but both partners must be shareholders and receive reasonable salaries. The break-even analysis is similar, but you’ll split the savings and costs.

Related guides

• 7 Mistakes New Ot Practices Make in Their First Year
• How Much Should a New Ot Practice Set Aside for Taxes?
• How to File Quarterly Estimated Taxes as a New Ot Practice

The bottom line

For a new OT practice, an LLC is usually the better choice until your net profit exceeds $50,000 to $60,000 per year. Below that, the S-Corp’s administrative costs outweigh the tax savings. Once you cross that threshold, an S-Corp can save you $3,000 to $6,000 annually in self-employment taxes, making it worth the extra paperwork. Start with an LLC, track your income, and revisit the decision when your practice grows. A CPA can help you run the numbers for your specific situation, but this guide gives you the framework to make an informed choice.