What Is an S-Corp and Should a New Optometry Practice Use One?
Learn what an S-corp is, how it works for optometry practices, and whether it's the right choice for your new practice, with costs and steps.
If you’re opening a new optometry practice, one of the first decisions is choosing a legal structure. An S-corp (S corporation) is a popular option for small businesses because it can save on self-employment taxes. But is it right for your practice? This guide explains what an S-corp is, how it works, and how to decide if it’s the best fit for your new optometry business.
What Is an S-Corp?
An S-corp is a corporation that elects to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. This means the business itself does not pay federal income tax. Instead, profits and losses are reported on the owners’ personal tax returns. The key benefit is that owners can take a salary and receive additional profits as distributions, which are not subject to self-employment tax (Social Security and Medicare) on the distribution portion.
How an S-Corp Works for an Optometry Practice
As an optometrist, you might operate as a sole proprietor, partnership, LLC, or corporation. An S-corp is a tax election, not a business entity type. You first form an LLC or corporation, then file Form 2553 with the IRS to elect S-corp status. For a new practice, you might form an LLC and then elect S-corp treatment.
With an S-corp, you must pay yourself a “reasonable salary” as an employee. The salary is subject to payroll taxes (Social Security and Medicare), but any additional profits taken as distributions are not. This can reduce your self-employment tax burden compared to a sole proprietorship or LLC taxed as a sole proprietor.
S-Corp vs. Other Structures: A Comparison
Here’s a comparison of common structures for a new optometry practice, with estimated costs and tax implications.
| Structure | Setup Cost | Annual Maintenance | Tax Treatment | Self-Employment Tax | Liability Protection |
|---|---|---|---|---|---|
| Sole Proprietorship | $0-$100 | $0 | Pass-through | Full on all profits | None |
| Partnership | $100-$500 | $100-$300 | Pass-through | Full on all profits | Limited |
| LLC (taxed as sole prop) | $100-$500 | $100-$300 | Pass-through | Full on all profits | Yes |
| LLC (S-corp election) | $100-$500 | $500-$1,500 | Pass-through | Only on salary | Yes |
| S-Corp (formed as corp) | $500-$1,500 | $500-$1,500 | Pass-through | Only on salary | Yes |
| C-Corp | $500-$1,500 | $500-$1,500 | Double taxation | Not applicable | Yes |
Note: Costs vary by state. Annual maintenance includes filing fees, registered agent fees, and payroll processing.
Pros and Cons of an S-Corp for a New Optometry Practice
Pros
- Tax savings: You can save on self-employment taxes by taking a salary and distributions. For example, if your practice profits $100,000, as a sole proprietor you pay 15.3% on the entire amount ($15,300). With an S-corp, if you take a $50,000 salary, you pay 15.3% on that ($7,650), and the remaining $50,000 distribution is not subject to self-employment tax. That’s a savings of $7,650, though you’ll have additional costs for payroll and filing.
- Liability protection: Like an LLC, an S-corp protects your personal assets from business debts and lawsuits.
- Credibility: Having an S-corp can look more professional to lenders and vendors.
Cons
- Administrative burden: You must run payroll, file payroll taxes, and hold shareholder meetings. This adds time and cost.
- Reasonable salary requirement: You must pay yourself a salary that’s considered reasonable for your industry. The IRS can challenge if it’s too low.
- Strict rules: S-corps have restrictions on shareholders (max 100, all must be US citizens/residents, only one class of stock).
- No retained earnings: You must distribute profits to shareholders, which can be a problem if you want to reinvest in equipment.
Should a New Optometry Practice Use an S-Corp?
For a new practice, the decision depends on your expected profits and your need for liability protection. Here’s a practical guide:
- If you expect profits under $40,000: The cost of payroll and compliance might outweigh the tax savings. A sole proprietorship or simple LLC might be better.
- If you expect profits between $40,000 and $100,000: An S-corp can save you $1,000 to $5,000 per year in self-employment taxes, but you’ll have extra costs of $500 to $1,500 per year. It can be worth it if you’re comfortable with the admin.
- If you expect profits over $100,000: An S-corp is usually a smart choice. The tax savings are significant, and you can afford the administrative costs.
Also consider: if you plan to take a salary that’s close to your net profit, the savings shrink. For example, if you pay yourself a $90,000 salary on $100,000 profit, you only save on $10,000.
Steps to Set Up an S-Corp for Your Practice
If you decide an S-corp is right, here are the steps to take this week:
- Consult a CPA or tax attorney: Discuss your specific situation. They can help you estimate tax savings and ensure compliance.
- Form your business entity: File Articles of Organization (for LLC) or Articles of Incorporation with your state. This costs $50-$500 depending on state.
- Elect S-corp status: File Form 2553 with the IRS within 75 days of formation (or by March 15 for the current tax year). This is a simple one-page form.
- Set up payroll: Use a service like Gusto or ADP, or hire a payroll company. Expect to pay $40-$100 per month plus a per-employee fee.
- Open a business bank account: Keep your personal and business finances separate.
- Get an EIN: You’ll need an Employer Identification Number from the IRS for payroll and tax purposes.
FAQ
Can I change from a sole proprietorship to an S-corp later? Yes, you can form an LLC and elect S-corp status at any time. However, there may be tax implications, so consult a professional.
What is a “reasonable salary” for an optometrist? The IRS doesn’t set a specific amount, but it should be comparable to what other optometrists earn. In 2026, a reasonable salary for a full-time optometrist is typically $100,000-$150,000, but it depends on your location and duties.
Do I need to pay myself a salary if I’m the only owner? Yes, if you elect S-corp status, you must pay yourself a reasonable salary, even if you’re the only shareholder. You can’t take all profits as distributions.
What happens if I don’t pay myself a reasonable salary? The IRS can reclassify distributions as wages, and you’ll owe back payroll taxes, penalties, and interest. It’s not worth the risk.
The Bottom Line
An S-corp can save you thousands in self-employment taxes, but it comes with extra paperwork and costs. For a new optometry practice, it’s often a good choice if you expect profits above $40,000 and are willing to manage payroll. Start by consulting a CPA to run the numbers for your specific situation. If you decide to go the S-corp route, follow the steps above to set it up correctly from the start.