S-Corp vs LLC for New Pt Practices: Which Saves More on Taxes?
Compare S-Corp and LLC tax structures for new physical therapy practices. Learn which saves more on taxes, with real numbers and steps to choose.
If you’re starting a physical therapy practice, one of the first big decisions is choosing a business structure. The two most common options are an LLC and an S-Corp. Both limit personal liability, but they differ significantly in how they are taxed. For a new PT practice, the S-Corp often saves more on self-employment taxes, but only once your net income reaches a certain threshold. This guide breaks down the numbers and gives you a clear path to decide.
How LLCs and S-Corps Are Taxed
A single-member LLC is a pass-through entity by default. All profits flow to your personal tax return, and you pay both income tax and self-employment tax (Social Security and Medicare) on the entire net profit. In 2026, the self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.
An S-Corp is also a pass-through entity, but it allows you to split your income into two categories: 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, but it adds administrative costs and requires you to pay yourself a “reasonable” salary.
The Tax Savings: Real Numbers
Let’s compare a PT practice with $120,000 in net profit (after expenses, before owner compensation) in 2026.
LLC (single-member):
- Self-employment tax: 15.3% of $120,000 = $18,360
- Income tax: depends on your bracket, but say 22% federal plus state, roughly $26,400 federal
- Total federal taxes: $44,760
S-Corp:
- You must pay yourself a reasonable salary. For a PT, that might be $80,000 (a typical range for a practicing PT in 2026 is $75,000-$90,000).
- Payroll taxes on $80,000: 15.3% = $12,240 (plus employer portion, which is also deductible, but net effect is similar)
- Distributions: $40,000 (the remaining profit) are not subject to self-employment tax, but you still pay income tax on them.
- Income tax on $120,000 total (salary + distributions): same as LLC, about $26,400 federal.
- Total federal taxes: $12,240 + $26,400 = $38,640
Savings: $44,760 - $38,640 = $6,120 per year. That’s a significant amount for a new practice.
However, the S-Corp has added costs: payroll processing, unemployment insurance, and possibly higher accounting fees. Expect to pay $1,000-$2,000 per year for payroll services and an extra $500-$1,000 in tax preparation. So net savings might be $3,000-$4,500.
When an S-Corp Doesn’t Pay Off
If your net profit is below $40,000, the S-Corp savings are minimal or negative. Here’s why:
- Payroll costs eat into the savings.
- The IRS requires a “reasonable” salary, which for a PT is at least $60,000, even if the practice doesn’t generate that much. If your profit is $50,000, you might have to pay yourself a $50,000 salary, leaving no distributions, and you still pay payroll taxes on the full amount. That defeats the purpose.
A common rule of thumb: consider an S-Corp only if your net profit exceeds $60,000-$70,000. Below that, an LLC is simpler and cheaper.
Comparison Table: LLC vs S-Corp for a New PT Practice
| Factor | LLC (single-member) | S-Corp |
|---|---|---|
| Formation cost | $50-$500 (state filing) | $100-$800 (filing plus additional paperwork) |
| Annual fees | $0-$800 (state franchise tax) | $0-$800 (state franchise tax) plus payroll costs |
| Payroll processing | Not required | $500-$2,000/year (payroll service) |
| Self-employment tax | 15.3% on all net profit | 15.3% on salary only, not on distributions |
| Tax preparation | $300-$600 | $800-$1,500 (more complex) |
| Administrative burden | Low | Higher (payroll, quarterly filings) |
| Best for | Net profit under $60,000 | Net profit over $60,000-$70,000 |
Steps to Decide This Week
- Project your net profit. Estimate your revenue and expenses for the first year. If you’re just starting, use conservative numbers. If you’re already operating, look at your profit and loss statement.
- Calculate your break-even. Use the formula: S-Corp savings (15.3% of distributions) minus extra costs (payroll + accounting). If the result is positive, an S-Corp might be worth it.
- Talk to a CPA. This is not a DIY decision. A CPA can run the numbers for your specific situation and advise on reasonable salary. Ask for a fee estimate; it’s worth $200-$400 for a consultation.
- Consider your growth plans. If you expect to grow quickly, an S-Corp may be better long-term. You can always convert from LLC to S-Corp later, but it’s easier to start right.
- Check state rules. Some states tax S-Corps differently or have higher franchise taxes. Your CPA can guide you.
FAQ
Can I change from an LLC to an S-Corp later? Yes. You can elect S-Corp status by filing Form 2553 with the IRS. The deadline is March 15 of the tax year you want the election to take effect. However, the conversion may have tax implications, so consult a CPA.
What is a “reasonable” salary for a PT owner? The IRS doesn’t set a fixed number. It should be comparable to what you’d pay a non-owner PT in your area. In 2026, that’s typically $75,000-$90,000 for a full-time PT. Your CPA can help justify it.
Do I need to pay myself a salary if my LLC has no profit? No. If your LLC has no net profit, you don’t owe self-employment tax, and you don’t need to pay yourself a salary. But if you have an S-Corp, you must pay yourself a reasonable salary even if the business breaks even, which can be a burden in lean years.
Are distributions taxed differently? No. Distributions from an S-Corp are not subject to self-employment tax, but they are subject to income tax. They are not taxed as dividends; they are pass-through income.
The Bottom Line
For a new PT practice with net profit under $60,000, an LLC is the simpler, cheaper choice. Once you’re consistently earning more than $70,000, an S-Corp can save you $3,000-$6,000 per year in taxes, even after accounting for extra costs. The key is to run the numbers with a CPA and revisit the decision as your practice grows. Start with an LLC if you’re unsure, and convert when the math makes sense.