S-Corp vs LLC for New Therapy Practices: Which Saves More on Taxes?
Compare S-Corp and LLC tax structures for new therapy practices. See which saves more, with real numbers and steps to decide.
For a new therapy practice, the choice between an S-Corp and an LLC often comes down to tax savings. The short answer: an S-Corp can save you thousands in self-employment taxes once your net income exceeds about $40,000, but it adds administrative costs. An LLC is simpler and cheaper to run, but you’ll pay the full 15.3% self-employment tax on all profits. Here’s the concrete breakdown to help you decide.
How LLCs Are Taxed for Therapy Practices
A single-member LLC is a pass-through entity by default. You report business income on Schedule C of your personal tax return. You pay income tax plus self-employment tax (Social Security and Medicare) of 15.3% on your net earnings. For 2026, the Social Security portion applies to the first $176,100 of net income (the wage base limit), and the Medicare portion applies to all net income. Above $200,000 (single filers), you also pay an additional 0.9% Medicare surtax.
Example: If your therapy practice nets $80,000, you pay 15.3% on the full $80,000, which is $12,240 in self-employment tax. That’s on top of income tax.
How S-Corps Are Taxed for Therapy Practices
An S-Corp is also a pass-through entity, but it changes how you pay self-employment taxes. As an S-Corp owner, you must pay yourself a “reasonable salary” (W-2 wages) for the work you do. You pay payroll taxes (Social Security and Medicare, plus unemployment) on that salary. The remaining profits are distributed to you as dividends, which are not subject to self-employment tax. You only pay income tax on those distributions.
Example: Same $80,000 net income. You set a reasonable salary of $50,000. Payroll taxes on $50,000 at 15.3% are $7,650. The remaining $30,000 is a distribution, with no self-employment tax. Total self-employment tax: $7,650. That’s a savings of $4,590 compared to the LLC.
The “Reasonable Salary” Requirement
The IRS requires that S-Corp owner-employees earn a salary that is “reasonable” for the services performed. For therapists, that typically means a salary comparable to what you’d pay an employee for the same work. In 2026, for a licensed therapist, a reasonable salary might range from $50,000 to $90,000, depending on your region, experience, and hours. If you set your salary too low to avoid payroll taxes, the IRS can reclassify distributions as wages and impose penalties.
How to determine a reasonable salary: Look at salary surveys from the Bureau of Labor Statistics, state licensing boards, or professional associations like the American Counseling Association. You can also use online tools like Salary.com or PayScale. Document your rationale in case of an audit.
Cost Comparison: S-Corp vs LLC
An LLC is cheaper to maintain. You file an annual report (often $50-$200) and pay state franchise taxes if applicable. An S-Corp requires additional filings: Form 2553 to elect S-Corp status, and then you must file Form 1120-S annually. You’ll also need to run payroll, which means paying payroll service fees (e.g., Gusto or ADP, typically $40-$60 per month) and filing quarterly payroll tax returns. You may also need to pay state unemployment insurance.
Here’s a realistic cost comparison for a new practice:
| Cost Item | LLC | S-Corp |
|---|---|---|
| Formation fee (one-time) | $100-$300 | $100-$300 |
| Annual report/franchise tax | $0-$200 | $50-$500 |
| Payroll service (annual) | $0 | $480-$720 |
| Tax preparation (annual) | $200-$500 | $500-$1,000 |
| Total first-year cost | $300-$1,000 | $1,130-$2,520 |
Note: These ranges are estimates. Your state may have specific fees, and tax preparation costs vary.
When an S-Corp Saves You Money
An S-Corp starts to pay off when your net income is high enough that the tax savings exceed the additional costs. A common rule of thumb: if your net income is above $40,000, an S-Corp may be worth it. Let’s compare at different income levels, assuming a reasonable salary of $50,000 for the S-Corp and a 15.3% self-employment tax.
| Net Income | LLC Self-Employment Tax | S-Corp Payroll Tax | S-Corp Savings |
|---|---|---|---|
| $40,000 | $6,120 | $7,650 (on $50k salary) | -$1,530 (loss) |
| $60,000 | $9,180 | $7,650 | $1,530 |
| $80,000 | $12,240 | $7,650 | $4,590 |
| $100,000 | $15,300 | $7,650 | $7,650 |
At $40,000, the S-Corp costs you more because you’re paying payroll tax on a salary higher than your net income. At $60,000, you start to save, but you need to subtract the extra administrative costs (payroll, tax prep). At $80,000, the savings are substantial.
Practical Steps to Decide This Week
- Estimate your net income for the next 12 months. Use your current client load, session fees, and expenses. Be realistic.
- Calculate your self-employment tax under an LLC using the formula: net income x 15.3%.
- Estimate your S-Corp payroll tax by picking a reasonable salary (use the BLS or a salary tool). Then calculate 15.3% on that salary.
- Subtract the S-Corp’s extra costs (payroll service, tax prep, etc.) from the tax savings.
- If the net savings are positive and you expect to stay above $60,000 in net income, consider forming an S-Corp. If not, stick with an LLC for now.
- Consult a CPA who works with therapists. They can help you set a reasonable salary and run the numbers for your specific situation. Many offer a free initial consultation.
FAQ
Can I start as an LLC and switch to an S-Corp later? Yes. You can form an LLC and later elect S-Corp status by filing Form 2553 with the IRS. You’ll need to meet the deadline (within 75 days of formation or by March 15 of the tax year). Switching later is common as your practice grows.
What if my practice loses money in the first year? If you have a loss, an LLC is simpler because you can deduct the loss on your personal return without payroll complexity. An S-Corp with a loss still requires you to pay yourself a reasonable salary if you performed services, which can be a burden.
Does an S-Corp protect my personal assets better than an LLC? Both provide limited liability protection. The difference is in taxation, not asset protection. As long as you maintain corporate formalities (separate bank accounts, proper records), both shield your personal assets from business debts.
Are there state-specific differences? Yes. Some states impose franchise taxes on S-Corps (e.g., California’s $800 minimum franchise tax) that can offset federal savings. Check your state’s rules or ask your CPA.
The Bottom Line
For a new therapy practice, an LLC is the simpler, cheaper starting point. But once your net income exceeds roughly $60,000, an S-Corp can save you $1,500 to $7,000 or more per year in self-employment taxes, even after accounting for extra costs. Run the numbers with a CPA, set a reasonable salary, and make the switch when the math works. The decision isn’t permanent: you can start as an LLC and elect S-Corp status later as your practice grows.