When an S corp makes sense for a DPC practice

An S corp can lower your self-employment tax once the practice makes steady profit. It also adds payroll, a separate business tax return and rules about your own salary. Whether it pays off for you is a call to make with your CPA, using real numbers.

What an S corp is

An S corp isn't a kind of company you form. It's a tax election. Your LLC or corporation files Form 2553 with the IRS and asks to be taxed as an S corporation. The legal company stays the same. What changes is how its profit gets taxed.

Where the savings come from

If you own your practice as a single-member LLC with the default tax setup, all of the profit is subject to self-employment tax, which is Social Security and Medicare, on top of income tax.

With an S corp, you become an employee of your own practice. You pay yourself a reasonable salary through payroll, and payroll taxes apply to that salary. Profit left after your salary can come out as distributions, and distributions don't carry payroll taxes. Income tax still applies to all of it.

In a made-up example, the practice makes $180,000 in profit and you pay yourself a $110,000 salary. Payroll taxes apply to the $110,000. The other $70,000 can come out as distributions without them. How much that saves depends on your total pay and the Social Security wage limit for the year, so have your CPA run it.

What it costs

The savings only count after the added costs:

• A payroll service, plus quarterly payroll filings and a W-2 for you every year.
• A separate business tax return, Form 1120-S, which usually means a higher CPA fee.
• State fees or taxes in some states.
• A salary that holds up as reasonable for the work you do. You can't pay yourself $20,000 and take the rest as distributions.
• Clean monthly books, with your salary, distributions and any reimbursements kept apart.

When it tends to make sense

I'd expect your CPA to look at it seriously when profit is steady and clearly more than a reasonable salary for your job, you can run payroll on schedule every month, and your books are reconciled monthly.

It tends to make less sense in the first months after opening, while the practice is losing money or barely breaking even, or when profit swings a lot from month to month.

Timing matters

For the election to cover a full calendar year, it's generally due by March 15 of that year. There's relief for late elections, and your CPA handles that. Switching partway through a year is possible, but it splits your books and your tax returns into two periods, so plan it with your CPA ahead of time.

What I'd bring to your CPA

• Your last 12 months of P&L, from reconciled books.
• What you expect the practice to earn this year and next.
• What you'd plan to pay yourself as salary.
• The state you operate in.
• Which payroll provider you'd use, or already use.

If you do elect, read how a reasonable salary gets set and how salary and distributions differ in your books.

Common questions

Can my LLC be an S corp?
Yes. An LLC can elect to be taxed as an S corporation. It stays an LLC legally. Only the tax treatment changes.

Is there a profit number where it always makes sense?
No. It depends on your salary, your state, your CPA's fees and how steady the profit is. Your CPA can compare both setups with your numbers.

Can I undo it later?
You can revoke the election, but you generally can't elect S corp status again for five years without IRS approval. Treat it as a long-term decision.