As therapists grow their private practices, one of the most common questions that comes up is whether it’s time to convert to an S Corporation (S Corp). You may have heard that an S Corp can “save on taxes,” but you may also feel unsure about whether it’s worth the added complexity.
For therapists, the decision to elect S Corp status isn’t just a tax move—it’s a business decision that should align with income level, practice goals, and long-term sustainability.
Understanding the pros and cons of converting to an S Corp as a therapist can help you decide whether this structure supports your practice—or creates more work than it’s worth.
What Is an S Corporation?
An S Corporation is not a business entity, but a tax election made with the IRS. Many therapists operate through an LLC and later elect to have that LLC taxed as an S Corp.
With an S Corp:
- The business owner becomes an employee
- You pay yourself a reasonable salary through payroll
- Remaining profits are distributed to you as owner distributions
- Only the salary portion is subject to self-employment taxes
This distinction is where potential tax savings come from—but it’s also where responsibility increases.
Why Therapists Consider an S Corp
Therapists often start as sole proprietors or single-member LLCs and report income on Schedule C. As income grows, self-employment taxes increase, and the tax burden can feel heavy.
Many therapists explore an S Corp when:
- Net income becomes consistently higher
- Self-employment taxes feel unmanageable
- The practice feels stable and predictable
- They want a more intentional financial structure
An S Corp can be powerful—but only when used at the right time and in the right way.
Pros of Converting to an S Corp for a Therapist
1. Potential Savings on Self-Employment Taxes
This is the biggest reason therapists consider an S Corp.
In a Schedule C structure, all net income is subject to self-employment tax. With an S Corp:
- Only your salary is subject to payroll taxes
- Owner distributions are not subject to self-employment tax
For therapists with sufficient income, this can result in meaningful tax savings when structured correctly.
2. Clear Separation Between Salary and Profit
An S Corp forces structure:
- You receive a paycheck
- Taxes are withheld automatically
- Distributions are taken intentionally
For many therapists, this improves cash flow management and reduces the “surprise tax bill” problem common with self-employment.
3. Increased Financial Professionalism
Running payroll and maintaining an S Corp structure often encourages:
- Better bookkeeping
- More consistent financial tracking
- Clearer business boundaries
This can be especially helpful for therapists planning to grow, add providers, or eventually transition to a group practice.
4. Improved Retirement Planning Opportunities
With an S Corp, therapists can implement more intentional retirement strategies tied to payroll, such as:
- Solo 401(k) contributions
- Employer contributions based on salary
When done correctly, this supports both tax efficiency and long-term financial security.
5. Long-Term Scalability
An S Corp can serve as a bridge between solo practice and future growth. Therapists who plan to:
- Increase income
- Hire staff
- Expand services
often find that an S Corp provides a more scalable framework than Schedule C alone.
Cons of Converting to an S Corp for a Therapist
While S Corps offer advantages, they are not a shortcut or a guaranteed win.
1. Payroll Is Required
Once you elect S Corp status, you must:
- Run payroll
- Pay yourself a reasonable salary
- File payroll tax forms
- Stay compliant with employment rules
This adds administrative work and cost, which can outweigh tax savings if income isn’t high enough.
2. Additional Ongoing Costs
S Corps come with increased expenses, including:
- Payroll software or services
- Additional tax filings
- Higher accounting and compliance costs
For therapists with lower or inconsistent income, these costs can cancel out potential benefits.
3. “Reasonable Salary” Must Be Defensible
The IRS requires S Corp owners to pay themselves a reasonable salary for the work they perform.
If salary is set too low to maximize distributions:
- Audit risk increases
- Penalties and back taxes may apply
Determining reasonable compensation requires professional judgment—not guesswork.
4. More Complexity and Responsibility
An S Corp demands:
- Accurate bookkeeping
- Timely payroll processing
- Clear separation of personal and business finances
- Consistent compliance
For therapists already stretched thin emotionally and mentally, this added complexity can feel overwhelming without proper support.
5. Not Ideal for Early-Stage Practices
If your therapy practice:
- Is new
- Has fluctuating income
- Is still stabilizing
- Generates modest profit
An S Corp may be premature. Timing matters just as much as structure.
When an S Corp Makes Sense for Therapists
An S Corp may be appropriate if:
- Your net income is consistently strong
- You want proactive tax planning
- You are comfortable running payroll
- Your practice is financially stable
- You want to reduce self-employment tax exposure legally
- You’re thinking beyond just this year’s tax return
This is where personalized analysis becomes critical.
When Therapists Should Wait on an S Corp
You may want to delay an S Corp election if:
- Income is inconsistent or seasonal
- You’re early in private practice
- You don’t yet have clean bookkeeping
- Administrative tasks feel overwhelming
- Tax savings would be minimal after costs
An S Corp is a tool—not a requirement.
The Biggest Mistake Therapists Make With S Corps
The most common issue isn’t choosing an S Corp—it’s choosing one without guidance.
Therapists often:
- Elect S Corp status too early
- Set salaries incorrectly
- Miss payroll compliance
- Assume savings without running the numbers
An S Corp done wrong can cost more than it saves.
S Corp vs Schedule C: It’s Not About “Better”
For therapists, the decision isn’t about which structure is better universally—it’s about which structure fits your current phase.
- Schedule C offers simplicity and flexibility
- S Corps offer structure and tax efficiency at higher income levels
The goal is alignment, not complexity.
Final Thoughts
Converting to an S Corporation can be a powerful step for therapists—but only when income, goals, and capacity support it.
The right structure should:
- Reduce unnecessary tax burden
- Support sustainability
- Create clarity—not stress
- Align with how you want to practice
There is no one-size-fits-all answer, and that’s okay.
Have Questions About Whether an S Corp Is Right for Your Therapy Practice?
If you’re considering an S Corp—or wondering whether it’s time to make a change—we’re happy to help you think it through.
Reach out to us with your questions, and we’ll help you understand your options, run the numbers, and make a decision that supports both your practice and your peace of mind.
You don’t have to navigate this alone—and you don’t have to guess.
The Good CPA 