Should a Healthcare Practice be Structured as an S-Corp or an LLC?

Which Structure Actually Saves More in Taxes?

The honest answer is: it depends on your revenue, your role in the practice, and whether your state has specific rules about professional entities in your field. But for most healthcare practice owners generating $200,000 or more in annual net profit, an S-Corp election produces meaningful payroll tax savings that a default single-member LLC does not. Here is how to think through the decision and what each structure actually means for your taxes.

What is the difference between an LLC and an S-Corp for a healthcare practice?

An LLC is a legal entity structure that determines liability protection. On its own, it does not determine how you are taxed. A single-member LLC is taxed as a sole proprietor by default, meaning all net profit flows to your personal return and is subject to self-employment tax at 15.3% up to the Social Security wage base ($168,600 in 2024, source: IRS) and 2.9% on everything above.

An S-Corp is a tax election, not a legal entity. You can have an LLC that elects to be taxed as an S-Corp, or you can form a corporation and make the S-Corp election. The key difference: in an S-Corp, you pay yourself a reasonable salary (subject to payroll taxes), and additional profit above that salary passes through as a distribution not subject to self-employment tax.

At what income level does an S-Corp election make sense for a healthcare practice?

General threshold: $50,000 to $80,000 or more in annual net profit above a reasonable owner salary. Below that level, the administrative costs of running payroll and filing a separate S-Corp return may outweigh the tax savings.

Here is a simple illustration. A physical therapist with a solo practice generates $300,000 in net profit. Under a default single-member LLC, she pays self-employment tax on the full $300,000. With an S-Corp election and a $130,000 reasonable salary, she pays payroll taxes only on $130,000. The $170,000 distributed as S-Corp profit avoids self-employment tax. At 15.3%, that is approximately $26,010 in annual payroll tax savings, minus the estimated $2,000 to $4,000 in additional annual costs to run payroll and file the S-Corp return. Net savings: roughly $22,000 to $24,000 per year.

Do healthcare practices face any special rules around S-Corps?

Yes, and this is where state law matters significantly.

Many states require healthcare practices to be organized as professional corporations (PCs) or professional limited liability companies (PLLCs) rather than standard corporations or LLCs. In those states, a standard LLC cannot practice medicine, dentistry, chiropractic, physical therapy, or veterinary medicine. The entity must be a PC or PLLC owned only by licensed professionals in that field.

Professional corporations can make the S-Corp tax election just as standard corporations can, but the entity formation requirements and the ownership restrictions vary by state and by profession. Before making any structure change, your attorney should confirm that the structure you are moving to is legally permissible for your profession in your state.

What are the most common mistakes healthcare practices make with entity structure?

Mistake 1: Never making the S-Corp election. Many solo practices never make the election because their accountant set up the entity and moved on. If your LLC has been profitable for more than two or three years and you have never made the S-Corp election, this conversation is overdue.

Mistake 2: Making the S-Corp election with no compensation analysis. The S-Corp only saves money if the salary is set at a defensible level. Too low creates IRS audit risk. Too high eliminates the savings. A proper compensation analysis is not optional.

Mistake 3: Not revisiting the structure as the practice grows. A structure that was right at $400,000 in revenue may not be optimal at $1.2M. Entity structure reviews should happen every two to three years, or whenever practice revenue changes significantly.

How does the S-Corp decision interact with retirement plan strategy?

This is a critical connection that many practice owners miss. Your W-2 salary in an S-Corp is the basis for most retirement plan contribution calculations. A Solo 401(k) employer contribution is limited to 25% of W-2 compensation. A defined benefit plan actuarial calculation also depends on compensation.

Setting the salary too low to maximize payroll tax savings can inadvertently cap your retirement plan contributions. The optimal structure balances payroll tax reduction against retirement savings capacity. That calculation is different for every practice and requires a coordinated analysis across all three variables.

A free strategy session is the right place to review your current entity structure and run the numbers specific to your practice: https://redbikeadvisors.com/book-a-free-strategy-session