If you’ve been thinking about filing an S Corp election for your practice, you probably have a few questions about whether or not it’s right for you before making a decision. You might already know the benefits of an S Corp, but it’s not the best solution for everyone!

Take some time to consider ALL the pros and cons before choosing to become an S Corp. ⏰

Whether you know a lot or a little about S Corporations — we’ll be shortening that to “S Corp” for now — this blog will give you more information about:

          👉What an S Corp is and why it matters

          👉Things to consider before electing S Corp status

          👉The benefits of being an S Corp

          👉How to know when you’re ready to switch

And if you’re ready to get your questions answered by a professional about if YOUR practice is a good fit to elect S Corp status, we’d love to have you apply to work with us at Therapeutic Bookkeeping!

What is an S Corp?

An S Corp is a business structure, like an LLC. The biggest difference between it and other business structures is that the income and losses flow through the company to its shareholders (even if you’re the only one). 

This means only the shareholders pay taxes on the company’s income and the S Corp avoids paying the dreaded double tax on its corporate income. More on that later! 🙂

While this sounds like a no-brainer, there are several factors to consider when choosing whether this business structure is a good fit for your practice. How profitable your practice is, how many shareholders the company would have, and your own personal financial situation are all important things to think about.

Requirements for Electing S Corp Status

Before you can even consider becoming an S Corp, you’ll have to meet requirements set by the IRS (read more about that here).

Even if you meet the IRS requirements for election, your practice still might not benefit from becoming an S Corp, so it’s important to do all your research and consult with someone👋 who can analyze your financial situation first.

What You Need To Know BEFORE Becoming an S Corp

S Corps carry significant benefits, but there are a few things to consider before you make that decision for your practice.

Given the amazing tax benefits, an S Corp can’t have more than 100 shareholders. Most likely, your private practice won’t be affected by that, but it is something to keep in mind. If you do happen to have more than 100 shareholders, a C Corp would be a better option.

Another thing to consider before making the switch is revenue. You might have heard that if you are making more than $50,000 in net profit, then you should consider an S Corp. While this is a good rule of thumb, it’s not the only financial item to consider. 

Tax liability varies for those filing as a married or single person. If you plan on filing as a single person, you are likely to have more tax liability, and your profit threshold may be higher than $50,000. If you have a second source of income that pays you through a W2, it may put you in a higher tax bracket and offset some of the benefits of S Corp designation. Children and dependents also have an impact on your tax situation. 

With a more formal corporate structure, you’ll need to keep more formal records. The most important change you’ll have to make? Payroll. All shareholders — including yourself — must be on the payroll and paid a reasonable salary. (If you need help with your payroll management, we LOVE Gusto! 💰(Note: This is an affiliate link for Gusto, which just means that if you sign up using our link, we’ll get a commission at no additional cost to you.).

This is where a lot of people get tripped up because they need to know what a “reasonable salary” would be according to the IRS. You can’t just put yourself on payroll at $12k per year and call it a day, I wish it were that simple! 🤣

Your bookkeeping records will also need to be rock-solid and done by a professional. And it’s important to have a bookkeeping professional in your corner who not only understands the therapeutic industry, but also the nuances of an S Corp in order to accurately maintain your bookkeeping records. (Psst, that’s us here at Therapeutic Bookkeeping!)

The Benefits of Becoming an S Corp

👍Limited Liability Protection

There are several reasons to want to designate your practice as an S Corp. If you operate your practice as a sole proprietor, and the practice were to have debts or liabilities, assets such as your home or personal savings would be vulnerable. S Corps provide the business owner(s) with significant protection of these personal assets.

💸Avoid Double Taxation

Unlike other corporate structures, an S Corp is immune to tax at the entity level. All of your practice’s profits and losses get passed directly to the shareholders. The shareholders would then pay taxes on them individually. This helps avoid taxation at both the entity and individual level – aka the Uncle Sam special, double taxation.

🤑Tax Savings

One of our favorite benefits associated with S Corps is that you’re going to avoid the self-employment tax. Instead, you’ll be responsible for payroll taxes through your W2!

👍Increased Credibility

When compared to a sole proprietorship, an S Corp can give your practice more credibility with banks and other businesses. This could make it easier to get a loan — both personally and professionally. 

Clients have even mentioned that providing proof of income when securing a home loan is much easier with a W2 from their S Corp than bank statements from their sole proprietor days!

Frequently Asked Questions About Applying for an S Corp

When is the deadline to submit my application?

The deadline to file Form 2553 with the IRS is March 15th every year. 

Note: If you plan to elect S Corp status within your first year of business, you have 75 days from the date of incorporation to apply, otherwise, you’ll have to wait until the following year for it to take effect on your taxes.

What if I miss the deadline?

If you can believe it, the IRS might actually give you a little grace in some cases! If for some reason you miss the March 15th election deadline, you might have to provide an explanation to the IRS as to *why* you were delayed. And they’ve been known to forgive the delay for reasons like:

🤷 “I didn’t know there was a deadline.”

Or

🤷 “I didn’t know there was a form to submit.”

And of course, it’s always on a case-by-case basis, so I can’t guarantee that these explanations will work for you. The IRS can and will request as much information as they see fit before making a decision 😆

How long does it take to get confirmation?

If you’re planning to elect S Corp status, just know that you could be waiting for several months to hear a response. The IRS will mail you confirmation within 3 months to let you know the status of your application.

If you haven’t heard back after 3 months, it’s recommended that you reach out to the IRS and try to speak with an agent. Put on your favorite movie and settle in, because the wait times to speak to a human can range from 30 minutes to 2+ hours, especially during tax season ⏳

Here’s the contact number for the IRS just in case: 800-829-0115. After you select the language you want, select option #3 for ‘All Other Business Notices and Letters’.

Is Your Practice Ready To Make The Switch?

Before you make any decisions about the future of your practice, have a chat with someone that you trust. They can help determine if the financial incentives are worth the switch, and if your practice has the proper structure for S Corp designation. 

If you think the advantages of an S Corp are worth it compared to an LLC or sole proprietorship, your tax professional will be your best friend. The current version of Form 1120S, which you are required to file with the IRS, is 47 pages long. If the idea of doing that on your own gives you hives, you’re not alone! 😬

Electing to be an S Corp carries a ton of benefits. Avoiding double taxation and self-employment taxes can make a huge impact on your practice’s finances. You could also be seeking a business or home loan and need the added credibility of an S Corp and the W2 it provides. But there’s no one-size-fits-all solution for everyone when it comes to business structure.

Finding a bookkeeping and tax firm that specializes in mental health private practices AND can support you in making this decision about if becoming an S Corp is right for you doesn’t have to be a headache. We’re here for you at Therapeutic Bookkeeping!!

Every business owner’s situation is different. This blog cannot and should not be taken as legal, tax, bookkeeping, or financial advice. Speak with an expert about your specific situation before making a decision about whether or not to elect S Corp status!