As a nurse practitioner business owner, it’s essential to be aware of the tax implications of your business structure. The way your business is classified by the IRS can significantly influence the amount of taxes paid per year. Electing as an S corporation with your LLC can be incredibly advantageous from a tax perspective. In addition to tax savings, S corp election offers increased flexibility and protection.

What is the difference between an S corp and a C corp?

An S corp is a unique tax status that allows your business to avoid paying federal income tax at the corporate level. Instead, profits and losses are passed through to the owners’ personal tax returns, where they are taxed at the individual level. This is a significant advantage over traditional C Corporations, which are subject to double taxation. Owners of a C corp must pay corporate tax on their business, then pay standard federal income tax on their salary and personal profits from their company. For this reason, Elite NP does not recommend a C corp for your practice. C corps are generally unnecessary unless you operate a very large business with hundreds of employees, multiple shareholders, and generate multi-millions per year in revenue.

How should I classify my business?

In an S corp, business owners avoid paying self-employment taxes on a portion of their income. Employment taxes, which include Social Security and Medicare taxes, are typically paid on all income earned by standard W2 employees. However, as an S corp owner, you can pay yourself a salary (W2) and only pay self-employment taxes on that portion of your income. Any additional profits can be distributed as dividends, which are not subject to self-employment taxes. This can save you up to around 15% in taxes.

It is not necessary to make the S corp election if you have a practice that does not generate significant income. Most accountants and tax experts agree that a net income of $50,000 or more can make an s corp election advantageous for business owners. It likely won’t be necessary for many NPs who are in the startup stages of business development, but keep it in mind as you grow. But for those that are generating close to $50,000+ per year in net income, Elite NP suggests filing as an S corp.

How do I elect my business as an S corp?

You can file IRS Form 2553 to request S corp status for your business. This form must be filed within 75 days of forming your LLC or within 75 days of the start of the calendar year in which you wish to be taxed as an S corp. This form is simple, and can usually be done by yourself without the help of an accountant or lawyer. A 2553 form usually takes about 4 weeks to process.

It’s important to note that not all LLCs are eligible for S corp status. To qualify, your LLC must meet the following criteria:

• The practice is a domestic LLC
• The practice has only allowable shareholders, including individuals, estates, and certain trusts
• The practice has no more than 100 shareholders
• The practice has only one class of stock
• The practice is not an ineligible corporation, such as an insurance company or domestic international sales corporation

Most medical practices and nurse practitioner businesses will qualify for S corp status. Once you’ve successfully elected as an S corp, it’s time to start paying yourself. As an S corp owner, you must pay yourself a reasonable salary, which is subject to self-employment taxes. The IRS defines a reasonable salary as what you would pay someone else to do the same job in your geographic area.

What should my salary be as a practice owner?

Determining your salary can be a bit tricky for many entrepreneurs, but there are several factors to consider. First, look at industry standards for nurse practitioners in your area. How much would you pay a nurse practitioner to do the same work you do? Next, consider your experience, education, and job duties. Luckily for many nurse practitioner entrepreneurs who have an S corp election through their LLC, nurse practitioner salaries are stagnant and low. So, pay yourself around $50/hour, which is the average NP salary for most of the United States. While bad for the profession as a whole, it is good for you as a business owner because it will lower your employment tax obligations.

Once you’ve determined your salary, you can pay yourself through your LLC’s standard payroll system (QuickBooks, Gusto, or have your accountant/bookkeeper do it for you). Once you are an established employee within your payment processing system, the money you pay yourself will have the standard withheld taxes from your paycheck such as federal income tax, Medicare, and Social Security. You’ll also need to file a W-2 form at the end of the year to report your salary to the IRS, just as you would if you were employed.

In addition to your salary, you can also receive distributions from your LLC’s profits. These distributions are not subject to self-employment taxes, but they are still taxable income. It’s important to carefully track your distributions and report them accurately on your personal tax return. A reliable bookkeeper/accountant can do this for you.

Overall, electing as an S corp with your LLC can provide significant tax benefits for the astute nurse practitioner business owner. By avoiding double taxation and reducing self-employment taxes, you can keep more of your hard-earned income and reinvest it back into your business to build your wealth!