As a nurse practitioner business owner, it’s essential to be aware of the tax implications of your business structure as it could mean THOUSANDS of dollars in extra taxes or savings! Electing as an S-Corp with your LLC can be incredibly advantageous from a tax perspective. Not only does it provide tax savings, but it also offers increased flexibility and protection. I have touched on this subject multiple times, but I thought it would be nice to have an article dedicated strictly to the S-Corp election.

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. C-Corp taxation occurs at the corporate level PLUS at the level of the owner because you must pay a corporate tax and then pay your standard federal income tax on your salary and distribution from the C-Corp. For this reason, you do NOT want a C-Corp for your practice. It is not necessary unless you have a LARGE business with hundreds of employees, multiple shareholders, and do multi-millions a year in revenue.

But to get back on topic, the main advantage of S-Corps is to allow business owners to 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 will save you approximately 15% in taxes. THAT IS HUGE FOLKS!

Now, it is not necessary to make the S-Corp election if you have a practice that does not generate a significant income. Most accountants and tax experts agree that the magic number to hit in NET income to make electing as an S-Corp worthwhile is around $50,000. So, it likely won’t be necessary for many getting started but keep it in mind as you grow. But for those that are generating close to $50,000+ a year in net income, you need to file as an S-Corp.

So, how do you do this? It is simple…

To make the S-Corp election with your LLC, you must first form an LLC (obviously). Once your LLC is established, you can file IRS Form 2553 to request S-Corp status. 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. That form can be found HERE, and you can do it yourself. I did and it was pretty simple… If it sounds complicated though, just have your accountant do it for you. It usually takes about 4 weeks to process and take effect.

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

• Be a domestic LLC
• Have only allowable shareholders, including individuals, estates, and certain trusts
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation, such as an insurance company or domestic international sales corporation

Luckily for all of you, you should qualify, so don’t worry too much about those restrictions!

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.

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 we stagnant and low. So, pay yourself around $50 an hour as that is the average salary for most in 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.

So, 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 this happens, 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 Form W-2 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 outside of you’re the salary. These distributions are not subject to self-employment taxes (15% savings!), but they are still taxable income (no way around that outside of a plethora of legal tax deductions you can take). It’s important to carefully track your distributions and report them accurately on your personal tax return. A solid bookkeeper/accountant should 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 and build your wealth! Talk to your accountant if this confuses you or file that 2553 form if you are ready to lower your legal tax obligations!