Electing S corporation status for your private practice can save you thousands of dollars in taxes each year. That’s the number one reason therapists opt to form S corps—but it’s not the only one.
Once your practice starts filing as an S corp, you can leverage retirement savings and employee benefits plans to further lower your tax burden. And an S corp gives you the tools to bring on shareholders and expand your practice.
Here are the four most impactful ways to maximize S corp status for your practice.
Note: You’ll need to reach a certain income threshold—usually around $80,000 – $100,000—before the tax savings of S corp status offset the cost of running your business. If you’re new to the world of S corps, and not sure whether it’s the right move for you, check out The Complete Guide to S Corporations for Therapists. While it’s written for therapy practice owners, the info in this guide applies to most types of private practices.
1. Make the most of the salary vs. distribution split
The most common reason for a private practice owner to elect S corp status is to save on taxes by collecting some of their earnings as distributions.
Salary vs. distributions
When you work for your S corporation, you do so as a regular W2 employee. Your S corp pays you a salary.
You can also earn money from your business in the form of distributions—funds transferred to you as a shareholder (similar to dividends on stock in a C corporation).
The two types of income are taxed differently:
- Your salary is subject to federal and state income tax. You also pay FICA (Social Security and Medicare) tax on it at a rate of 7.65% (taken from your wages), which is added to another 7.65% (contributed by your employer) for a total of 15.3%.
- Your distributions are subject to federal and state income tax. However, neither you nor the business make FICA payments. You also do not owe self-employment tax (15.3%) on these earnings.
Contrast this to paying yourself as a sole proprietor: One hundred percent of your profit (revenue minus expenses) is treated as self-employment income. It’s subject to the 15.3% self-employment tax.
The biggest benefit of S corp status is that you can collect some of your personal earnings as salary (subject to a total FICA tax of 15.3%) and some of it as distributions (no FICA or self-employment tax).
Reasonable salary
The IRS requires your S corp to pay you a reasonable salary. A reasonable salary is on par with what other professionals in your field, with the same level of experience and training, earn as W2 employees.
Without this requirement, S corp owners could collect 100% of their income as distributions without paying self-employment tax (or the FICA equivalent) on any of it.
For more, check out How to Calculate a Reasonable Salary as a Therapist. The guidelines for therapists setting a reasonable salary apply to all professionals in private practice.
Maximizing the salary vs. distribution split
You can maximize the salary vs. distribution split—and maximize your tax savings—by paying yourself the lowest reasonable salary possible and collecting the remainder of your earnings as distributions.
Setting a low reasonable salary can be tricky. If you consult with an accountant, due to reasons of professional liability, they won’t tell you a reasonable salary outright. But they can help you find a ballpark figure that minimizes your tax liability while meeting IRS requirements.
2. Set up an accountable plan
With an accountable plan, a business (your S corp) reimburses an employee (you) for personal funds used to pay for business expenses.
These reimbursements are tax free, meaning:.
- The employee does not pay income tax on the reimbursement amount
- The business deducts the cost of the reimbursement from its gross revenue
Accountable plans benefit S corp owner-employees in three ways:
- By covering mixed expenses
- By potentially reducing the owner’s allowable reasonable salary
- By allowing the owner to take advantage of rewards programs on personal credit cards
For a deep dive, check out How to Set up an Accountable Plan for your Private Practice.
Covering mixed expenses
As an owner-employee of an S corp, you may find yourself paying out-of-pocket for expenses that are partially attributable to your business.
One common example is a personal phone that you also use for business purposes. If you use your phone for personal calls and texting 30% of the time, and use it for business purposes 70% of the time, you can use an accountable plan to reimburse yourself 70% of the cost of your phone plan.
So if you pay $100 per month for your phone plan, you can reimburse yourself $70 each month via the accountable plan.
This makes it easier to account for mixed expenses and enjoy the maximum tax benefits possible.
Reducing reasonable salary
If you cover a substantial amount of your business expenses using personal funds and receive reimbursements via an accountable plan, you may be able to pay yourself a lower reasonable salary without coming under IRS scrutiny.
That’s because compensation from your practice under an accountable plan is a business tax deduction—it lowers your practice’s net income. Not only does that reduce its tax burden, but it may allow you to justify a lower salary; your practice’s total income is one of the factors taken into account when setting a reasonable salary.
As always, consult with a tax professional when setting a reasonable salary in order to reduce the likelihood of extra scrutiny from the IRS.
Personal credit cards and rewards programs
Some S corp owner-employees benefit from using their personal credit cards to cover business expenses. Personal credit cards may offer rewards points, cash back, or other benefits owner-employees wouldn’t enjoy when simply using cash from the S corp’s retained earnings to cover expenses.
Using your personal credit card to cover business expenses—provided your accountable plan reimburses you in a timely fashion—is also a low-risk way of building personal credit.
As Jason Watson, CPA notes, credit card businesses and the IRS are at odds about how rewards from personal cards used to cover business expenses should be treated. According to the IRS, they ought to count as taxable income (as an “ascension of wealth”). But for the time being—until the IRS changes tax laws—they’re not. So bear in mind that this method of racking up credit card rewards may have a limited shelf life.
How to set up an accountable plan
In order for the IRS to consider it legitimate, an accountable plan must meet three criteria:
- The expenses are business related
- The payments are reimbursed in a timely manner
- The employee returns any unused reimbursements to the business
If the IRS decides that your accountable plan is not legitimate, the tax deductions your S corp claims for reimbursements may be considered illegitimate—resulting in a higher tax burden.
Best practice demands you create a written accountable plan for your business. You also need to log payments and reimbursements and keep receipts.
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3. Take advantage of S corp retirement funds
When your practice elects S corp status, you become a W-2 employee. Your retirement fund contributions are based on your W-2 income, not your total business profits.
That means:
- The S corp can make employer contributions that do not count as wages
- Those contributions can reduce the S corp’s total taxable income
- Some contributions avoid payroll taxes entirely
With careful planning, you can defer income tax and even avoid payroll taxes (FICA) entirely by making contributions to retirement funds. That gives you more control over your taxable income while allowing you to save for the future.
Three options to help you maximize your savings:
- Solo 401(k)
Ideal for solo S corp practice (where only the owner is an employee), a Solo 401(k) offers high limits and straightforward administration. Contributions from your S corp are not subject to payroll taxes.
Income tax on funds you contribute as an employee is deferred until they are withdrawn. The limit for 2026 is $24,500 (with additional catch-up payments if you’re aged 50+), with employer contributions capped at 25% of W-2 wages. The combined maximum contribution is $72,000.
- Traditional or Roth 401(k)
Best suited to S corp practices with employees, a Traditional or Roth 401(k) allows your S corp to deduct contributions to employee savings funds as business expenses.
As the business owner, you can contribute to your own 401(k) and defer income tax in the same way you would with a Solo 401(k).
The 2026 contribution limits for a Traditional or Roth 401(k) are the same as for a Solo 401(k). However, a Traditional or Roth 401(k) is more complex, with a higher administrative burden.
- SEP-IRA
If you run a solo practice, a SEP-IRA offers the simplest way to reduce your tax burden by making contributions to a retirement fund. With minimal paperwork involved, a SEP-IRA is a popular choice with new practices.
Your S corp can designate up to 25% of your W-2 wages as SEP-IRA contributions. Income tax on these contributions is deferred until the funds are withdrawn.
However, SEP-IRA contributions are calculated after payroll taxes are applied—meaning that you can’t use this method to avoid making FICA contributions as either an employee or an S corp.
For more on retirement funds for private practice owners, check out How to Choose a Retirement Plan for Your Therapy Practice.
4. Set up a health insurance plan for your S corp practice
Premiums your S corp pays for your health insurance as an employee—or premiums you pay personally that your S corp reimburses—reduce your taxable income. They’re also a means of benefitting financially from your business without incurring payroll tax.
Here’s how it works:
- Your S corp pays your health insurance premiums (or reimburses you)
- You add these premiums to Box 1 of the Form W-2 your S corp files for you as an employee
- On your personal return (Form 1040), you deduct the health insurance premiums as an above-the-line deduction
You don’t pay FICA (7.65%) on these premiums as an employee, and your S corp doesn’t pay FICA (7.65%) as an employer. And the premium payments lower your individual tax burden at the state and federal levels.
It’s important to document payments and reimbursements. In the event of an audit, the IRS will require proof that the payments were covered by the S corp:
- If your S corp pays directly, the health insurance policy must be registered in the S corp’s name
- If you are reimbursing yourself as an employee, submit invoices and proofs of payment to the S corp and keep them on file
All premium payments to insurance companies or reimbursements made to employees should be recorded as part of your normal S corp bookkeeping.
Some common mistakes to watch out for:
- Deducting the premium on your business tax return (Form 1120S). You make the deduction on your personal return; the business does not file it.
- Treating premiums as taxable wages. They’re either paid directly by the S corp or reimbursed to you as an employee.
- Failing to claim a reimbursement. If you personally pay for health insurance premiums, they need to be reimbursed by the S corp. Otherwise, you can’t deduct them.
- Making unequal payments for multiple owners. If your S corp has more than one owner, each owner with a share greater than 2% must have their premiums covered. Premium payments should be based on ownership percentage, and each owner is handled individually.
- Using your accountable plan. Health insurance premiums are not reimbursed through your accountable plan. Instead, they’re recorded as a health insurance expense on the S corp’s tax return.
Eligible plans include:
- Individual ACA plans
- Marketplace plans
- Private individual plans
- Family coverage for spouses and dependents
If your plan has a high deductible, you can combine premium coverage through your S corp with employer health savings account (HSA) contributions to maximize your savings. Learn more from our complete guide to HSAs.
Stay compliant to keep maximizing your S corp benefits
In order to enjoy the benefits an S corp offers, you need to comply with IRS reporting and filing requirements.
And if you have not yet elected S corp status, you’ll need to make sure an S corp election is the right move for your practice.
Here are some resources to help you stay on track. While written for therapists in private practice, the information covered applies to all private practice owners:
- The Complete Guide to S Corporations for Therapists
- When Should My Therapy Practice Become an S Corp?
- How Much Do Therapists Really Save by Switching to an S Corp?
- Tax Season Checklist for S Corporations
- How to Read an S Corporation Tax Return for Your Therapy Practice
- How To Switch From a Sole Proprietor to an S Corporation as a Therapist
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.
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