S Corporations for Therapists: The Contract Review Most People Skip

Thinking About an S Corporation? Check Your Contracts First

If you're considering S corporation status for your therapy practice, most of what you'll hear focuses on tax savings. You'll hear discussions about reducing self-employment taxes, paying yourself a reasonable salary, and whether your profits are high enough to justify the additional complexity. Those are all important considerations.

However, there is another question that often gets overlooked:

Who is actually contracting for your services?

For many therapists, especially those who contract with schools, staffing agencies, government agencies, or other therapy practices, this question can be just as important as the tax savings calculation itself.

Why Your Contracts Matter

Many therapists assume that once they form an LLC or elect S corporation status, all their business income automatically belongs to the business. Unfortunately, it isn't always that simple.

In certain situations, the IRS can treat income as belonging to the individual who personally performed the services, regardless of how the business is structured. This is why the way your contracts, payments, and business operations are set up matters. If most of your income comes from a small number of contracts, it's worth taking a closer look at how those relationships are structured.

A Common Scenario

Let's say a speech therapist starts their career as a sole proprietor and signs a contract with a local school district. A few years later, the therapist forms an LLC/PLLC and eventually elects S corporation status after hearing about the potential tax savings.

The business bank account changes.

Payroll is established.

The accounting records are updated.

But nobody ever reviews the original contract with the school district.

Years later, the therapist is operating through an S corporation while still working under an agreement that was originally signed personally. This doesn't automatically mean the structure is incorrect. However, if the contract and surrounding facts indicate that the services are still being provided by the therapist personally rather than by the business, the IRS could challenge whether the income truly belongs to the S corporation.

That's why situations like this deserve attention before assuming the S corporation structure is fully supporting the tax position being taken.

Red Flags Worth Reviewing

One of the first things I look for is how Forms 1099 are being issued. If you have an S corporation but continue receiving Forms 1099 under your Social Security number rather than your business EIN, that's worth investigating. Sometimes the issue is administrative. The contract may already be with the business, but an outdated Form W-9 is still on file.

Other items that may warrant a closer look include:

• Contracts are signed in your personal name.

• Agreements that don't reference your business.

• Vendor records are established under your Social Security number.

• Payments are made directly to you rather than your business.

None of these items automatically determine the proper tax treatment, but they can indicate that your contracts and business structure may not be fully aligned.

Questions to Ask

If you currently have an S corporation or you're considering one, review your largest revenue sources and ask:

• Who is named in the contract?

• Who receives the payments?

• Who receives the Form 1099?

• Is the agreement with me personally or with my business?

• If the agreement is in my personal name, can it be updated?

These questions become even more important if most of your revenue comes from a small number of contracts with schools, staffing agencies, government agencies, or other practices.

Contracts Are Only One Piece of the Puzzle

Even if your contracts are structured correctly, your S corporation still needs to operate in a way that supports the position that the business, not you personally, is earning the income.

One factor that helps support the structure is paying yourself a reasonable salary. If your S corporation is receiving income from your work, paying yourself for the services you provide helps reinforce that the business, not you personally, is the one earning that income. By contrast, taking little or no salary while treating most of the income as distributions can undermine the distinction between you and the corporation.

Reasonable compensation is often discussed as an IRS payroll requirement, but it also helps reinforce the overall structure of the business.

The contracts, payroll, tax reporting, and day-to-day operations should all tell the same story: that the business, not you personally, is the one providing the services and earning the income.

S Corporations Are About More Than Profit Levels

Many therapists are told that an S corporation becomes worthwhile once profits reach a certain threshold. While profitability is certainly an important consideration, it isn't the only factor.

Before electing S corporation status, you should also consider:

• Whether your contracts support operating through the entity.

• The cost and complexity of running payroll.

• Additional tax filings and compliance requirements.

• State tax rules that may apply to S corporations.

• Whether the potential tax savings justify the overall cost and complexity.

The right answer depends on your specific situation.

Final Thoughts

S corporations can be an excellent tax planning tool for therapists in private practice, but they work best when the legal structure, contracts, payroll, and tax reporting all align.

If you contract with schools, staffing agencies, government agencies, or other practices, reviewing your agreements may be just as important as calculating the potential tax savings. Before making an S corporation election, take the time to make sure your contracts, payment arrangements, and business operations support the structure you're planning to use. A little planning now can help you avoid much larger problems later.

How I Help Therapists

I work exclusively with therapists in private practice, and part of that work is helping practice owners make sure all the pieces of their business fit together. Whether you're considering an S corporation, reviewing your contracts, planning for taxes, or evaluating your overall business structure, the goal is the same: your contracts, payroll, tax reporting, and day-to-day operations should all tell the same story.

Articles like this highlight just one example of the details that can affect your tax position. If you're considering an S corporation or want a second opinion on your current setup, I'd be happy to help you evaluate whether your structure is supporting your goals.