To accurately determine whether your private practice is a Sole Proprietorship or an S Corporation, it's important to review your business formation documents. These documents, filed with your state's Secretary of State, outline the specific structure of your business.
Business entity vs Tax entity
A Federal Tax Entity is the classification of your private practice for federal tax purposes, especially regarding income tax. This classification helps determine your practice's applicable tax rates and filing requirements, which may fall into categories such as Sole Proprietorship, Partnership, or Corporation.
A State Business Entity refers to the legal structure of your private practice as recognized by the state where you operate your practice. It’s the formal organization of your business, such as a corporation, LLC, partnership, or sole proprietorship.
A State Tax Entity is the classification of your private practice for state tax purposes. This classification determines the state taxes applicable to your practice, such as income, sales, and property taxes.
It’s important to note that state and federal classifications can differ. For example, your practice may be recognized as an LLC at the state level but treated as a sole proprietorship or partnership for federal tax purposes.
Sole Proprietor
Sole proprietor (sole prop) is the default IRS tax designation for self-employed therapists. You’re automatically considered to be a sole proprietor if you do business activities but don’t register as any other kind of business.
- If you are a sole member of a domestic limited liability company (LLC) and do not make any tax elections to be treated as a corporation/S Corp, then you are treated as a sole proprietor for tax reporting purposes. However, if you elect to treat the LLC as an S Corporation, you are not a sole proprietor.
- If you are a two or more member-owned domestic limited liability company (LLC) and do not make any tax elections, you will automatically be treated as a Partnership (tax form 1065) for tax reporting purposes. Please note: Heard does not support Partnerships.
As a Sole Proprietor, you file a personal tax return, Form 1040, and a Schedule C to capture the profit and loss of your private practice income. A Schedule C is a sub-schedule of your 1040 return; it is not a separate filing. The net income from your practice will be included in your 1040 and any other income you earn. This return is due April 15th.
S Corporation
In order to be considered as an S Corporation, you must elect and file paperwork with your state and the IRS and receive an approval letter from the IRS.
- If you filed paperwork with your state to establish a separate legal entity such as articles of incorporation, you're likely an S Corporation or another type of corporation.
- If you are a sole member of a domestic limited liability company (LLC) and make the tax election to be treated as an S Corporation, you would have filed with the IRS and received a CP261 from the IRS, which will acknowledge your S-corporation status and the effective start date.
As an S Corporation, you will file Form 1120S for your private practice and Form 1040 for your personal income tax filing. An 1120S is an entirely separate tax filing that is due March 15th.
If you are unsure, contact our team via Messages, and we will verify your information on file with Heard.
Please note: Therapists residing in California must be a sole proprietor or a professional corporation elected as S Corp, never an LLC. An LLC is disallowed for individuals within the mental health field of business in California. Per the CA guidelines, mental health professionals, including therapists, must form a professional corporation or remain a sole proprietor due to state regulations that prohibit the practice of therapy under an LLC structure.
LLC or PLLC
It is important to note that an LLC or PLLC is a state business entity different from a Sole prop or S Corp which are federal tax entities. This means you can be registered as an LLC and file your taxes as a sole prop unless you have elected and the IRS has recognized you as an S Corp.
Limited Liability Company (LLC) is a business entity registered at the state level. Some states, such as CA and NY, require licensed professionals to be registered as a Professional Limited Liability Company (PLLC). An LLC or PLLC is a specific type of legal entity that provides limited liability, ensuring that, as an owner, you are not personally responsible for the debts or liabilities incurred by your practice.
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