Taxes and Legal Structures: What You Must Understand

Recently, a tax-related question posted in the Nurse Practitioner in Business FB Group caught my eye. The question concerned FICA taxes and how they are paid.

Taxes can be confusing, and since Tax Day is approaching fast, I thought it might be helpful to review taxes as they relate to different business structures.

But before I continue, and for the record, what follows is not tax or legal advice. If necessary, please consult with the appropriate professional.

As a Nurse Practitioner in private practice, the type of taxes you’re responsible for paying depends on the legal structure of your business.

Hence, your tax liability will differ for an LLC or an LLC with an S-Corporation (S-Corp) tax election compared to a C-Corporation.

As you read through the information, please keep in mind that we’re only considering tax treatment here, not legal protection.

Selecting a legal structure or entity for your business should always include legal and tax considerations.

Federal Taxes

Simple LLC

If the legal structure of your business is a simple LLC (also known as a sole proprietorship for tax purposes), all your income and expenses are reported on IRS form Schedule C.

Once the business income or loss is captured on Schedule C, the schedule is filed with your personal 1040 tax return, and you will pay income tax at your individual tax rate.

Your business income flows through to your personal return; hence, a simple LLC is considered a flow-through entity for tax purposes.

Do you have to pay self-employment taxes as a simple LLC?

Yes.

As an LLC without special tax election, you are responsible for paying your own self-employment taxes throughout the year.

You must submit self-employment taxes, comprised of Social Security and Medicare taxes, to the IRS at set intervals (four times) during the year. The projected income for the year determines the amount of self-employment tax to be submitted.

Sole Proprietor

While nobody should be organized as a sole proprietor to own and operate a practice, some still do. However, when it comes to taxes, there is no difference between the sole proprietor and the simple LLC.

Both are treated as flow-through entities, report income or loss on Schedule C, and pay income tax at the personal tax rate.

Both are required to submit self-employment taxes based on the projected income for the year.

LLC with S-Corporation Election

If your practice is structured as an LLC but you elected to have it taxed as an S-Corporation, your tax liabilities will likely be different.

Here is how it works…

As an S-Corp, you’ll pay yourself a reasonable salary as an employee of the business. You will also pay payroll taxes, which are comprised of Social Security and Medicare taxes, on your salary.

Payroll taxes are submitted to the government whenever you receive a paycheck from your business; depending on your selection, this might be every other week or monthly.

Any additional business profits may be distributed to you as dividends, which are not subject to self-employment taxes.

The benefit of the S-Corp could be that your overall tax liability may be less than if you were taxed as a simple LLC.

However, remember that every situation is different, and not all businesses may experience the same results.

Before making changes to how your business is treated from a tax point of view, always consult with the appropriate professional.

C-Corporation

Small businesses organized as C-Corporations are taxed differently from the pass-through entities discussed above.

Corporations pay a corporate income tax at the federal level, separate from and in addition to any taxes paid by the owners or shareholders on their personal income.

Like other business structures, C-Corporations also submit payroll taxes on behalf of their employees.

Other taxes may be assessed on C-Corporations; always consult with the appropriate professional.

State Taxes

Before closing, let’s briefly touch on state taxes.

While not all states collect income tax, many do and collect additional taxes.  

What’s important is that you are informed about your responsibilities.

Depending on where your practice is located, whether you own a simple LLC,  an S-Corp, or a C-Corp, you may also be responsible for state taxes.

Again, it’s essential you consult a tax professional to understand your specific tax obligations and ensure timely payments are made.

Additionally, working with a tax professional will let you take advantage of all tax-saving strategies available to your business.


I hope this helps shed some light on taxes and emphasizes the importance of proper planning for tax purposes.

Let me know what you think… leave your comment below.

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  1. Your businesses structure is a state specific structure you choose. Your taxes are going to depend on being a pass-through company, an S-corp election, and your personal financial situation. It’s best to talk with your CPA/tax professional to determine how you will be affected.

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