In California, establishing a California Professional Occupational Therapy Corporation is a favored option for licensed occupational therapists providing occupational therapy services in California. We recently published an article titled When Not to Use a California Professional Occupational Therapy Corporation outlining when this legal structure may not be suitable for a California occupational therapy practice. This article is intended to outline the strengths that most often make the California Professional Occupational Therapy Corporation the business entity of choice for California licensed occupational therapists rendering occupational therapy services in California.

Liability Protection in California Professional Occupational Therapy Corporations

Licensed occupational therapists often choose to practice occupational therapy in a California Professional Occupational Therapy Corporation to limit personal liability. Unlike sole proprietorships or partnerships, California Professional Occupational Therapy Corporations offer a liability protection and personal asset protection by separating the personal assets of the licensed occupational therapist shareholder from the business debts, liabilities, obligations, and legal judgments against the California Professional Occupational Therapy Corporation.

Limited liability protection is vital for licensed occupational therapists who employ other licensed individuals as employees or independent contractors to render professional services, especially when there is a significant risk of malpractice claims. By forming a California Professional Occupational Therapy Corporation, occupational therapists can safeguard their personal assets and future earnings while adhering to state regulatory requirements and complying with agencies which govern rendering professional services in California, such as the California Board of Occupational Therapy.

Tax Benefits when Rendering Professional Service in a California Professional Occupational Therapy Corporation Taxed as an S-Corp

Selecting the ideal business structure to render professional service requires a deep understanding of tax implications. A California Professional Occupational Therapy Corporation that opts for S Corporation status can provide substantial tax benefits, especially in relation to self-employment and payroll taxes.

Self-employed occupational therapists are responsible for covering the full Social Security and Medicare taxes, totaling 15.3% of net profit up to the statutory cap, which is $168,600 as of 2024. Beyond this cap, they must pay 2.9% on all net profit. Additionally, there is a 0.9% Medicare tax for single taxpayers earning $200,000 or more and for married taxpayers filing jointly with incomes of $250,000 or above, added to the 2.9%.

A California Professional Occupational Therapy Corporation taxed as an S-Corp offers a strategic way to minimize self-employment taxes. By providing a market-rate salary to licensed occupational therapist shareholders, the salary becomes subject to payroll taxes of 15.3% up to the statutory cap ($168,600 in 2024) and 2.9% for earnings above this limit. The remaining profits can then be distributed as shareholder distributions, which are not subject to payroll or self-employment taxes. This approach can result in significant tax savings for licensed occupational therapists who balance their salary for occupational therapy services with the distributions on their shares of stock based upon ownership of their California Professional Occupational Therapy Corporation.

When do the California Professional Corporation Benefits Make Sense for a Licensed Occupational Therapist?

Most licensed occupational therapists would benefit from practicing with a California Professional Occupational Therapy Corporation in California, with the exceptions being very low revenue occupational therapy practices without employees that do not accept insurance and with no plans for future growth of the occupational therapy practice.

This article examines why forming a California Professional Occupational Therapy Corporation is advantageous for a licensed occupational therapist, whether practicing solo or with other licensed professionals. This article addresses relevant considerations to weigh when choosing the best business entity in which to practice occupational therapy, namely, federal income taxes, California corporate taxes, self-employment taxes, personal income tax, liability protection, asset protection, and ownership issues.

The goal of this article is to equip licensed occupational therapists with the information needed to make informed decisions. It is crucial to ensure that the chosen business entity aligns with the business goals of the licensed occupational therapist while adhering to California law, including the California Corporations Code, the Moscone-Knox Professional Corporations Act, the California Business and Professions Code, and other relevant regulations, as well as the rules of government agencies overseeing the practice of occupational therapy, such as the California Board of Occupational Therapy.

Executive Summary: Putting the Conclusion First for Busy Occupational Therapists

A licensed occupational therapist should form a California Professional Occupational Therapy Corporation if they are either:

(i) concerned about liability protection or the separation of personal and business assets; or

(ii) anticipate an immediate or future tax benefit.

Some licensed occupational therapists establish California Professional Occupational Therapy Corporations solely for liability protection, while many other licensed occupational therapists do so exclusively for the tax benefits of practicing occupational therapy using a California Professional Occupational Therapy Corporation. When either liability protection or tax benefits justify the creation of a California Professional Occupational Therapy Corporation, a licensed occupational therapist should consider using a California Professional Occupational Therapy Corporation, even if only one of liability protection or tax benefits are sought by the licensed occupational therapist.

For most licensed occupational therapists in most occupational therapy practices, the experienced corporate attorneys at San Diego Corporate Law recommend the use of a California Professional Corporation for the limited liability protections and tax benefits a California Professional Occupational Therapy Corporation provides.

Lower Net Income Practices without Employees or Independent Contractors

If a licensed occupational therapist works alone, has no employees or independent contractors, is fully insured, and runs a practice with an annual net income below $50,000 to $60,000 without the intention to grow the occupational therapy practice in the future, operating as a sole proprietorship in California may be suitable for that licensed occupational therapist.

Lower Net Income Practices with Employees or Independent Contractors

For licensed occupational therapists earning less than $50,000 to $60,000 in net income annually without plans to grow their occupational therapy practice in the future, establishing a California Professional Occupational Therapy Corporation is still recommended if the licensed occupational therapist has or plans to have employees or independent contractors at any point in time, because California Professional Occupational Therapy Corporations offer protection to the licensed Occupational Therapy shareholder from liabilities related to their employees and independent contractors, including vicarious liability and malpractice liability claims.

Higher Net Income Practices Regardless of Liability Concerns

A licensed occupational therapist earning (or planning to earn) over $60,000 in net income annually should seriously consider practicing occupational therapy in a California Professional Occupational Therapy Corporation regardless of liability concerns because the tax savings of a California Professional Occupational Therapy Corporation can outweigh the additional administrative costs associated with practicing occupational therapy in a California Professional Occupational Therapy Corporation, and these tax savings can be significant.

Starting a New Practice Without Certainty of Future Performance

Licensed occupational therapists planning to start practicing occupational therapy small and grow their occupational therapy practice over time should carefully consider the administrative challenges of initially operating as a sole proprietor or general partnership with plans to later convert to a California Professional Occupational Therapy Corporation. It is best to schedule a consultation with an experienced corporate attorney for advice on the challenges for converting a thriving occupational therapy practice from a sole proprietorship or general partnership to a California Professional Occupational Therapy Corporation versus forming the California Professional Occupational Therapy Corporation as a part of starting their occupational therapy practice.

Special Considerations for Occupational Therapists Accepting Insurance, Working with a Regional Center, or Other Third-Party Payor Panels

A licensed occupational therapist whose occupational therapy practice accepts (or plans to accept) insurance, work with a regional center, or otherwise engage with third-party payor panels should weigh the administrative burden of undergoing a second round of paneling if they initially establish as a sole proprietorship or general partnership and later transition to a California Professional Occupational Therapy Corporation. Many licensed occupational therapists opt to form a California Professional Occupational Therapy Corporation as a part of starting their occupational therapy practice to avoid the arduous task of paneling as a sole proprietorship or general partnership only to endure the process a second time one or two years later after forming a California Professional Occupational Therapy Corporation for the tax benefits or limited liability protection.

California Professionals are Prohibited from Practicing in a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

It is worth noting that LLCs and PLLCs are not permitted for use with occupational therapy practices in California.

Contact San Diego Corporate Law for Expert Guidance

Choosing the right business structure for your occupational therapy practice can be a complex task. For tailored advice that considers your specific circumstances, schedule a consultation with the experienced attorneys at San Diego Corporate Law. Our team is committed to assisting licensed occupational therapists in determining whether a California Professional Occupational Therapy Corporation or another business structure best suits their needs, maximizing tax benefits while minimizing liability risks.

Schedule a consultation today to ensure your occupational therapy practice is structured for success.

Liability Protection for Licensed Occupational Therapists

Licensed occupational therapists often opt to practice occupational therapy as a California Professional Occupational Therapy Corporation to shield themselves from personal liability and to keep their personal assets separate and protected from business debts, liabilities, obligations, and legal judgments related to their occupational therapy practice. It is essential for licensed occupational therapists to understand the liability protection differences between sole proprietorships and general partnerships compared to those offered by a California Professional Occupational Therapy Corporation when deciding on the ideal business structure for their occupational therapy practice.

General Liability

Licensed occupational therapists selecting a business structure for their occupational therapy practice should understand the distinctions in general liability protection between sole proprietorships and general partnerships compared to California Professional Occupational Therapy Corporations.

In this section, “general liability” refers to liabilities arising from contracts with vendors, claims of bodily injury, property damage, and other liabilities not related to employment relationships, malpractice, or professional errors and omissions.

For instance, consider scenarios such as a long-term lease of office space or specialized equipment, a bodily injury resulting from a visitor slipping and falling in the office of a licensed occupational therapist, property damage to leased premises or neighboring properties due to the occupational therapy practice, or claims of libel, slander, and other reputational harm stemming from professional advertising.

General Liability for Sole Proprietors and General Partnerships

Sole proprietors and general partners practicing occupational therapy encounter substantial liability risks due to the absence of a distinction between personal and business assets. In a sole proprietorship, the occupational therapist owner is personally liable for all business debts, liabilities, obligations, and legal judgments related to general liability claims against the occupational therapy practice.

Similarly, in general partnerships, all general partners share joint and several liability. Each individual general partner is personally responsible for all business debts, liabilities, obligations, and legal judgments arising from general liability against the partnership. This means that each licensed occupational therapist acting as a general partner for a California occupational therapy practice operating as a general partnership is personally liable for all liabilities of the occupational therapy practice.

If a visitor is injured on the premises or if the occupational therapy practice causes damage to property of a third-party property, the personal assets of a California occupational therapist sole proprietor or each occupational therapist general partner in a general partnership bear unlimited liability for these claims. This unlimited personal liability imposes a significant burden on a California occupational therapist sole proprietor or individual occupational therapist general partners of a general partnership, especially if the occupational therapy practice lacks sufficient insurance or fails to effectively manage risks. It is essential for occupational therapist sole proprietors and occupational therapist general partners to be aware of these risks and consider protective measures, such as comprehensive insurance policies or restructuring the occupational therapy practice to limit personal liability exposure.

General Liability for California Professional Occupational Therapy Corporations

A California Professional Occupational Therapy Corporation offers significant protection against personal liability for licensed occupational therapists. Unlike occupational therapist sole proprietors and occupational therapist general partners of a general partnership, who face unlimited personal liability for business debts, liabilities, obligations, and legal judgments, licensed occupational therapist shareholders of a California Professional Occupational Therapy Corporation generally enjoy protection from such business liabilities. This protection means the personal assets of licensed occupational therapist shareholders, such as homes and personal bank accounts, are typically shielded from claims related to the debts, liabilities, obligations, and legal judgments of the California Professional Occupational Therapy Corporation. As a distinct legal entity, the California Professional Occupational Therapy Corporation is accountable for its own debts, liabilities, obligations, and legal judgments, thereby insulating the personal financial exposure of its licensed occupational therapist shareholders.

It is important to recognize that the liability protection offered by a California Professional Occupational Therapy Corporation has its limitations. Licensed occupational therapist shareholders may still be personally liable for their own negligent or wrongful actions. Additionally, this protection does not cover liabilities backed by the personal guarantee of the licensed occupational therapist shareholder. To ensure limited liability protection for its licensed occupational therapist shareholders, the California Professional Occupational Therapy Corporation must be operated diligently and in compliance with California laws and regulations.

Despite the limitations mentioned above, the general liability protections afforded to licensed occupational therapist shareholders of California Professional Occupational Therapy Corporations are significant. These protections enable licensed occupational therapists to manage their occupational therapy practices confidently with the maximum liability protection available under applicable law.

General Liability Conclusion

Some general liabilities for a California occupational therapy practice, whether it is structured as a sole proprietorship, general partnership, or California Professional Occupational Therapy Corporation, are insurable risks. However, if an incident occurs that is not covered by insurance, if the insurer denies coverage, or if the liability exceeds the insurance limits, the limited liability features of a California Professional Occupational Therapy Corporation may protect a licensed occupational therapist shareholder whereas a California occupational therapist sole proprietor or occupational therapist general partner or a general partnership would be personally liable for the same claim. The limited liability of a California Professional Occupational Therapy Corporation offers protection compared to the unlimited personal liability faced by a California occupational therapist sole proprietor or occupational therapist general partner.

Employment Liability

Licensed professionals choosing a business structure for their practice should understand the differences in employment liability protection among sole proprietorships, general partnerships, and California Professional Occupational Therapy Corporations.

In this section, the term “employment liability” refers to both the responsibility owed to employees and independent contractors and the vicarious liability to third parties arising from the actions or inactions of employees and independent contractors.

Employment liability to employees encompasses issues such as wage and hour law, sexual harassment, hostile work environment claims, privacy and information privacy claims, discrimination, wrongful termination, and a host of other potential liabilities. In contrast, vicarious liability to third parties might involve a business being held accountable for an injury to a third party arising from an auto accident caused by an employee during company time or some similar claim.

Employment Liability for Sole Proprietors and General Partnerships

Much like general liability issues, occupational therapist sole proprietors and occupational therapist general partners of general partnerships are significantly exposed to liability due to the absence of a clear divide between personal and business assets. In a California occupational therapy sole proprietorship, the licensed occupational therapist owner bears full responsibility and unlimited liability for employment-related claims made by employees or independent contractors, as well as for third-party claims concerning employee or independent contractor actions or inactions for which the occupational therapist practice is vicariously liable.

In general partnerships, occupational therapist general partners share joint and several liability. Each occupational therapist general partner has unlimited personal liability for all employee-related claims against the occupational therapy practice and for all third-party claims of vicarious liability resulting from employee or independent contractor actions or inactions.

If an employee or independent contractor files a claim for a meal break violation, wrongful termination, or other common workplace issues, the personal assets of a California occupational therapist sole proprietor or each occupational therapist general partner in a general partnership is subject to unlimited liability. Similarly, if an employee or independent contractor assaults or injures a third party, or damages third-party property, the occupational therapist sole proprietor or each occupational therapist general partner faces unlimited liability for these claims under the legal principle of vicarious liability.

Unlimited personal liability places a heavy burden on occupational therapist sole proprietors and individual occupational therapist general partners of general partnerships, particularly when the occupational therapy practice is underinsured or poorly manages risks. It is crucial for occupational therapist sole proprietors and individual occupational therapist general partners to recognize these risks and explore protective measures. Options such as employment practices liability insurance can guard against employee claims, while comprehensive general liability insurance addresses vicarious liability from employee and independent contractor actions or inactions. Alternatively, restructuring the occupational therapy practice can help mitigate personal liability exposure.

Employment Liability for California Professional Occupational Therapy Corporations

A California Professional Occupational Therapy Corporation provides significant protection against personal liability for licensed occupational therapist shareholders, shielding them from employee-related claims. Unlike occupational therapist sole proprietors and occupational therapist general partners of general partnerships, who face unlimited personal liability for employee and independent contractor claims and incidents caused by employees and independent contractors, licensed occupational therapist shareholders in a California Professional Occupational Therapy Corporation typically enjoy protection from both types of employment liability.

The liability protection provided by a California Professional Occupational Therapy Corporation ensures that the personal assets of licensed occupational therapist shareholders, such as their homes and bank accounts, are generally shielded from claims arising from employment liability related to the occupational therapy practice. As a separate legal entity, the California Professional Occupational Therapy Corporation assumes responsibility for employee and independent contractor claims and third-party claims based on employee and independent contractor actions or inactions under the legal theory of vicarious liability, thereby significantly reducing the personal financial exposure of licensed occupational therapist shareholders of a California Professional Occupational Therapy Corporation.

It is important to recognize that a California Professional Occupational Therapy Corporation holds liability for employee and independent contractor claims as well as third-party claims due to vicarious liability for the actions or inactions of employees and independent contractors. Although this is preferable to unlimited personal liability for licensed occupational therapists, such liability can still significantly impact a California occupational therapy practice, even as it protects the assets of the licensed occupational therapist shareholders.

Similar to general liability, a California Professional Occupational Therapy Corporation must operate diligently and comply with California laws and regulations to ensure its licensed occupational therapist shareholders receive limited liability protection. This protection extends to both employee claims and third-party vicarious liability claims.

Despite the previously mentioned limitations, licensed occupational therapist shareholders enjoy significant employment liability protections with California Professional Occupational Therapy Corporations, and the safeguards provided allow them to conduct their practices with confidence with the maximum liability protection available under applicable law.

Employment Liability Conclusion

Employment practices liability insurance can cover many, but not all, liabilities related to employee and independent contractor liabilities. Similarly, many general liabilities are insurable risks for a California practice whose employees may expose it to third-party claims under vicarious liability. Whether operating as a sole proprietorship, general partnership, or California Professional Occupational Therapy Corporation, having comprehensive insurance is crucial. However, if an incident is not covered by insurance, if a claim is denied by an insurer, or if liability exceeds the limits of insurance coverage, the limited liability status of a California Professional Occupational Therapy Corporation can protect a licensed occupational therapist shareholder from personal liability. This stands in contrast to a California occupational therapist sole proprietor or occupational therapist general partner of a general partnership who would face unlimited personal liability for the same claim.

Malpractice Liability

Licensed occupational therapists selecting a business structure for their occupational therapy practice should understand the differences in malpractice and errors and omissions liability protection offered by sole proprietorships, general partnerships, and California Professional Occupational Therapy Corporations.

In this section, “malpractice” is defined as the professional errors and omissions that occur when an individual occupational therapist fails to meet the accepted standards of occupational therapy practice, resulting in harm or damage. Malpractice liability pertains to the legal accountability occupational therapists may incur for not adhering to these standards, which can lead to claims and lawsuits.

For occupational therapists selecting a business entity in which to practice occupational therapy in California, understanding the assignment of malpractice liability is vital. In a California occupational therapy practice, the consequences of malpractice can be significant. This section explores the intricacies of malpractice liability, focusing on the risks associated with professional errors and omissions, and examines the liability of occupational therapy practice owners in sole proprietorships, general partnerships, and California Professional Occupational Therapy Corporations.

Malpractice Liability for Sole Proprietors and General Partnerships

California occupational therapist sole proprietors and occupational therapist general partners of general partnerships bear unlimited liability for their own malpractice, errors, and omissions. Consequently, these occupational therapists are personally liable for any malpractice claims filed against them by their patients.

In a general partnership, each of the occupational therapist general partners not only bear unlimited liability for the malpractice and errors and omissions claims against them personally, but they also have unlimited liability for the malpractice and errors and omissions of all other occupational therapist general partners in the general partnership, giving each occupational therapist general partner unlimited personal liability for the malpractice and errors and omissions of each other occupational therapist general partner.

Furthermore, as previously mentioned regarding vicarious liability for employees and independent contractors, occupational therapist sole proprietors and occupational therapist general partners of general partnerships bear unlimited liability for malpractice claims of the professional employees and professional independent contractors who practice for the sole proprietorship or general partnership. This liability stems from the alleged malpractice or errors and omissions of their professional employees under the legal theory of vicarious liability.

The unlimited personal liability associated with malpractice claims for all other professional general partners, employees, and independent contractors makes sole proprietorships and general partnerships less appealing for occupational therapy practices because these business entities expose the personal assets of occupational therapist owners to unlimited liability for the alleged malpractice of other professionals.

Malpractice Liability for California Professional Occupational Therapy Corporations

Similar to occupational therapist sole proprietors and occupational therapist general partners in a general partnership, licensed occupational therapist shareholders of a California Professional Occupational Therapy Corporation face unlimited liability for their own malpractice and professional errors and omissions. This means that licensed occupational therapist shareholders remain personally liable for their own acts of malpractice and errors and omissions due to their own negligence.

However, licensed occupational therapist shareholders of a California Professional Occupational Therapy Corporation do enjoy protection from liability related to malpractice and errors and omissions allegedly made by employees, independent contractors, and other professional shareholders. A California Professional Occupational Therapy Corporations function as a legal entity separate and apart from its shareholders, safeguarding individual shareholders and their personal assets from malpractice liability, except for their own acts of malpractice and their own errors and omissions. In essence, while licensed occupational therapist shareholders of a California Professional Corporation are accountable for their own professional negligence, they are not held personally liable for the malpractice or errors and omissions of employees, independent contractors, or fellow occupational therapist shareholders within the California Professional Occupational Therapy Corporation.

This protection exists because the California Professional Occupational Therapy Corporation, not the individual licensed occupational therapist shareholder, is considered the employer of any employee, independent contractor, or other professional shareholder accused of malpractice. As a result, vicarious liability for malpractice falls on the California Professional Occupational Therapy Corporation rather than the individual occupational therapist shareholder. Consequently, while the professional alleged to have committed malpractice or an error or omission and a California Professional Occupational Therapy Corporation may face lawsuits for malpractice claims due to the actions of employees, independent contractors, or other professional shareholders, the personal assets of licensed occupational therapist shareholders not alleged to have personally committed an act of malpractice or an error or omission are typically protected.

As with general liability and employment liability, the limited liability framework for malpractice and errors and omissions relies upon the diligent operation of the California Professional Occupational Therapy Corporation in compliance with California laws and regulations.

Malpractice Liability Conclusion

Licensed occupational therapists, regardless of their chosen business structure, are personally liable for their own acts of malpractice and their own errors and omissions. However, operating as a sole proprietorship or general partnership in California exposes licensed occupational therapists to unlimited liability for malpractice and errors and omissions committed by employees, independent contractors, and professional co-owners. In contrast, forming a California Professional Occupational Therapy Corporation provides protection from personal liability for professional negligence committed by employees, independent contractors, or fellow professional shareholders. While malpractice insurance can cover errors and omissions, its limitations and the possibility of claim denial make malpractice liability a significant concern for licensed occupational therapists and California Professional Occupational Therapy Corporations provide the maximum legal protection available under applicable law.

Conclusions About Liability Protections

Choosing the right business entity for a California occupational therapy practice requires careful consideration and consultation with legal experts, such as the experienced corporate attorneys at San Diego Corporate Law. It is crucial to have adequate insurance coverage, including general liability insurance, employment practices liability insurance, and malpractice liability insurance, to protect against claims regardless of the chosen professional business entity. However, insurance is limited in coverage and coverage amounts, and insurers deny claims when possible, so understanding professional liability and selecting an appropriate business structure, such as a California Professional Occupational Therapy Corporation, can offer further peace of mind for occupational therapists and safeguard both their personal and professional assets in ways even the best insurance policies cannot.

Tax Benefits for Licensed Occupational Therapists

The organizational structure of a California Professional Occupational Therapy Corporation offers significant liability protection for licensed occupational therapists. However, it is essential to also consider its tax implications. Establishing a California Professional Occupational Therapy Corporation may also lead to favorable tax results. By understanding the tax benefits of California Professional Occupational Therapy Corporations compared to the taxation of sole proprietorships and general partnerships, licensed occupational therapists can make more informed decisions when selecting a business entity for their practice of occupational therapy.

The tax benefits of a professional business entity are influenced by several factors: the net income of the practice before distributing funds to owners, additional income earned by the owners, and their overall tax strategy.

Certain tax situations can diminish the usual benefits of forming a California Professional Occupational Therapy Corporation from a tax perspective. This is especially true when the net income of the occupational therapy practice before compensation to the occupational therapist owner is relatively low or when other income of the occupational therapist owner already meets the FICA cap. In such cases, the tax advantages of a California Professional Occupational Therapy Corporation may be diminished.

California Professional Occupational Therapy Corporations are by default C Corporations (C-Corps) and typically face double taxation at personal service corporation rates (sometimes referred to as professional service corporation rates). However, California Professional Occupational Therapy Corporations have the option to elect S Corporation status, which is advantageous for most occupational therapy practices. This article will concentrate on the benefits of S Corporation taxation, omitting detailed discussions on professional C Corporation (C Corp) taxation and the issue of double taxation generally.

This section examines tax concerns for licensed occupational therapists, helping them assess whether establishing a California Professional Occupational Therapy Corporation aligns with their financial objectives and tax efficiency strategies.

FICA Tax Liability

The FICA tax is a mandatory payroll tax in the United States that funds Social Security. Both employees and employers share the responsibility of paying FICA taxes.

The FICA tax is directly deducted from the wages or salaries of employees at a rate of 6.2% of their gross income. Employers must match this contribution with an additional 6.2%, resulting in a total contribution of 12.4% per employee.

For self-employed individuals, such as occupational therapist sole proprietors and occupational therapist general partners in general partnerships, the FICA tax is calculated differently. Instead of being based on wages or salaries, it is assessed at 12.4% of the net income attributed to the self-employed person (whether a sole proprietor or general partner) from their occupational therapy practice.

The FICA tax is applied solely to income or net income up to a specified limit, which is annually adjusted for inflation. As of 2024, this cap is set at the first $168,600 earned.

FICA Tax Liability for Sole Proprietors and General Partners

Licensed occupational therapist sole proprietors and licensed occupational therapist general partners in general partnerships shoulder the entire FICA tax burden on the net income of a California occupational therapy practice, each up to their individual FICA cap. Unlike professional employees who split this tax with their employers, self-employed occupational therapists must cover both the employer and employee portions, resulting in a total FICA rate of 12.4% for occupational therapist sole proprietors and occupational therapist general partners in general partnerships.

The following are some examples of FICA tax liability for a licensed occupational therapist with various net income:

$50,000 net income x 12.4% = $6,200 FICA tax liability

$150,000 net income x 12.4% = $18,600 FICA tax liability

$300,000 net income x 12.4% = $20,906 FICA tax liability (limited by $168,600 FICA cap for 2024)

FICA Tax Liability for California Professional Occupational Therapy Corporations Taxed as S Corporations

When a California Professional Occupational Therapy Corporation opts for S Corporation status for tax purposes, it modifies the approach to handling FICA tax liability for its licensed occupational therapist shareholders. Unlike occupational therapist sole proprietors or occupational therapist general partners of general partnerships, who pay FICA taxes on their entire net income, California Professional Occupational Therapy Corporations taxed as S Corporations offer a potential reduction in FICA tax liability by distributing a portion of business profits as shareholders distributions rather than wages. However, licensed occupational therapist shareholders actively participating in the daily operations of the California Professional Occupational Therapy Corporation must still receive reasonable compensation which is subject to FICA taxes. This reasonable salary is taxed at the 12.4% FICA rate up to the annual wage base limit, with a 6.2% contribution deducted from the wages of the licensed occupational therapist shareholder as an employee and a matching 6.2% paid by the California Professional Occupational Therapy Corporation.

Licensed occupational therapist shareholders may receive distributions from any profits beyond their reasonable salary exempt from FICA taxes. This allows licensed occupational therapists in California Professional Occupational Therapy Corporations electing S Corporation taxation to strategically organize their income to reduce FICA tax liabilities as long as they adhere to Internal Revenue Service guidelines for determining reasonable compensation.

Here is an example of FICA tax liability for a licensed occupational therapist earning a minimum fair market value salary as determined by Internal Revenue Service guidelines:

$50,000 salary x 12.4% = $6,200 FICA tax liability

This applies regardless of whether the licensed occupational therapist shareholder also receives $100,000, $250,000, or any other amount as a distribution through shares of stock in the California Professional Occupational Therapy Corporation.

This approach requires planning and documentation, as non-compliance with reasonable compensation standards could lead to the reclassification of distributions as wages, incurring additional FICA tax liabilities and penalties. Nonetheless, a $50,000 salary can be considered reasonable according to Internal Revenue Service standards, regardless of the total net income of the California Professional Occupational Therapy Corporation.

FICA Tax Liability Conclusion

When comparing FICA tax liability, occupational therapist sole proprietors and occupational therapist general partners of general partnerships are taxed on the total net income of their occupational therapy practice. In contrast, a California Professional Occupational Therapy Corporation that elects S Corporation taxation can divide its income into that which is paid to a licensed occupational therapist shareholder as salary subject to the FICA tax and shareholder distributions paid to the licensed occupational therapist shareholder through the shares of the stock of the California Professional Occupational Therapy Corporation, which distributions are not subject to the FICA tax.

Based upon the examples above, a California Professional Occupational Therapy Corporation taxed as an S Corporation that pays a $50,000 fair market salary to a licensed occupational therapist shareholder as an employee could save that licensed occupational therapist shareholder up to $14,706 per year based on the 2024 FICA tax cap of $168,600 compared that same net income being paid to a California occupational therapist sole proprietor or occupational therapist general partner.

Medicare Tax Liability

The Medicare tax is a mandatory payroll tax in the United States, supporting the federal Medicare insurance program. Responsibility for paying these taxes is shared between employees and employers.

For employees, the Medicare tax is deducted directly from their wages or salaries at a rate of 1.45% of their gross income. Employers must also contribute an additional 1.45% on behalf of the employee, resulting in a total contribution of 2.9% per employee.

For self-employed individuals, including occupational therapist sole proprietors and occupational therapist general partners in general partnerships, the Medicare tax is calculated not on wages or salaries, but rather as 2.9% of the net income of the occupational therapy practice attributed to the licensed occupational therapist owner.

Unlike the FICA tax, which is imposed only on income up to a certain threshold, the Medicare tax has no cap on the amount owed by an employee, occupational therapist sole proprietor, or occupational therapist general partner.

Medicare Tax Liability for Sole Proprietors and General Partners

As occupational therapist sole proprietors or occupational therapist general partners of a general partnership, these licensed occupational therapists shoulder the entire Medicare tax burden on their net income. Unlike employees who share this responsibility with their employers, self-employed occupational therapists must cover both the employer and employee portions of the tax, resulting in a total Medicare tax rate of 2.9%.

The following are some examples of Medicare tax liability for a licensed occupational therapist with various net income:

$50,000 net income x 2.9% = $1,450 Medicare tax liability

$150,000 net income x 2.9% = $4,350 Medicare tax liability

$300,000 net income x 2.9% = $8,700 Medicare tax liability

Medicare Tax Liability for California Professional Occupational Therapy Corporations Taxed as S Corporations

When a California Professional Occupational Therapy Corporation opts for S Corporation status for tax purposes, it changes how Medicare tax obligations are managed for its licensed occupational therapist shareholders. Unlike occupational therapist sole proprietors or occupational therapist general partners of a general partnership who pay Medicare taxes on their entire net income, California Professional Occupational Therapy Corporations taxed as S Corporations offer a way to potentially reduce Medicare tax liability by classifying a portion of business profits as distributions on shares of stock instead of wages. Licensed occupational therapist shareholders actively engaged in the daily operations of the occupational therapy practice must still receive reasonable compensation, which is subject to Medicare taxes. The Medicare tax responsibility is split, with a 1.45% contribution from the wages of the licensed occupational therapist shareholder as an employee and a matching 1.45% paid by the California Professional Occupational Therapy Corporation.

Licensed occupational therapist shareholders must receive a reasonable salary, but any additional profits can be paid as shareholder distributions to the licensed occupational therapist shareholder not subject to Medicare taxes. This allows licensed occupational therapists with California Professional Occupational Therapy Corporations taxed as S Corporations to strategically manage their income and reduce Medicare tax liabilities. It is essential, however, to adhere strictly to Internal Revenue Service guidelines when determining reasonable compensation.

Here is an example of Medicare tax liability for a licensed occupational therapist earning a minimum fair market value salary as determined by the Internal Revenue Service:

$50,000 salary x 2.9% = $1,450 Medicare tax liability

This applies regardless of whether the licensed occupational therapist shareholder receives $100,000, $250,000, or any other amount as shareholder distributions through shares of stock in the California Professional Occupational Therapy Corporation.

This approach requires planning and documentation, as non-compliance with reasonable compensation standards may lead to shareholder distributions being reclassified as wages, resulting in additional Medicare tax liabilities and penalties. Nonetheless, a $50,000 salary can be considered reasonable under Internal Revenue Service standards, regardless of the total net income of the California Professional Occupational Therapy Corporation.

Medicare Tax Liability Conclusion

When examining Medicare tax liability, occupational therapist sole proprietors and occupational therapist general partners of general partnerships are taxed on the entire net income of their occupational therapy practice. In contrast, a California Professional Occupational Therapy Corporation that chooses S Corporation taxation can bifurcate its income to pay a reasonable salary to a licensed occupational therapist shareholder as an employee, which is subject to the Medicare tax, while distributing the remaining income to the licensed occupational therapist shareholder through the shares of stock of the California Professional Occupational Therapy Corporation, which is not subject to the Medicare tax.

Based upon the examples above, a California Professional Occupational Therapy Corporation taxed as an S Corporation that pays a $50,000 fair market salary to a licensed occupational therapist shareholder as an employee could save that licensed occupational therapist shareholder $2,900 per year based on a $150,000 annual income or $7,250 per year based on a $300,000 annual income compared to the Medicare tax liability for a California occupational therapist sole proprietor or occupational therapist general partner of a general partnership.

Additional Medicare Liability

The Additional Medicare Tax, introduced under the Affordable Care Act, targets high-income earners with increased taxation. Unlike the standard Medicare tax, this additional levy applies only to individuals and couples who surpass specific income thresholds. Specifically, it imposes a 0.9% tax rate on wages and self-employment income exceeding these limits, affecting only the income that surpasses the threshold.

The threshold for the Additional Medicare Tax is $200,000 for single taxpayers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Additional Medicare Tax Liability for Sole Proprietors and General Partners

As occupational therapist sole proprietors and occupational therapist general partners in general partnerships, individuals bear the full burden of the Additional Medicare tax obligation on their entire net income in excess of the thresholds.

The following are some examples of Additional Medicare tax liability for a single licensed occupational therapist with various net income:

$50,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$150,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$300,000 net income x 0.9% = $900 Additional Medicare tax liability ($100,000 above threshold)

The following are some examples of Additional Medicare tax liability for a married licensed occupational therapist filing jointly with various net income:

$50,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$150,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$300,000 net income x 0.9% = $450 Additional Medicare tax liability ($50,000 above threshold)

The following are some examples of Additional Medicare tax liability for a married licensed occupational therapist filing separately with various net income:

$50,000 net income x 0.9% = $0 Additional Medicare tax liability (below threshold)

$150,000 net income x 0.9% = $225 Additional Medicare tax liability ($25,000 above threshold)

$300,000 net income x 0.9% = $1,575 Additional Medicare tax liability ($175,000 above threshold)

Additional Medicare Tax Liability for California Professional Occupational Therapy Corporations Taxed as S Corporations

While the Additional Medicare tax applies to wages, including wages earned by licensed occupational therapist shareholders involved in the day-to-day operations of a California Professional Occupational Therapy Corporation, the fair market value wages required by the Internal Revenue Service are unlikely to come close to the thresholds for the Additional Medicare tax, regardless of marital status or tax filing status, with proper tax planning as follows:

$50,000 salary x 0.9% = $0 Additional Medicare tax liability (below threshold)

Additional Medicare Tax Liability Conclusion

While not as large as the FICA and Medicare tax examples at the net income rates used as examples above, the Additional Medicare tax is not nominal and can become quite large for the owners of large practice groups or owners of occupational therapy practices with high net income.

Deductibility of Health Insurance Premiums and Other Fringe Benefits

Deducting health insurance premiums and other fringe benefits for licensed occupational therapist shareholders is another consideration in tax planning when selecting a business entity for a California occupational therapy practice. This section will detail the tax implications and advantages of providing health insurance and other fringe benefits to licensed occupational therapist shareholders and employees. By grasping these deductions, one can engage in more strategic financial planning, significantly affecting overall tax liabilities.

Deductibility of Health Insurance Premiums and Other Fringe Benefits for Sole Proprietors and General Partners

For occupational therapist sole proprietors and occupational therapist general partners of general partnerships, the ability to deduct health insurance premiums and other fringe benefits can offer a tax advantage. Sole proprietors can deduct the health insurance premiums they pay for themselves as an above-the-line deduction, thereby reducing their adjusted gross income.

This deduction is available even if the sole proprietorship does not show a profit, though it cannot surpass the net profit of the occupational therapy practice. It is important to remember that these deductions do not reduce Medicare or Social Security taxes. For occupational therapist general partners in general partnerships, similar provisions apply if the premiums are paid by the general partnership and classified as guaranteed payments.

These deductions not only reduce taxable income but also serve as incentives within the tax code, encouraging smaller business structures to offer health-related benefits.

Deductibility of Health Insurance Premiums and Other Fringe Benefits for California Professional Occupational Therapy Corporations Taxed as S Corporations

For California Professional Occupational Therapy Corporations taxed as S Corporations, understanding the deductibility of health insurance premiums and other fringe benefits for licensed occupational therapist shareholders is important to creating an effective tax strategy.

Shareholders who own more than 2% of the California Professional Occupational Therapy Corporation can deduct health insurance premiums and other fringe benefits for their benefit paid on their behalf by the California Professional Occupational Therapy Corporation, however, these premiums are treated as compensation to the licensed occupational therapist shareholders and are reported as such on their W-2 forms, underlining their inclusion in taxable income.

Proper handling of these deductions ensures that the California Professional Occupational Therapy Corporation remains compliant with tax regulations.

Deductibility of Health Insurance Premiums and Other Fringe Benefits Conclusion

Grasping these deductions is crucial for selecting the right business structure and optimizing tax responsibilities. For sole proprietorships, general partnerships, and California Professional Occupational Therapy Corporations taxed as S Corporations, health insurance premiums can qualify as business expenses. However, licensed occupational therapist shareholders of California Professional Occupational Therapy Corporations must include these premiums and other fringe benefits in their income tax calculations, although they are exempt from FICA and Medicare tax liabilities.

Additional Costs to Operating as a California Professional Occupational Therapy Corporation

California Franchise Tax Board Minimum Annual Franchise Tax

California Professional Occupational Therapy Corporations, when taxed as S Corporations, must pay the minimum annual franchise tax mandated by the California Franchise Tax Board. The minimum franchise tax is the greater amount between an annual $800 or 1.5% of net income.

Sole proprietorships and general partnerships are exempt from franchise taxation in California, allowing them to bypass the annual minimum tax. This exemption provides a slight financial benefit; however, the tax efficiency of California Professional Occupational Therapy Corporations far exceeds the California minimum franchise tax requirement.

Other Administrative Costs to Operate a California Professional Occupational Therapy Corporation

Operating a California Professional Occupational Therapy Corporation involves additional administrative costs beyond the minimum annual franchise tax compared to sole proprietorships and general partnerships.

For example, a California Professional Occupational Therapy Corporation will have expenses related to maintaining state and federal compliance for keeping its FinCEN Beneficial Ownership Information Report up to date, filing an annual statement of information, and the drafting of meeting minutes for its annual meetings of shareholders and its board of directors that sole proprietorships and unregistered general partnerships do not require.

For both general partnerships and California Professional Occupational Therapy Corporations, additional administrative costs for bookkeeping, legal consultation to ensure adherence to corporate governance requirements, and tax preparation are likely higher than equivalent costs for a sole proprietorship.

Sole proprietorships and general partnerships without employees will generally not incur payroll costs, but California Professional Occupational Therapy Corporations will require payroll services even if the licensed occupational therapist shareholder is the only employee of the California Professional Occupational Therapy Corporation, which is an added expense. However, sole proprietorships and general partnerships with employees will incur equivalent payroll costs that are comparable to those of California Professional Occupational Therapy Corporations.

The additional financial obligations of a California Professional Occupational Therapy Corporation can add up to a few thousand dollars per year depending upon the costs of tax preparation and payroll services, but these costs are often outweighed by the tax benefits provided by a California Professional Occupational Therapy Corporation taxed as an S Corporation.

Conclusions About Tax Benefits

The additional costs associated with operation as a California Professional Occupational Therapy Corporation vary but are generally a few thousand dollars per year compared to a sole proprietorship or general partnership that does not pay an annual franchise tax to the California Franchise Tax Board and does not have employees requiring payroll. In addition, sole proprietorships may enjoy lower tax preparation costs than general partnerships or California Professional Occupational Therapy Corporations.

However, depending upon the net income of the professional practice, these additional expenses may be paid for by the FICA, Medicare, and Additional Medicare tax savings possible with a California Professional Occupational Therapy Corporation.

For $50,000 of allocated net income, a California occupational therapist sole proprietor or occupational therapist general partner would expect to pay $7,650 in self-employment taxes ($6,200 FICA + $1,450 Medicare), equivalent to that which would be paid by a licensed professional shareholder of a California Professional Occupational Therapy Corporation.

For $150,000 of allocated net income, a California occupational therapist sole proprietor or occupational therapist general partner would expect to pay $22,950 in self-employment taxes ($18,600 FICA + $4,350 Medicare), compared to $7,650 in payroll taxes (employee and employer contributions combined of ($6,200 FICA + $1,450 Medicare) for a $50,000 salary from a California Professional Occupational Therapy Corporation, a tax savings of $15,300.

For $300,000 of allocated net income, a California occupational therapist sole proprietor or occupational therapist general partner would expect to pay $30,506 in self-employment taxes ($20,906 FICA + $8,700 Medicare + $900 Additional Medicare), compared to $7,650 in payroll taxes (employee and employer contributions combined of ($6,200 FICA + $1,450 Medicare) for a $50,000 salary from a California Professional Occupational Therapy Corporation, a tax savings of $122,856.

Thus, for lower net income, say $50,000 or below, a California Professional Occupational Therapy Corporation will likely cost more in additional administrative expenses than the tax savings realized.

At around $60,000 of net income per year, the tax savings versus additional expense of operating a California occupational therapy practice as a California Professional Occupational Therapy Corporation starts to break even depending on the costs of the additional expenses incurred.

Above the $60,000 of net income per year, the tax savings begins to exceed the additional expense of operating a California occupational therapy practice as a California Professional Occupational Therapy Corporation, resulting in the licensed occupational therapist shareholder keeping more of the net income earned after taxes.

The experienced corporate attorneys at San Diego Corporate Law are available to assist with the analysis of net income versus administrative expense budgeting when deciding whether or not a licensed occupational therapist should form a California Professional Occupational Therapy Corporation or choose another business structure for a California occupational therapy practice.

Establishing a Business Structure for Anticipated Growth

Establishing a business structure conducive to anticipated growth involves selecting a formation that not only accommodates current operations but also facilitates future expansion.

For licensed occupational therapists foreseeing growth of their professional practice, choosing to start as a California Professional Occupational Therapy Corporation is advantageous because it allows these occupational therapists to establish their practice once, avoiding the establishment of a practice as a sole proprietorship or general partnership for a year or two before facing the need to establish the occupational therapy practice a second time to after net income grows and the self-employment tax burden becomes expensive.

Additionally, even when net income remains lower, the California Professional Occupational Therapy Corporation is still valuable to a licensed occupational therapist because it provides legal protection by separating personal assets from business liabilities, a critical consideration for risk management.

Finally, for occupational therapists who accept insurance, work with a regional center, or otherwise engage with third-party payor panels, the insurance paneling process will need to be repeated for a licensed occupational therapist first establishing a sole proprietorship or general partnership and later incorporating to take advantage of the liability protections and tax benefits of a California Professional Occupational Therapy Corporation.

If within the means of such a licensed occupational therapist, the recommendation is to start with a California Professional Occupational Therapy Corporation formed as a part of starting the occupational therapy practice.

A Quick Note on LLCs and PLLCs

A licensed occupational therapist may not use a foreign or California limited liability company (LLC), nor may a foreign professional limited liability company (PLLC) be used to practice occupational therapy in California. Pursuant to California Corporations Code Section 17701.04(e):

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

This comes as a surprise to many licensed occupational therapists, as professional limited liability companies (PLLCs) are commonly used to render professional services in other states.