Takeaway: Massage practices generally fall into one of three types of business entities, and each type comes with differing tax savings and liabilities.

NOTE: This article was not written by a tax professional. ABMP does not intend the information in this article to be official tax advice. Please consult a certified tax preparer regarding the material in this article to determine whether it is applicable to your situation.

Owning a massage business comes with wearing many hats. You are the practitioner, marketer, office manager, chief financial officer, and chief executive officer.

As the owner, it’s important to have a basic understanding of various business and financial concepts. One such concept is the difference between different types of business entities.

When you open a business, you are creating an entity: a thing that operates outside of just you as a person. While it may be obvious that larger businesses and corporations are entities, a solo massage practice is also an entity. It’s a real business that follows similar business rules.

Massage practices generally fall into one of three types of business entities. For the purposes of this discussion, we will assume your business is a solo massage business with no partners. With this in mind, a solo massage practice will usually be structured as a sole proprietorship, a single-member LLC, or an S corporation.

Let’s start with the simplest of business structures: the sole proprietorship.

Sole Proprietorship

The sole proprietorship is extremely simple to set up because it actually requires no setup. You don’t need to take any formal action to use this entity—it’s the default business structure created the first time you accept payment for your massage services. By nature of being in business, you are a sole proprietor.

When you operate as a sole proprietorship, your business name is automatically the same as your own name. This is how many massage therapists operate. However, if you operate under a different business name, you will need to file a fictitious name, assumed name, or DBA (which stands for “doing business as”), which are all different terms for the same thing. For example, if your name is Jenna Jones and your massage business is called “Purple Lotus Massage” then you will need to file the DBA for Purple Lotus Massage.

The process for filing a DBA differs from state to state. In some states, you need to register at the state level. In other states, it may be at the city or county level, so consult the regulations in your own state.

Sole proprietorships can operate under the owner’s social security number for tax purposes. While this may seem convenient, it may still make sense to get an official business tax ID, called an employer identification number (EIN). This can help keep your social security number private and add legitimacy to your business. Getting an EIN is free and fast. You can get one online at irs.gov/ein. (Don’t get scammed by an online service that tries to charge you to get an EIN. Do it directly at the irs.gov website.)

Sole proprietorships offer no legal protection in your business. Your personal assets and business assets are considered one and the same from a legal standpoint, and if any legal action is taken against your business, your personal property is just as exposed as your business property.

When it comes to filing taxes, all business profits from a sole proprietorship end up on a Schedule C, which gets added to your personal tax return.

While a sole proprietorship has quite a few advantages from a convenience standpoint, the legal liability leads many attorneys to recommend considering an LLC instead, which we will discuss next.

Limited Liability Company

The limited liability company (LLC) is a very common business entity for massage practices.

For a single-owner massage practice, an LLC operates in much the same way as a sole proprietorship. Profits end up on the Schedule C and get added to your personal tax return.

However, the LLC does have a few differences. One of the most important advantages of the LLC is legal protection.

The LLC structure sets up the business in a way that shields the owner from liability. LLC owners are protected from personal liability for business debts and legal claims. This means that if the business itself defaults on a debt, the creditor cannot legally come after an LLC owner’s house, car, or other personal possessions, if the creditor does not have those assets listed as collateral for the debt you owe them.

There are exceptions to this rule, but in general, the LLC offers greater protection to the owner.

One caveat is that this protection is only enforceable if the business owner keeps business and personal finances properly separated. If the owner pays for personal expenses with business funds or vice versa, this can nullify the protections offered by an LLC if it’s ever challenged.

An LLC is typically easy to set up. In most places it can be done online through your state’s secretary of state’s website. Fees can vary depending on the state—anywhere from $100 in some states (such as Indiana) to $800 in others (such as California).

An LLC should also have an EIN. While it’s not technically required, it’s a good idea to get one for the reasons outlined earlier (privacy and legitimacy) and because you will need to get one anyway if you ever hire employees or bring on a partner.

An LLC can file taxes with a Schedule C, just like a sole proprietorship, or as an S corporation, which we’ll discuss next.

S Corporation

The third term to explore is the S corporation. It’s not as common among solo massage practices but it’s important to know about.

While LLCs and S corporations are often discussed in tandem, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification that may be chosen by an LLC.

A business entity must be registered first (either a C corporation or, more commonly, an LLC) and then the S corporation “election” allows the business to be taxed as an S corporation. To put it another way, most massage businesses form an LLC as the entity and then apply with the IRS to be taxed as an S corporation.

So why would a massage therapist consider filing taxes as an S corporation? While there are multiple differences between an LLC and an S corporation, most of them are not consequential to a small solo business. The primary reason to file as an S corporation is often tax efficiency.

Filing as an S corporation can mean saving a significant amount in self-employment taxes (Social Security and Medicare). Massage therapists filing as a sole proprietorship or LLC (identical tax status) pay self-employment taxes on all income. So if your net income (business profit) is $60,000, you will be taxed 14.13 percent in Social Security and Medicare taxes on that income, or $8,478.

However, when filing as an S corporation, you pay yourself in two ways. While sole proprietorship and LLC owners are paid only through distributions or owner’s draw (moving money from your business account to your personal account), S corporation owners take compensation as payroll and distributions. Payroll is typically done through a payroll provider (there are some great high-tech options for solo business owners).

This payroll is still subject to Social Security and Medicare taxes. However, the key point here is that you don’t have to take all your compensation as payroll. As long as you pay yourself a “reasonable salary” you can pay yourself the rest as distributions. And in an S corporation, the remaining business income (which you can take distributions from) is not subject to Social Security and Medicare taxes.

So going back to the example above in which the massage therapist made $60,000, let’s say $40,000 of that is taken as payroll. The Social Security and Medicare tax of 14.13 percent would be applied to $40,000 this time, coming to $5,652. That’s a savings of $2,826.

In both examples, the massage therapist can “take home” the same amount. But in an S corporation, the business income is split between payroll and distributions from income.

So should you be filing as an S corporation? The short answer is talk to your tax preparer. There are also variations in some state tax codes that may make it more or less beneficial to reconsider how you file taxes. Generally, the higher your net income is (your business profits) the more tax savings you can get from filing as an S corporation.

Taxes as a Pass-Through Entity

One thing that is important to be aware of is how these business entities are taxed, or rather not taxed, when it comes to federal and state income taxes.

In every entity and tax filing status we’ve discussed (sole proprietorship, LLC, S corporation), the business itself is not taxed. All income “passes through” to your personal tax return. This is why these business types are often called “pass-through entities.”

In a sole proprietorship or single-member LLC, your business income is reported on your Schedule C. If you are filing as an S corporation, it will be reported on your Schedule E. In all cases, the business income attaches to your personal or joint tax return (the basic 1040) and becomes income you report.

One side effect of this that some massage therapists may not be aware of is that you are taxed on the total business income reported, not just on what you take home.

For example, let’s continue our example and say you are an LLC and your net income for the year was $60,000. From that, you paid yourself $50,000 in distributions and left $10,000 in your business bank account. You are still taxed on the full $60,000.

So, keep in mind that when it comes to federal and state income taxes, you are taxed on what shows up on your tax return—not necessarily what you paid yourself.

Converting from One Business Type to Another

Another detail to be aware of is how to convert from one type of business to another. There can be some work involved in making changes.

One common scenario for many massage therapists is starting off as a sole proprietorship and then forming an LLC later in order to add a layer of liability protection. When this happens, a new EIN must generally be created, which also means most banks will require a new business account to be opened. This can cascade into a series of updates that must be paid with various service providers and can be a bit of a headache.

Going from an LLC to filing as an S corporation is generally a little easier but it does require filing some paperwork with the IRS.

Because of the complexity involved in going from a sole proprietorship to an LLC or S corporation, it may be advantageous to consider forming an LLC from the start if you are forming a new massage practice. LLC filing fees can be prohibitive depending on your state so weigh it against your financial situation, but bypassing a sole proprietorship and starting as an LLC from day one can help you avoid some headaches down the road if and when you convert to a new business type.

Which Entity is Right for Me?

If you’re still not sure what business type makes sense for you, it never hurts to talk to your accountant, financial advisor, or attorney. They will be able to give you the most personalized advice that’s right for you.

But regardless, you are now armed with knowledge of the different types of businesses, how they work, and how they are taxed.