S Corporation Tax Planning for Physicians: S Corp vs. LLC and When the Election Makes Sense
Key takeaways
- An LLC is a legal structure; an S corporation is a tax election. Many physicians have both.
- The S corporation saves Social Security and Medicare tax on distributions, but salary must be reasonable.
- Because Social Security tax stops at $184,500, the savings above that level come mostly from the 2.9% to 3.8% Medicare tax.
- An S corporation (or partnership) is also the doorway to the state pass-through entity tax in most states.
LLC vs. S corporation
A single-member professional LLC is taxed like a sole proprietorship by default: all net income is subject to self-employment tax. Electing S corporation status (on a PLLC or a professional corporation) splits income into W-2 salary, which is subject to payroll tax, and distributions, which are not.
Where the savings come from
Suppose a 1099 physician nets $400,000. As a sole proprietor, self-employment tax applies to all of it (12.4% up to the wage base, then 2.9%, plus 0.9% Additional Medicare). As an S corporation paying a reasonable salary of, say, $220,000, payroll tax applies to the salary, and the remaining $180,000 of distributions avoids the 2.9% Medicare tax and 0.9% Additional Medicare Tax. Savings in this range are often around $5,000 to $8,000 a year, before costs. The S corporation also makes the state PTET available, which can be worth more than the payroll tax savings in high-tax states.
Reasonable compensation
The IRS requires S corporation owners who work in the business to receive reasonable compensation for their services before taking distributions. For physicians, reasonable compensation is often benchmarked to what a practice would pay an employed physician in the same specialty and market. Paying too little is a common audit issue.
Effects on retirement and health insurance
- Employer retirement contributions are based on W-2 salary, so a lower salary means lower profit-sharing contributions. Cash balance plan design also depends on salary.
- Health insurance for a more-than-2% shareholder is included in W-2 wages (not subject to Social Security or Medicare) and deducted on the owner's return.
Costs
Payroll processing, a separate corporate return, state fees and franchise taxes (California charges 1.5% of S corporation income, with an $800 minimum), and additional bookkeeping. For many physicians, the election starts to pay off somewhere above $100,000 to $150,000 of net profit, but state rules can move that point.
State rules
Some states limit which entities physicians may use. California generally requires a professional medical corporation rather than an LLC. New York and New Jersey have their own professional entity rules. Check your state page.
When an S corporation is not the right choice
- Net income too low to cover costs.
- You want to maximize retirement contributions based on full earnings.
- Multiple owners with unequal profit splits (S corporations require pro-rata distributions; partnerships allow special allocations).
- A sale is coming soon and the buyer prefers a different structure.
Frequently asked questions
What is a reasonable salary for a physician S corp?
It depends on specialty, hours and market. A common approach is to benchmark against what a practice would pay an employed physician for the same work, then document the basis.
Should a locum physician be an S corp?
Often once net 1099 income is consistently above roughly $100,000 to $150,000, but it depends on state fees, retirement goals and whether the PTET is valuable in your state.
Get a tax plan built for your situation
GenWealth 360 builds proactive, tax-first plans for physicians, dentists and medical practice owners in all 50 states. Start with a conversation about your income, entity and goals.
Schedule a consultationBrowse the Resource CenterRelated guides
Sources
This article is for general educational purposes and is not tax, legal or investment advice. Tax law changes often and its application depends on your facts. Figures reflect 2026 rules as published by the sources listed above. Consult a qualified professional before acting. See our editorial policy.