5 Costly Tax Mistakes Medical Practice Owners Make Every Year

By Brian Giesecke, CPA/EA | Giesecke Advisory

What if there were a handful of tax mistakes that almost every medical practice owner makes at some point?

Not complicated, obscure stuff. Just common patterns that end up costing real money — often $20,000 to $50,000 or more per year.

I've seen these same five things come up over and over again in practices with 1-5 providers. Here's what they are — and how to fix them.

Mistake #1: Operating Under the Wrong Entity Structure

If you're operating as a sole proprietor or single-member LLC and you're making real money, you're probably paying more self-employment tax than you need to.

The self-employment tax rate is 15.3% (12.4% Social Security + 2.9% Medicare) on everything you earn. It adds up fast.

The fix: If you're consistently making $80,000-$100,000+ in profit, evaluate S-corp election by filing IRS Form 2553. The math usually works.

Example: $200,000 profit as a sole prop = ~$28,000 in SE tax. As an S-corp with a $100,000 salary = ~$14,000. That's $14,000 saved annually.

Mistake #2: Having No Retirement Plan (or the Wrong One)

This is probably the biggest single lever for tax reduction in a medical practice.

I'm surprised how many practice owners either have nothing set up or have a SEP-IRA when something better exists.

The fix: If you're maxing a SEP (capped at $69,000 for 2024) and still have profit to shelter, look at a Solo 401(k) or Cash Balance Plan. Cash Balance Plans can allow deductible contributions of $150,000-$300,000+ per year depending on age.

Example: A client switched from a SEP to a Cash Balance Plan combined with a 401(k). Annual tax savings: over $50,000.

Mistake #3: Setting the Wrong S-Corp Salary

If you're an S-corp, you have to pay yourself a "reasonable salary" (per IRS guidelines and case law). But people get this wrong on both ends.

Pay yourself too little? The IRS can reclassify distributions as wages and hit you with back taxes, penalties, and interest.

Pay yourself too much? You're paying extra FICA tax for no reason.

The fix: Research what's reasonable for your role, specialty, and geography using sources like the Bureau of Labor Statistics and MGMA compensation data. Document your reasoning. Usually 50-70% of total compensation for physician-owners who provide clinical services.

Mistake #4: Skipping Quarterly Tax Planning Check-ins

Most practice owners find out what they owe in April. By then, it's too late.

Good tax planning happens throughout the year — not just at filing time.

The fix: At minimum, schedule a mid-year check (June/July) and a pre-year-end planning conversation (October/November). Review your estimated quarterly tax payments (Form 1040-ES) to ensure you're on track and avoiding underpayment penalties.

If you realize in November you're going to have a big tax bill, you have options — retirement plan contributions, Section 179 deductions, accelerated expenses. If you realize in April? Your only option is writing a bigger check.

Mistake #5: Bookkeeping That Doesn't Support Tax Planning

The books are technically "done" but they're not useful. Categories are messy. Personal and business expenses are mixed.

Good tax planning requires good data. Without clean books, your CPA is guessing — and guessing costs money.

The fix: Clean up your chart of accounts. Get current monthly. Make sure your P&L actually reflects reality. Separate personal and business transactions completely.

Example: No tracking of home office expenses? At year-end, you're scrambling to reconstruct it — or just skipping the home office deduction (calculated using IRS Form 8829 or the simplified method at $5 per square foot, up to 300 sq ft).

Key Takeaways

• The wrong entity structure is the most common tax mistake for medical practices. Sole proprietors earning $100,000+ typically overpay by $10,000-$30,000/year in self-employment tax that S-corp election would eliminate.
• The wrong retirement plan (or no plan at all) is the most expensive mistake. Switching from a SEP-IRA to a Cash Balance Plan can unlock $50,000-$100,000+ in additional annual tax deductions.
• Reasonable salary matters on both ends. Setting S-corp compensation too low invites IRS reclassification; setting it too high wastes the tax savings you elected for.
• Tax planning happens mid-year, not in April. Two conversations per year — mid-year and pre-year-end — can save more than any single strategy.
• Clean bookkeeping is the foundation of tax savings. Without accurate monthly financials, even the best CPA can't identify optimization opportunities.

Frequently Asked Questions

Which of these five mistakes costs practice owners the most money?

Typically, Mistake #2 (wrong or no retirement plan) has the largest dollar impact. A practice owner earning $300,000+ who switches from a basic SEP-IRA to a Cash Balance Plan combined with a 401(k) can save $50,000-$100,000+ per year in taxes. However, all five mistakes compound — fixing them together often produces savings of $30,000-$80,000 annually.

How do I know if my entity structure is wrong?

If your medical practice is earning $80,000-$100,000+ in consistent annual profit and you're still operating as a sole proprietor or single-member LLC (filing Schedule C on your Form 1040), you should evaluate S-corp election. Ask your CPA to run a side-by-side comparison of your tax liability under both structures.

Your Next Step

Pick one of these five. Just one. The one that felt most relevant.

Take one small step this week.

That's it. Start there.