S-Corp Election for Medical Practice Owners: A Complete Guide

By Brian Giesecke, CPA/EA | Giesecke Advisory

Should your medical practice be an S-corp?

It's one of the most common questions I get from practice owners. And the answer isn't always yes.

But when it IS yes, an S-corp election can save you tens of thousands of dollars a year in self-employment tax.

What Is an S-Corp, and How Does It Work for Medical Practices?

Here's the thing... an S-corp isn't really a type of business. It's a tax election.

You can have an LLC and choose to be taxed as an S-corp. You can have a corporation and choose to be taxed as an S-corp.

The "S" refers to Subchapter S of the Internal Revenue Code (IRC Sections 1361-1379) — a section that allows certain businesses to pass income through to owners while treating part of that income differently.

So when someone says "I have an S-corp"... what they really mean is: my business has elected to be taxed under Subchapter S.

How Does an S-Corp Save Money on Taxes?

It comes down to self-employment tax.

If you're a sole proprietor or single-member LLC taxed as a sole prop, you pay self-employment tax on ALL of your profit. The self-employment tax rate is 15.3% — that's 12.4% for Social Security (on income up to the wage base of $168,600 for 2024) plus 2.9% for Medicare (on all income, with no cap).

Make $200,000 in profit? You're paying roughly $28,000 in self-employment tax. On top of income tax.

With an S-corp, it works differently.

You pay yourself a salary — a reasonable salary — and you pay FICA taxes (the employer/employee equivalent of self-employment tax) on that salary. But the rest of your profit comes out as distributions, which are NOT subject to self-employment tax.

Same $200,000 in profit. You pay yourself a $100,000 salary. FICA on $100,000 is about $14,000 (combined employer and employee share). The other $100,000 comes as a distribution — no self-employment tax.

You just saved $14,000. Every year.

What Is a "Reasonable Salary" for an S-Corp Practice Owner?

You can't pay yourself $30,000 and take the rest as distributions. The IRS requires a "reasonable salary."

What's reasonable depends on your role, your industry, and what someone in a similar position would be paid.

If you're a physician seeing patients full-time AND running the business, your reasonable salary might be 60-70% of what you're taking out.

The key is defensibility. If the IRS looks at it and says "no physician would work for $40,000 a year"... you've got a problem.

S-corps save money, but you can't game it.

When Does S-Corp Election Make Sense for a Medical Practice?

A few rules of thumb...

You're consistently profitable. If you're making under $60,000-$70,000 in profit, the savings probably don't justify the complexity. Most people look at S-corp when they're above $80,000-$100,000 consistently.

You're okay with payroll. S-corps require running payroll for yourself. Payroll taxes, W-2s, quarterly filings. Not hard, but real.

Your state doesn't penalize S-corps. Some states have additional taxes. California charges an $800 minimum franchise tax plus 1.5% on S-corp income.

You can plan for retirement contributions. S-corps change how retirement plans work. Contributions are based on W-2 salary, not total profit.

When Should a Practice Owner Avoid S-Corp Election?

Just starting out. Wait until you have consistent profitability.

Profit under $60,000-$70,000. The tax savings are small, and the hassle might not be worth it.

Planning to sell soon. S-corps can complicate asset sales. Talk to someone first.

Specific ownership situations. Complicated ownership structures might not work with S-corps.

How Do You Make the S-Corp Election?

You file IRS Form 2553 (Election by a Small Business Corporation) with the IRS. To be treated as an S-corp for the current year, file within 75 days of the start of the tax year — usually by March 15th.

Miss that window? You can still elect for the following year. Or request late election relief under Revenue Procedure 2013-30.

Once you elect:

• You start running payroll (filing Form 941 quarterly)
• You file an S-corp return (Form 1120S) plus your personal return (Form 1040)
• You receive a Schedule K-1 showing your share of income
• You maintain corporate formalities

The Bottom Line

For profitable practices with straightforward situations, S-corp election usually makes sense.

But "usually" isn't "always." The math depends on your specific numbers.

If you're not sure, ask your accountant to run both scenarios: what would taxes look like as a sole prop vs. an S-corp?

That comparison tells you what you need to know.

Key Takeaways

• An S-corp is a tax election, not a business structure. You make the election by filing IRS Form 2553, and your LLC or corporation is then taxed under Subchapter S of the Internal Revenue Code.
• The self-employment tax rate is 15.3%, and S-corp election eliminates this tax on the distribution portion of your income — typically saving practice owners $10,000-$30,000+ per year.
• S-corp election generally makes sense at $80,000-$100,000+ in consistent annual profit. Below that threshold, the added complexity of payroll and separate tax filings may not justify the savings.
• The IRS requires a "reasonable salary" — typically 50-70% of total compensation for physician-owners who provide clinical services.
• The Form 2553 deadline is March 15th for current-year elections, though late election relief is available under Revenue Procedure 2013-30.

Frequently Asked Questions

How much does it cost to set up and maintain an S-corp?

Ongoing costs include payroll processing ($30-$100/month), an additional tax return filing (Form 1120S), and maintaining corporate formalities. For most practices, total annual overhead is $2,000-$5,000 — well below the typical $10,000-$30,000 in annual tax savings.

Can I switch my medical practice to S-corp mid-year?

Technically, you must elect by the 75th day of the tax year (March 15th for calendar-year filers). However, if you miss the deadline, you can request late election relief with the IRS, or simply plan to elect for the following year by filing Form 2553 before the next March 15th deadline.