Should I form an LLC or S-corp for my medical side income?

An LLC and an S-corp aren’t really competing choices. An LLC is a legal entity you form under state law. An S-corp is a tax election that an LLC or corporation makes with the IRS. So the real question has two parts. Should you form an LLC, and if you do, should that LLC elect S-corp status?

A single-member LLC gives you some separation between your side work and your personal assets when it comes to business debts and contracts. It does not protect you from malpractice claims tied to your own patient care. That’s what your malpractice policy is for. Some states also require physicians to form a professional LLC instead of a standard one. For taxes, the IRS ignores a single-member LLC by default. Your side income still goes on Schedule C and you pay self-employment tax on it, the same as if you had no entity at all.

The S-corp election is where people expect the savings. You pay yourself a reasonable salary through payroll and take the rest as distributions, which aren’t subject to Social Security or Medicare tax. For many business owners that adds up. For a physician with a full-time W-2 job, it often doesn’t.

Social Security tax only applies up to the wage base, which is $184,500 in 2026. If your hospital or group salary already exceeds that, your side income isn’t being hit with the 12.4% Social Security portion of self-employment tax anyway. The only payroll tax an S-corp can save you is the 2.9% Medicare tax on whatever you take as distributions, plus the 0.9% Additional Medicare Tax if your income is above that threshold, which most physicians’ income is.

This comes up constantly in our tax services for physicians, and the math usually surprises people. Say you earn $60,000 from locums or a medical directorship. The IRS expects a reasonable salary for the work you perform, and for a physician doing physician work that salary can’t be a token amount. If $30,000 runs through payroll and $30,000 comes out as distributions, you save roughly $870 to $1,140. Running payroll, filing a separate S-corp return, and paying state fees can easily cost that much or more.

Other costs are easy to miss. Employer contributions to a solo 401(k) are based only on your S-corp salary, so keeping salary low can shrink your retirement deduction. Some states add their own charges. California, for example, has an $800 minimum franchise tax plus a 1.5% tax on S-corp income. You also take on quarterly payroll filings and the deadlines that come with them.

An S-corp tends to make sense when side income is substantial and consistent year after year, generally well into six figures, and you expect it to continue. Locums shifts that come and go or an occasional expert witness case usually won’t clear that bar.

For most employed physicians, the practical path is to start as a sole proprietor or single-member LLC, keep a separate bank account and clean books, make quarterly estimated payments, and revisit the S-corp question once the income has a track record. Our side-income package for employed physicians covers that bookkeeping along with a yearly check on whether an election is worth it. Our CIO, Marc Eastin, is a practicing neurosurgeon with outside business income, so we know this situation firsthand.