Does an S-corp election still make sense for a medical practice?

For many practice owners it still makes sense, but it is not the automatic yes it is often sold as. The commonly cited break-even is around $80,000 to $100,000 of net practice income. Below that, the added cost of running payroll and filing a separate business return, usually $3,000 to $5,000 a year, eats most of the benefit. Physicians are well above that line, so the real question is how much the election saves at your income level and what else it changes.

The savings come from splitting your income into two pieces. You pay yourself a reasonable salary through payroll, which carries Social Security and Medicare tax. The rest comes out as distributions, which do not. The catch for physicians is that a reasonable salary for a full-time doctor is often higher than the 2026 Social Security wage base of $184,500. Once your salary passes that number, you have already paid the maximum Social Security tax, the same as you would as a sole proprietor. The distributions only avoid Medicare tax, which is 2.9%, or 3.8% once the additional Medicare tax kicks in.

Here is what that looks like. Say your practice nets $450,000 and you set a defensible salary of $250,000. The $200,000 in distributions saves you roughly $7,000 in Medicare tax. Subtract the extra payroll and accounting costs and you might be ahead by $2,000 to $4,000. That is real money, but it is far from the five-figure savings people expect. A part-time physician or one in a lower-paying specialty whose salary sits below the wage base can save considerably more, because the distributions avoid the full 15.3%.

Several other factors can tip the decision either way.

The QBI deduction works differently for medicine. Medical practices are a specified service business, so the 20% qualified business income deduction phases out entirely once taxable income passes the IRS limit. Most high-earning physicians never get it. If you are below the limit, your S-corp salary does not count as qualified income, so the salary you choose can shrink the deduction.

State pass-through entity tax elections can be a strong reason to elect. Many states let a business pay state income tax at the entity level so the owner gets a federal deduction that sidesteps the SALT cap. Some states only offer this to partnerships and S corporations, not sole proprietors or single-member LLCs, so the election can unlock a deduction worth more than the payroll tax savings.

State entity taxes can work against you. California, for example, charges S corporations a 1.5% tax on net income. Other states have franchise or gross receipts taxes that apply to corporations and not to sole proprietors.

Retirement plans depend on your salary. Employer contributions to a 401(k) or cash balance plan are based on your W-2 wages, not your total profit. If you want large retirement contributions, you may need a higher salary than you otherwise would, which shrinks the payroll tax savings further.

The honest answer is that you need to run your own numbers with your income, your state, and your retirement goals side by side. That comparison is a standard part of our tax planning for practice owners, and it often turns up a better answer than the one a colleague got. If you are weighing the election or wondering whether your current setup still fits, our tax services for physicians are built around exactly this kind of decision.