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S-Corp vs LLC for New Medical Practices: Which Saves More on Taxes?

2026-08-21

S-Corp vs LLC for New Medical Practices: Which Saves More on Taxes?
Photo: https://kaboompics.com/ / Pexels

Compare S-Corp vs LLC tax structures for new medical practices. Learn which saves more on taxes, with real numbers and steps to decide.

For a new medical practice, the choice between an S-Corp and an LLC can significantly impact your tax bill. In most cases, an S-Corp saves more on self-employment taxes once your practice profits exceed a certain threshold, but it comes with added administrative costs and payroll requirements. This guide breaks down the numbers, pros, and cons so you can make an informed decision.

How Each Structure Is Taxed

LLC (default): As a single-member LLC, you are taxed as a sole proprietor. The IRS considers all net income as self-employment income, subject to both the employee and employer portions of Social Security and Medicare taxes, totaling 15.3% on the first $176,100 (2026 limit) and 2.9% on income above that. You pay income tax on the entire profit, regardless of whether you take it as a draw.

S-Corp: You must pay yourself a “reasonable salary” (W-2 wages), and only that salary is subject to payroll taxes (Social Security, Medicare, and unemployment). Any remaining profit is distributed as a non-taxable dividend, avoiding self-employment tax on that portion. However, you must file Form 1120-S, run payroll, and comply with strict deadlines.

The Tax Savings: Real Numbers

Let’s assume a new medical practice nets $150,000 in profit before owner compensation. Here’s a simplified comparison:

Structure Self-Employment/Payroll Tax Income Tax (approx.) Total Tax (approx.)
LLC (sole prop) $22,950 (15.3% of $150k) $24,000 (federal, 22% bracket) $46,950
S-Corp (with $100k salary) $15,300 (15.3% of $100k) $24,000 + $11,000 (corporate profit tax? No, S-Corp is pass-through, so income tax on $150k total) $39,300

Note: Income tax is calculated on total profit for both, but the S-Corp saves $7,650 in self-employment tax. Actual tax rates vary; consult a CPA.

At $150,000 profit, the S-Corp saves roughly $7,650 in payroll taxes. However, you’ll incur additional costs: payroll service ($40-$100/month), CPA fees for S-Corp returns ($500-$1,500/year), and state fees (e.g., $800 in California). If your profit is below $40,000, the savings may not cover these costs.

When an LLC Makes More Sense

  • Profit under $40,000: The self-employment tax savings are minimal, and the administrative burden isn’t worth it.
  • You want simplicity: No payroll, no separate tax return, no corporate formalities.
  • You plan to reinvest profits: If you’re not taking distributions, the S-Corp advantage shrinks.
  • You’re in a state with high S-Corp taxes: Some states impose franchise taxes on S-Corps.

When an S-Corp Wins

  • Profit above $60,000: The tax savings typically exceed the extra costs.
  • You want to reduce self-employment tax legally: This is the primary benefit.
  • You have employees: You’ll already be running payroll, so the marginal cost is lower.
  • You plan to take distributions: The more you take as dividends, the more you save.

Practical Steps to Decide This Week

  1. Project your net profit for the first year. Use realistic numbers from your business plan.
  2. Estimate the costs of an S-Corp: payroll service, CPA, state fees. Call a local CPA for quotes.
  3. Run the numbers using the table above or a tax calculator. If savings exceed costs by $2,000+, consider S-Corp.
  4. Talk to a CPA who works with medical practices. They can model both scenarios and factor in state taxes.
  5. If you choose S-Corp, file Form 2553 with the IRS within 75 days of formation or by March 15 of the tax year. Miss the deadline and you’ll wait a year.

FAQ

Can I change from LLC to S-Corp later? Yes, you can elect S-Corp status by filing Form 2553. It’s easiest to do at the start of a tax year.

What is a “reasonable salary” for a physician? The IRS requires a salary comparable to what you’d pay someone else for the same work. For a new practice, $100,000-$150,000 is typical, but it depends on your specialty and hours.

Are there state-specific differences? Yes. Some states (like California) impose a 1.5% franchise tax on S-Corp net income, and others have different LLC fees. Check with your state’s revenue department.

Does an S-Corp protect me from malpractice lawsuits? Both structures offer limited liability, but neither protects you from personal malpractice claims. You still need malpractice insurance.

The Bottom Line

For most new medical practices with projected profits above $60,000, an S-Corp saves more on taxes, often $5,000-$10,000 annually. But if your practice is just starting and profits are low, an LLC is cheaper and simpler. Crunch the numbers with a CPA before deciding, and remember: the IRS requires a reasonable salary, so don’t try to zero out your salary to avoid taxes. Choose the structure that fits your profit level and administrative capacity.