S-Corp for Physicians: Savings and Salary

A physician who works through an S corporation takes money out of the practice in two ways: a salary, paid through payroll and reported on a Form W-2 like any employee's pay, and distributions of the profit left after expenses. The salary carries Social Security and Medicare taxes and the distributions don't, so the IRS requires the salary to be reasonable, meaning roughly what the practice would have to pay another physician to do the same work.

For physicians the saving is often smaller than that gap suggests, because Social Security tax stops at a yearly cap that a physician's salary often reaches. The salary also takes more care to document, because physician pay sits at the very top of the government's wage data.

This guide is for physicians with 1099 income from locum tenens work, contracting or moonlighting, for physicians who own a practice, and for their CPAs.

How an S-corp saves a physician tax

Without an election, a physician paid as an independent contractor on a Form 1099, working as a sole proprietor or through a single-member LLC, pays self-employment tax on net earnings: 12.4% for Social Security and 2.9% for Medicare. With an S election, those taxes apply only to the salary, as payroll tax split between the company and the paycheck, and distributions carry neither.

How much that saves depends on two limits. Social Security tax stops once the year's earnings reach the wage base, a yearly cap set by the Social Security Administration: $184,500 for 2026 and $192,300 for 2027. Medicare tax has no cap, and an Additional Medicare Tax of 0.9% applies to earnings above $200,000 for single filers and $250,000 for married couples filing jointly. So a physician whose reasonable salary reaches the wage base pays the year's full Social Security tax with or without the election, and the S-corp saves only the Medicare tax on the distributions. As an illustration, with invented round numbers for 2027:

• An owner whose S-corp earns $160,000 sets a reasonable salary of $80,000 and takes $80,000 in distributions. All of it sits below the wage base, so the distributions escape the full 15.3%. Without the election, self-employment tax on the $160,000 would come to about $22,600 (it applies to 92.35% of net earnings); with it, payroll tax on the salary is $12,240, a saving of about $10,400.
• A physician whose S-corp earns $500,000 sets a reasonable salary of $300,000 and takes $200,000 in distributions. The salary is already past the wage base, so the distributions escape only Medicare tax, 2.9% plus the 0.9% Additional Medicare Tax, a saving of about $6,100.

The physician earns three times as much and saves less, before the yearly cost of running payroll and filing a corporate tax return (Form 1120-S).

A physician who moonlights alongside a hospital job may save nothing at all. Once the hospital salary passes the wage base, the 1099 income owes no more Social Security tax, because Schedule SE, the form that figures self-employment tax, subtracts wages already taxed from the year's cap. An S-corp is a separate employer with its own wage base, though (IRC §3121(a)(1)). It owes a 6.2% employer share on the salary it pays, and only the 6.2% withheld from the physician's pay can come back as a credit on the personal return, so the election can cost more than it saves.

The QBI deduction phases out for physicians

Income tax can change the answer too. The qualified business income (QBI) deduction under Section 199A lets many owners deduct up to 20% of their business's profit, but medicine is a "specified service trade or business" (the regulations name physicians), so the deduction phases out as taxable income rises. For 2026 it starts to shrink at $201,750 for single filers and $403,500 on a joint return, where a spouse's income counts, and it is gone at $276,750 and $553,500 (Rev. Proc. 2025-32). The owner's salary is not QBI, so below that range a higher salary shrinks the deduction, while above it there is no deduction from the practice left to protect. How the QBI Deduction Affects an S-Corp Salary Decision works through the range in between.

LLC, PLLC or S-corp?

The decision is often put as a choice between entities, but an LLC, a professional LLC (PLLC) and a professional corporation (PC) are legal forms created under state law, while an S corporation is a federal tax status. A corporation, or an LLC eligible to be taxed as one, elects it by filing Form 2553, so the real question is whether the physician's entity should make the election. Which forms a physician may practice through is up to each state. California's medical board, for example, says physicians "cannot practice medicine as LLPs or LLCs" (Medical Board of California), so the entity itself is a question for a lawyer in the physician's state.

What is a reasonable salary for a physician?

Under any of these structures, the salary should be the amount that "would ordinarily be paid for like services by like enterprises under like circumstances" (Treas. Reg. §1.162-7(b)(3)). The IRS gives no formula, and WageProof's guide to S-corp reasonable compensation and the nine IRS factors cover what an examiner weighs.

One part of the IRS's guidance on S-corp compensation fits medicine closely: receipts produced by the owner's own services should be paid as wages, while receipts produced by employees who aren't owners, or by capital and equipment, can be paid as distributions. A solo locum earns nearly all of the receipts through their own patient care, so a market salary for that care can take up most of the profit. A practice that employs other clinicians or owns imaging or surgical equipment earns part of its profit from them, and that part can go out as distributions, though the physician's own time managing those clinicians and that equipment still belongs in the salary.

A physician who also runs the practice usually has the salary built in two parts, which is the cost approach: clinical hours at the wage for the specialty, and hours spent hiring, overseeing billing and negotiating payer contracts at the wage for medical and health services managers. The Bureau of Labor Statistics (BLS) publishes both under federal Standard Occupational Classification (SOC) codes: 11-9111 for those managers, whose examples include clinic directors, and these for physicians and surgeons:

• Physicians (29-1210): anesthesiologists (29-1211), cardiologists (29-1212), dermatologists (29-1213), emergency medicine physicians (29-1214), family medicine physicians (29-1215), general internal medicine physicians (29-1216), neurologists (29-1217), obstetricians and gynecologists (29-1218), general pediatricians (29-1221), pathologists (29-1222), psychiatrists (29-1223), radiologists (29-1224), and physicians, all other (29-1229), which includes gastroenterologists, oncologists and pulmonologists.
• Surgeons (29-1240): ophthalmologists except pediatric (29-1241), orthopedic surgeons except pediatric (29-1242), pediatric surgeons (29-1243), and surgeons, all other (29-1249), which includes neurological surgeons, otolaryngologists, thoracic surgeons and urologists.

The salary also has to reflect the hours. BLS's annual figures assume a full-time year of 2,080 hours, so a locum who works 1,000 hours a year should be priced for 1,000 hours, with shift schedules, agency statements or billing records to show them.

What BLS wage data shows for physicians

Those wages come from BLS's Occupational Employment and Wage Statistics (OEWS) survey, which asks employers what they pay their employees and reports pay from the 10th percentile (the wage 10% of workers earn less than) to the 90th (the wage 10% earn more than).

Physician pay used to run off the top of those tables. Before the May 2025 release, BLS often showed the top percentiles only with a footnote saying the wage was "equal to or greater than" a stated threshold (OEWS FAQ). In the May 2023 release, the national 75th and 90th percentiles carried that footnote for all 17 occupations listed above, and the median did for 13 of them. Starting with the May 2025 estimates, published May 15, 2026, BLS publishes specific figures for many of those percentiles, including every national median and 90th percentile for the 17 occupations, though some local figures still show only the floor.

A floor is not a market rate, and a report built on one should say so. WageProof ties each report to the BLS release for its tax year, so a physician's report for 2024 or earlier is more likely to rest on one. Its methodology explains how a report then prices from the highest figure BLS did publish at or below the percentile it needs, never below BLS's threshold, and names that figure, or calls the result a minimum estimate when BLS published nothing below.

What goes in a physician client's file

An IRS examiner who questions a physician's salary will ask how it was set. If the examiner decides the salary was too low, enough of the distributions to make up the shortfall is reclassified as wages, and the practice owes payroll tax on it, usually with interest and sometimes penalties. The exposure is largest when the salary sat well below the wage base, where the reclassified pay carries Social Security tax as well as Medicare. The defense is a file made when the salary was set. Since it is often the CPA who sets the number or signs off on it, a physician client's file usually holds:

• the specialty, BLS occupation and SOC code, area, release and percentile, with the reason for the percentile, and the occupation used for management time;
• the split of hours between clinical and management work, and the records behind it;
• where the practice's receipts come from: the physician's own care, or employed clinicians and equipment;
• any figure BLS showed only as a floor, and how it was handled;
• the physician's other W-2 wages that year, and where household taxable income sits against the QBI thresholds;
• a dated board resolution or minutes approving the salary.

For a calendar-year practice, December's payroll is the last chance to change the year's W-2 wages, so the review belongs before it. Year-End S-Corp Reasonable Compensation for CPAs plans that review.

Documenting a physician's salary

With no IRS formula to point to, the protection is a record made at the time that shows the specialty, the hours, the BLS figures and where each came from. Physicians who want that record, and CPAs preparing it for physician clients, can use WageProof. It prices the clinical and management parts of the week from BLS data for the county's wage area and the tax year, for the hours actually worked, up to a full-time year of 2,080. Where BLS doesn't publish a local figure, it uses a broader or older one, and the report names the source of every wage figure, so your CPA, an IRS examiner or anyone else can check it against BLS.gov. The report is ready to keep with the corporate minutes. The sample report shows the finished documentation, and a physician or their CPA can start a report for the current tax year.