The Best Business Entity Structure for a Private Medical Practice

When running a private medical practice, choosing the right business entity structure is crucial for optimizing tax benefits and building your present and future business wealth.

Understanding the nuanced choices between different structures such as sole proprietorships, S Corporations, and C Corporations can lead to significant tax savings.

Let's focus on the advantages of different structures, and their key tax benefits relevant to medical practice owners.

FICA Tax Savings as an S Corporation Officer

One of the primary tax benefits of operating as an S Corporation (S Corp) is the ability to save on FICA taxes.

FICA, which is basically shorthand for Social Security and Medicare taxes, applies to wages paid to employees and self-employment income.

If you were to operate your medical practice as a sole proprietorship or an LLC taxed as a disregarded entity (commonly filing a Schedule C), you are subject to self-employment tax on your entire net income.

Put another way, you are paying what both an employee AND an employer would pay, yourself.

For quite a few years that rate has been 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare, with an additional 0.9% Medicare tax on income above $200,000 for single filers ($250,000 for married couples filing jointly).

By electing to be taxed as an S Corp, you can split your income between a reasonable salary and distributions.

The salary is subject to FICA taxes, but the distributions are not.

For example, if your practice generates $300,000 in net income, you might allocate $150,000 as a salary and $150,000 as a distribution.

You would only pay FICA taxes on the $150,000 salary, potentially saving tens of thousands of dollars annually.

This strategy is ideal within a certain mathematical range of overall income for the physician practice owner.  Think in terms of $100K per year in combined salary and net income, up to $500K or so. 

Note that this is NET income, the bottom line, not your gross revenue.

C Corporation Taxation and Executive Salary

As your medical practice grows and becomes more profitable, you may reach a point where the current 21% corporate tax rate is more favorable than the individual income tax rates that can reach up to 37% at higher income levels.

This scenario presents a strong case for considering taxation as a C Corporation (C Corp).

A C Corp pays corporate taxes on its profits at the corporate level. The remaining profits, after tax, can be distributed as dividends to shareholders, who then pay tax on these dividends.

Alternatively, the profits can be retained within the corporation for reinvestment in the business.

An essential aspect of the C Corp structure is the ability to pay yourself an executive salary, which is deductible to the corporation. This salary, while subject to ordinary income tax rates, can be strategically managed to keep both corporate and individual taxes lower overall.

For instance, if your practice’s income is substantial enough that the corporate tax rate is more beneficial than the top individual rate, structuring your compensation package effectively can lead to significant tax savings.

At this point you may be wondering: if your corporation is paying a separate entity tax (albeit at currently favorable rates), and you're also paying tax on corporate dividends, what's the advantage?

The answer is the capital gains tax rate, which for most married people over $583,751 a year in income is 20%, not the 37% of the highest bracket.

By careful management of the finances of the corporation it is possible to legitimately keep corporate income taxation low, pay yourself as well as your staff and all operating expenses, and enjoy a favorable tax rate on the non-salary dividend distributions.

The Impact of the Tax Cuts and Jobs Act (TCJA) Sunset

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes, including a reduction of the corporate tax rate to 21%, down from the pre-2018 rate of 35%.

However, these provisions are set to expire on December 31, 2025, unless extended or replaced by new legislation.

The potential sunsetting of the TCJA means that the corporate tax rate could revert to pre-2018 levels or a new rate altogether.

During the current election cycle, there has been discussion about increasing the corporate tax rate to 28%. While this is still significantly lower than the 35% rate that existed before the TCJA, it could influence the decision to elect C Corp taxation.

Medical practice owners should monitor these developments closely, as the corporate tax rate plays a crucial role in determining the most tax-efficient structure for high-income earners.

Conclusion

Choosing the right entity structure for your private medical practice requires a thorough understanding of the tax implications.

An S Corporation can offer significant FICA tax savings by allowing income to be split between salary and distributions.

On the other hand, as your practice’s income grows, a C Corporation may become more advantageous, particularly in light of the current 21% corporate tax rate, though changes in tax law could impact this strategy.

Given the impending sunset of the TCJA and potential shifts in the corporate tax rate, it is essential to stay informed and work with a tax advisor to reassess your practice’s entity structure regularly.

Making informed decisions based on the latest tax laws can lead to substantial tax savings and enhanced financial health for your medical practice.

Speaking of the tax implications of your business: have you ever wanted to discuss an even more proactive approach to the business element of your practice? 

Yes? So, have you ever thought about how having a non-equity financial partner guiding your practice can increase your wealth, reduce your taxes, and provide the peace of mind that will allow you to put 110% of yourself into your patient care goals?

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Use the link I’m providing below now to choose the time to talk that is most convenient for you.

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