If you're a doctor or practice owner earning a healthy income, you've likely heard someone mention switching to an S-Corp to save on taxes. Maybe your accountant brought it up, or a colleague told you it “cut their tax bill in half.” And while S-Corps can be promising, like anything in tax planning, it’s important to slow down, look at the whole picture, and make sure this option is a good fit for your current situation.

When it comes to doctors and your financial planning, Earned has you covered. Let’s talk S-Corps and how to avoid common pitfalls.

What is an S-Corp?

An S-Corporation isn’t actually a type of business entity; it’s a tax election. So, you can’t form an S-Corp. Instead, an LLC or corporation elects to be taxed as an S-Corp by filing a form with the IRS. When you elect S-Corp tax treatment, you earn money through two means:

1. Salary: The amount you pay yourself via W-2 wages.
2. Distributions: The profits that pass through the S-Corp directly to you. They aren’t considered employee wages, nor are they treated as self-employment income.

The basic selling point of an S-Corp for doctors is this: Taking some of your earnings as distributions (not subject to self-employment tax) from your business profits allows you to save on taxes and keep more of what you’ve earned.

When your business is taxed as a sole proprietorship (which many LLCs are by default), you pay both income tax and self-employment tax on your earnings. That self-employment tax includes Medicare and Social Security — about 15.3% on your first $176,100 of net earnings in 2025.

Defining “reasonable compensation”

The IRS requires that S-Corp owners who work in the business pay themselves a reasonable salary. Not surprisingly, you are not permitted to take all your income as distributions and completely avoid taxes.

So, what counts as “reasonable”? The IRS looks at factors like:

• What someone else in a similar role earns
• Your training, experience, and time spent working
• Industry standards and geographic location
• Revenue of the business and your role in producing it

For example, if you're a doctor-owner of a practice making $500,000, it’s  not reasonable to pay yourself $50,000 and take the rest as distributions. That could lead to penalties and back taxes.

How much could you save?

Let’s take the example of Dr. Roberts.

Scenario: No S-Corp (Taxed as a Sole Proprietor)

Dr. Roberts earns $300,000 in net income.

As a sole proprietor, all $300,000 is subject to self-employment tax, which includes:

• 12.4% Social Security tax on the first $176,100 = $21,836
• 2.9% Medicare tax on the full $300,000 = $8,700
• (0.9% x 50,000) additional Medicare tax (applies to wages above $250k) = $450
• Total SE tax = $21,836 + $8,700 = $30,986

SE tax = $30,986

Scenario: With S-Corp

Dr. Roberts pays herself:

• $180,000 salary (W-2)
• $120,000 distribution (not subject to SE tax)

Now her self-employment tax burden shifts to FICA payroll tax on her salary only:

• 12.4% Social Security tax on $176,100 = $21,836
• 2.9% Medicare tax on $180,000 = $5,250
• Total payroll tax = $21,836 + $5,220 = $27,056

Payroll tax = $27,056

Estimated tax savings = $3,930

When done correctly, an S-Corp can lead to meaningful tax savings — often several thousand dollars per year — by reducing the portion of your income subject to self-employment tax.

While that may not sound huge, it’s net savings after implementing a compliant salary. And if she increased her distribution (while still maintaining a reasonable salary), or optimized further with retirement contributions and other strategies, the benefits grow over time.

Is an S-Corp right for you?

Signs it might make sense:

• You’re consistently netting $150,000+ from your business or practice
• You’re open to some additional complexity (payroll, bookkeeping, tax filings)
• You’re willing to work with a professional to make sure it’s done correctly
• You live in a state that offers a pass-through entity tax (PTET) election — which may allow you to deduct state income taxes on your S-Corp profits as a business expense

Signs it might not be time yet:

• Your income is highly variable or below $100,000
• You’re early in your practice and still reinvesting
• You’re not ready for the extra administrative tasks or cost
• If you're eligible for the Qualified Business Income (QBI) deduction — For some solo practitioners, especially those filing as married jointly with a non-working spouse and household income below $360,000, staying as an LLC or sole proprietorship might be advantageous, as you can take advantage of the QBI deduction. However, most single doctors will not qualify for this deduction.

How Earned can help

We help you evaluate strategies like the S-Corp election in the context of your practice earnings and broader financial plan by:

• Running tax projections so you can see the savings before making a change
• Helping determine a reasonable salary range for your role
• Coordinating with your CPA to set up payroll and quarterly filings
• Ensuring the strategy supports — and doesn’t complicate — your goals

For high-earning doctors and practice owners, an S-Corp can be a smart way to improve tax efficiency. But it’s not a one-size-fits-all solution. We’re here to help you weigh the pros and cons, implement it correctly, and make sure it integrates seamlessly into your overall wealth strategy.

Thinking about making the S-Corp switch?

Let’s talk. We’ll help you understand if it’s right for you. And if it is, we’ll help you do it the right way. Reach out to your Earned advisor to start a conversation.

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