S-corp vs LLC for physicians and dentists: the numbers that decide it

The question is never LLC or S-corp

An LLC is a legal entity created under state law. An S-corp is a federal tax election. An LLC can elect to be taxed as an S-corp and remain an LLC. So the real question for a physician or dentist is not which entity to form — it is whether to make the S-corp election on the entity you already have, and when.

Many states also add a layer for licensed professionals: a professional LLC or professional corporation, with ownership restricted to licensed individuals. That affects formation and ownership, not the tax election, but it does affect the paperwork and the timing.

What the election actually changes

Without the election, the practice's net profit flows to the owner and is subject to self-employment tax in full. With the election, the owner becomes an employee of their own practice, takes a reasonable salary subject to employment taxes, and the remaining profit is distributed without self-employment tax.

That is the entire mechanism. Everything else people attribute to S-corps — liability protection, professionalism, credibility with banks — comes from the entity and the way it is run, not from the election.

The saving is therefore a function of one variable: how much profit sits above a defensible salary. A practice netting modestly above a market salary for that specialty has very little room above the salary line, and the election buys little. A practice netting well above it has real room, and the election matters.

Reasonable compensation is the whole argument

The reasonable-salary requirement is where physician and dentist S-corps are most often challenged, because a clinician's revenue is clearly attributable to personal services. Setting an artificially low salary to convert more profit into distributions is the single fastest way to turn a tax saving into an examination.

Support the figure the way you would support any other position: specialty, geography, years in practice, hours, administrative and supervisory duties, and published compensation survey data for the role. Write the basis down in the year you set it, keep the surveys you relied on, and revisit it annually rather than letting a figure set at formation drift for five years.

Where a practice employs associates, the analysis separates cleanly: their compensation is a business expense, and the owner's salary covers the owner's clinical and management time.

The costs on the other side of the ledger

An S-corp adds real, recurring administration: a payroll function, quarterly filings, W-2 reporting, a separate corporate return, and more bookkeeping discipline than a single-member LLC needs. Our published payroll rate is $85 per month plus $12 per employee, and the business tax subscription that covers the filings is $195 per month.

The bookkeeping standard also rises, because distributions, basis, and payroll all have to reconcile. Our monthly accounting plans start at $450 and run to $1,650, with an Advisory+ tier from $2,800 for multi-entity and multi-location groups.

Add those together and you have the annual cost of maintaining the election. The election is worth making when the employment-tax saving exceeds that cost by a comfortable margin — not by a rounding error, because a thin margin disappears the first year profit dips.

Timing, and the mistakes that cost the most

Elections have deadlines, and a late election is a fixable problem only sometimes and only with additional work. If you are within reach of the threshold where the election makes sense, decide before year end rather than discovering it in the following spring.

Three mistakes account for most of the damage we see. Running personal expenses through the practice, which converts a tax structure into an audit exposure. Taking distributions without running payroll at all, which forfeits the defensibility of the whole arrangement. And keeping the election after the practice's profit falls, so the owner is paying for an administrative structure that no longer saves anything.

Multi-state practice adds a further layer: a provider licensed and billing across state lines may create filing obligations in more than one state, and the election does not change that analysis.

How to decide it with numbers rather than opinion

Take last year's net profit, subtract a defensible market salary for your specialty and hours, and apply the employment-tax rates to the remainder. That is the gross saving. Subtract the annual cost of payroll, the additional return, and the higher bookkeeping standard. What is left is the actual benefit, and it is usually smaller than the figure quoted at dinner parties and still frequently worth having.

Run it on your real numbers before you form anything or elect anything. A 30-minute review with the prior-year return and a current profit and loss in hand is normally enough to settle it either way.