S-Corp vs LLC for Physician Practices: The Breakeven Math

An LLC is a state-law entity that provides liability protection; an S-corp is a federal tax election, filed via Form 2553, that changes how your income is taxed — the two are not mutually exclusive, and most solo physician practices end up as a professional LLC (PLLC) with an S-corp election layered on top. Every physician who sets up a practice eventually hears some version of: “You should be an S-corp.” Sometimes that is correct. Sometimes a single-member LLC is the better choice. The decision depends entirely on one number — whether the annual tax savings from S-corp treatment exceed the annual compliance costs of running one.

Most physicians never see that calculation. They accept a recommendation without understanding the math behind it. This article shows you the math.

Is an S-Corp a Legal Entity or a Tax Election?

Before the comparison: a clarification that trips up a lot of physicians.

An LLC (Limited Liability Company) is a legal entity — it determines liability protection and ownership structure. An S-corporation is a tax election — it determines how income is taxed.

These are not mutually exclusive. You can have:

• A single-member LLC taxed as a sole proprietor (default for one-owner LLCs)
• A single-member LLC taxed as an S-corp (you file Form 2553 to elect this)
• A corporation (C-corp) taxed as an S-corp
• A professional corporation (PC) taxed as an S-corp

When physicians say “should I be an S-corp,” they usually mean: “should I elect S-corp taxation?” The legal entity underneath can be an LLC or a corporation depending on state law and preference.

In most states, a physician practice can be a professional LLC (PLLC) with an S-corp tax election. That is the most common structure for solo physician practices.

How Does S-Corp Tax Treatment Differ From a Standard LLC?

Single-member LLC (no S-corp election): All net income is self-employment income. You pay self-employment tax on the full amount: 15.3% on the first $184,500 (2026 Social Security wage base) and 2.9% on everything above. Then income tax on top of that.

LLC or corporation with S-corp election: You pay yourself a W-2 salary. That salary is subject to payroll taxes (Social Security and Medicare). Income above the salary is distributed as K-1 income — taxed as ordinary income, but not subject to payroll taxes.

The savings come from avoiding payroll taxes on the distribution portion. For income above the Social Security wage base ($184,500 in 2026), that savings is the Medicare tax: 2.9% on each dollar that flows as a distribution instead of salary.

How Much Does an S-Corp Actually Save at Different Income Levels?

Here is the Medicare tax savings calculation at different net income levels. These assume the S-corp salary is set at the MGMA median for a generalist physician ($230,000), which already exceeds the Social Security wage base.

For income above the salary, the savings per dollar of distribution = 2.9% Medicare tax avoided.

There is an additional benefit: the employer’s share of payroll taxes on the salary is a deductible business expense. At a $230,000 salary, the employer pays approximately $16,639 in payroll taxes. That deduction at 37% produces about $6,156 in additional income tax savings.

So the total annual benefit of S-corp election at $400,000 net income is approximately:

• Medicare tax avoided: $4,930
• Income tax on employer payroll tax deduction: $6,156
• Total: ~$11,086

What Are the Compliance Costs of Running an S-Corp?

S-corp taxation is not free. Running an S-corporation requires:

• Payroll setup and quarterly administration: You must run payroll, file quarterly 941s, and issue yourself a W-2 at year-end. If you use a payroll service (Gusto, ADP, Paychex), expect $600–$1,200/year for a single-employee S-corp payroll.
• Form 1120-S (S-corp tax return): Filed annually, separate from your personal return. CPA preparation cost: $1,500–$3,500 depending on complexity.
• State filing fees: Varies by state. Georgia charges an annual registration fee for corporations and LLCs.
• Total annual compliance cost: $2,500–$5,000/year for a well-run solo practice S-corp.

At What Income Level Does an S-Corp Election Break Even?

At what income level do the S-corp tax savings exceed the compliance costs?

The breakeven is approximately $150,000–$175,000 in net practice income. Below that threshold, the compliance costs eat the tax savings and an S-corp election is a net cost, not a net benefit. Above $200,000, the benefit grows meaningfully with every additional dollar of practice income.

When Is S-Corp Election the Wrong Choice for a Physician?

Despite the conventional wisdom, S-corp election is the wrong choice in several specific situations:

Net income below $150,000: The compliance cost exceeds the tax savings. A single-member LLC with no S-corp election is simpler and costs less.

Practice income highly variable year to year: S-corps require consistent payroll. If your practice has a bad year, you still have a salary obligation and payroll tax filings. A sole prop or LLC can simply pay less without the administrative burden.

Your salary must equal your net income: If MGMA benchmarks for your specialty require a salary that equals or exceeds your practice net income (common for physicians with lower-volume practices), there is no distributable income. Without distributions, there are no payroll tax savings. The S-corp structure adds cost with no benefit.

You are primarily employed and the practice is a small side operation: A physician who earns $400,000 at a hospital and $80,000 from a side aesthetic practice is already at the Social Security wage base from the W-2 income. The S-corp savings on the side practice are only the 2.9% Medicare tax on the distribution amount — at $80,000 net, that is minimal, and the compliance costs likely outweigh it.

When Is S-Corp Election Clearly the Right Choice?

S-corp election is the obvious choice when:

• Net practice income exceeds $200,000 and is expected to remain there
• Your MGMA specialty median salary leaves meaningful income above salary for distribution
• You are already running payroll (or are willing to)
• You have a CPA actively managing the salary split annually

It becomes increasingly compelling as income rises. A physician netting $600,000+ from their practice is leaving $12,000–$16,000/year on the table without an S-corp election — before accounting for the employer payroll tax deduction benefit.

How Do You Make the Switch to S-Corp Election?

If you are currently a single-member LLC and want to elect S-corp taxation, the mechanism is IRS Form 2553. The election is generally effective for the tax year in which it is filed, if filed by March 15 of that year (for calendar-year taxpayers).

If you missed the deadline, the IRS offers late election relief under Revenue Procedure 2013-30 for elections up to 3 years and 75 days late, provided you have reasonable cause. A retroactive election can recover two or three years of payroll tax savings in a single filing — potentially $15,000–$40,000+ depending on income level.

If you are already in an S-corp and questioning whether it was the right choice, the same math applies in reverse. The answer is almost always to stay once you are in — the compliance infrastructure is already built, and the costs are sunk. The question is whether the salary is calibrated correctly, not whether the structure itself should change.

The Decision in One Sentence

If your physician practice nets more than $175,000 consistently, an S-corp election almost certainly saves you money. Below that, it probably does not, and the simpler structure is better.

The entity setup is a one-time decision. The salary calibration is an annual one. Most physician practice owners get the entity right and then let the salary drift — costing them far more than the entity decision ever saved.