5 Tax Strategies Every Physician in Private Practice Should Use

Most physicians in private practice operate as sole proprietors or through a simple LLC — and most of them are paying more in self-employment tax than they need to. The reason is that all net income from a sole proprietorship or single-member LLC is subject to self-employment tax (15.3% on the first ~$168,000, then 2.9% on earnings above that), on top of federal and California income taxes.

An S-Corporation changes that equation. When you operate through an S-Corp, you pay yourself a "reasonable salary" — and only that salary is subject to payroll taxes. The remaining profits flow through as a distribution, which is not subject to self-employment tax. For a physician earning $500,000 of net practice income, this structure can generate $15,000–$30,000 or more in annual payroll tax savings.

There are real costs and administrative requirements involved — payroll, quarterly filings, state fees — but for most physicians above $200,000 in net income, the S-Corp structure pays for itself many times over. A Professional Corporation (PC) is the required entity type for licensed professionals in California, which can elect S-Corp tax treatment.

A standard Solo 401(k) allows you to contribute up to $69,000 in 2025 (employee + employer contributions combined, with a $7,500 catch-up if you're 50 or older). That's excellent — and most physicians should have a 401(k) in place. But if you're in your peak earning years and want to accelerate tax-deferred wealth accumulation, a Defined Benefit (DB) plan can allow contributions of $150,000 to $350,000+ per year, depending on your age and compensation.

DB plans are actuarially determined — the contribution is based on funding a specific retirement income amount. Older physicians benefit more because the funding period is shorter. Combined with a 401(k), a DB plan can create an enormous annual deduction for physicians in the 50s who still have significant earning years ahead.

The tradeoffs: DB plans have minimum contribution requirements each year, actuarial fees, and administration costs. They work best for physicians who have consistent high income and plan to maintain the plan for at least a few years. But for the right physician, there's no better tool for reducing current tax while building retirement assets.

The Tax Cuts and Jobs Act created the Section 199A deduction, which allows owners of pass-through businesses to deduct up to 20% of their qualified business income (QBI). For physicians, this is complicated — medicine is a "specified service trade or business" (SSTB), which means the deduction phases out at higher income levels.

The phaseout begins at $191,950 (single) or $383,900 (married filing jointly) of taxable income in 2024. If your income is above the complete phaseout threshold, you get no 199A deduction. But if you're within the phaseout range, careful planning around retirement contributions, deductions, and compensation can preserve a meaningful portion of the deduction.

The 199A deduction is set to expire after 2025 unless Congress acts to extend it — but as of this writing, the rules are still in effect. This is one more reason to have a CPA model your tax situation annually rather than relying on last year's return.

Most physicians earn too much to contribute directly to a Roth IRA (the 2024 income limit phases out at $161,000 for single filers and $240,000 for married filers). But the backdoor Roth IRA is a legal workaround that has survived IRS scrutiny for years.

The strategy: make a non-deductible contribution to a traditional IRA (anyone can do this regardless of income), then convert that IRA to a Roth IRA. The conversion is taxable — but if you have no other pre-tax IRA balances, the tax hit is minimal. Once the funds are in the Roth, they grow and are withdrawn tax-free in retirement.

For married physicians, you and your spouse can each do a backdoor Roth, contributing $14,000–$16,000 per year in after-tax dollars that will never be taxed again. Over a 20-year career, the compounding effect is substantial. Be aware of the pro-rata rule — if you have existing pre-tax IRA balances, the math becomes more complicated.

Physicians operating through a PC or S-Corp have flexibility in how they receive income that W-2 employees simply don't have. With careful planning, you can:

• Balance salary vs. distributions to minimize payroll taxes while maintaining a "reasonable compensation" level the IRS will accept
• Time income across tax years by delaying December billing collections or accelerating deductible expenses into high-income years
• Establish an accountable plan to reimburse yourself tax-free for legitimate business expenses — medical journals, CME, home office, professional development
• Hire family members in legitimate roles to shift income to lower tax brackets (subject to reasonable compensation and actual work performed requirements)
• Utilize a Health Reimbursement Arrangement (HRA) to pay for medical expenses and premiums tax-free through your practice

None of these are aggressive or risky when done correctly. But they all require intentional setup — they don't happen automatically.