As an independent physician or CRNA, you may wonder whether incorporating as an S-corporation (S-corp) is the best option for your tax and financial planning. The decision isn’t as straightforward as it might seem, and understanding the nuances is critical to avoid unexpected tax burdens. This guide will break down the key factors to consider and provide examples to help you make an informed decision.
Common Misconceptions About Incorporating
Payroll Tax Savings: Many believe incorporating always minimizes payroll taxes. While this can be true in some cases, it’s not universal. If you have a W2 job in addition to your contract work, incorporating might increase your tax burden.
Why? Payroll taxes (FICA) include Social Security and Medicare taxes. If your W2 earnings already exceed the Social Security wage base limit ($176,100 in 2025), incorporating could result in double taxation on your S-corp salary for the employer portion of FICA.
Cash Balance Plans and Solo 401(k): Sole proprietors can also establish these retirement plans. Incorporating isn’t a requirement to access these benefits.
QBI Deduction: The Qualified Business Income (QBI) deduction applies to both sole proprietors and S-corps. Incorporating isn’t necessary to claim this deduction.
When Incorporating Doesn’t Make Sense
Let’s consider an example:
Scenario 1: A physician earns $350,000 through a W2 job and $150,000 in contract work.
W2 Job:
$350,000 exceeds the Social Security wage base limit, so only the 1.45% Medicare tax (plus the 0.9% additional Medicare tax on earnings over $200,000) applies.
Contract Work (as Sole Proprietor):
Payroll taxes would only include the flat Medicare portion (2.9%) and the additional 0.9% on combined earnings over $200,000.
Contract Work (as S-Corp):
Setting a reasonable salary (e.g., $100,000) means the S-corp pays the employer portion of FICA (6.2% on the first $176,100) even though the employee has already hit the Social Security limit. This results in unnecessary double taxation.
Result: Staying as a sole proprietor reduces payroll tax liability.
When Incorporating Makes Sense
Scenario 2: A CRNA earns $300,000 solely through contract work.
As Sole Proprietor:
Payroll taxes apply to the entire $300,000:
Social Security tax: 12.4% on the first $176,100
Medicare tax: 2.9% on the full $300,000
Additional Medicare tax: 0.9% on earnings over $200,000
As S-Corp:
Setting a reasonable salary (e.g., $120,000):
Social Security and Medicare taxes apply only to $120,000
The remaining $180,000 is distributed as a dividend, avoiding payroll taxes.
Additional Benefits:
In states like California or New York, you can use the Pass-Through Entity Tax (PTET) election to deduct state income taxes at the entity level, bypassing the $10,000 SALT cap.
The cost savings from payroll tax reduction and state tax optimization can justify professional fees for managing the S-corp.
Result: Incorporating provides significant tax savings and justifies the additional administrative burden.
Other Benefits of Incorporating
Business Formality:
An S-corp operates as a separate legal entity with its own tax return, adding a layer of professionalism and legitimacy to your practice.
Real Estate Strategies:
S-corps can facilitate self-rental strategies, allowing you to rent office space to your business and optimize tax deductions.
Lower Audit Risk:
Sole proprietors face higher audit rates compared to S-corps.
Key Takeaways
Incorporating doesn’t always lead to tax savings, especially if you already have W2 earnings exceeding the Social Security wage base limit.
Sole proprietors can still benefit from cash balance plans, Solo 401(k)s, and the QBI deduction without needing an S-corp.
S-corps make sense when your income is primarily from contract work, and you can leverage payroll tax savings and state-specific tax elections like PTET.
Professional guidance can help maximize these strategies and ensure compliance.
For more information or to discuss your specific situation, visit my pricing page - as part of our Standard Plan - we review your income sources to determine the optimal tax structure.
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