S-Corp vs LLC: The $15K Decision

If you're a 1099 physician earning over $100,000, electing S-Corp status can save you $10,000-20,000+ per year in taxes—but only if you do it correctly. Make the wrong decision or implement it improperly, and you'll pay more in compliance costs than you save.

This guide breaks down exactly when S-Corp election makes sense, how to calculate your potential savings, what administrative requirements you're signing up for, and the income threshold where it becomes worthwhile.

Understanding the Tax Problem

When you operate as a sole proprietor or single-member LLC (the default structure), ALL your net 1099 income is subject to self-employment tax:

• Self-Employment Tax: 15.3% on first $168,600 (2026)
• Additional Medicare Tax: 2.9% on all income above $168,600
• Plus: Regular income tax on top of this

How S-Corp Election Saves Taxes

When you elect S-Corp status, you split your income into two categories:

• Salary (W-2): Subject to payroll taxes (15.3%)
• Distributions: NOT subject to self-employment tax

By paying yourself a "reasonable salary" and taking the rest as distributions, you save self-employment tax on the distribution portion.

Same Example as S-Corp:

Dr. Rodriguez still earns $300,000, but now:

• Salary: $150,000 (reasonable for locum work)
• Distributions: $150,000
• Payroll tax: $21,195 (only on the $150,000 salary)
• Tax savings: $42,435 - $21,195 = $21,240 per year

The "Reasonable Salary" Requirement

The IRS requires you to pay yourself a "reasonable salary" for the work you perform. If you pay yourself too little, the IRS can reclassify your distributions as salary and hit you with back taxes and penalties.

What's "Reasonable"?

Unfortunately, there's no bright-line rule. The IRS considers:

• Comparable W-2 salaries in your specialty
• Your geographic location
• Your experience and qualifications
• Time spent working vs. managing the business
• Industry standards

General Guidelines for Physicians:

• $100K-$150K total income: 70-80% as salary
• $150K-$250K total income: 60-70% as salary
• $250K-$400K total income: 50-60% as salary
• $400K+ total income: 40-50% as salary

Conservative approach: Use the higher end of these ranges. The goal is tax savings, not an IRS audit.

Calculating Your Exact Savings

Formula:

Tax Savings = (Total Income - Reasonable Salary) × 15.3%*

*Approximately. Exact calculation is more complex due to Social Security wage base limit.

Example Calculations:

Scenario 1: $150,000 income

• Reasonable salary: $105,000 (70%)
• Distributions: $45,000
• Tax savings: $45,000 × 15.3% = $6,885/year

Scenario 2: $250,000 income

• Reasonable salary: $150,000 (60%)
• Distributions: $100,000
• Tax savings: $100,000 × 15.3% = $15,300/year

Scenario 3: $400,000 income

• Reasonable salary: $200,000 (50%)
• Distributions: $200,000
• Tax savings: $200,000 × 15.3% = $30,600/year

The Administrative Burden

S-Corp election isn't free money—it comes with compliance requirements and costs.

Required Ongoing Tasks:

1. Run Payroll: Must pay yourself via formal payroll (can't just write checks)
2. File Quarterly Payroll Taxes: Form 941 due quarterly
3. Make Payroll Tax Deposits: Usually monthly or semi-weekly
4. File Annual Payroll Forms: W-2, W-3, state payroll reports
5. File S-Corp Tax Return: Form 1120S due March 15th
6. Issue K-1 to Yourself: Reports your share of income
7. Maintain Corporate Formalities: Separate bank account, meeting minutes, corporate records

Annual Costs:

• Payroll service: $500-1,200/year (Gusto, QuickBooks, ADP)
• CPA for S-Corp return: $800-2,000/year
• Bookkeeping: $0-3,000/year (if you outsource)
• State filing fees: $50-800/year depending on state
• Total annual cost: $1,500-5,000/year

The Breakeven Analysis

S-Corp makes sense when tax savings exceed compliance costs by a meaningful margin.

Minimum Income Threshold:

Conservative rule: Don't elect S-Corp unless you're earning at least $80,000-100,000 in net 1099 income.

Why?

• At $80K, reasonable salary might be $56K (70%), leaving $24K distributions
• Tax savings: $24,000 × 15.3% = $3,672
• Compliance costs: ~$2,000
• Net benefit: $1,672 (marginal, probably not worth hassle)

Sweet spot: $150,000+ in 1099 income is where S-Corp becomes clearly beneficial.

When to Skip S-Corp:

• 1099 income below $80,000
• Income is highly variable year-to-year
• You hate administrative tasks and won't stay compliant
• You're only doing 1099 work temporarily (1-2 years)
• You don't have time to learn proper procedures

LLC vs S-Corp: Understanding the Difference

This is where physicians get confused. Let's clarify:

LLC (Limited Liability Company):

• Legal structure: Protects personal assets from business liabilities
• Tax status: By default, taxed as sole proprietorship (disregarded entity)
• Can elect: S-Corp or C-Corp tax treatment

S-Corporation:

• Tax classification: NOT a legal structure, it's a tax election
• Applies to: LLCs or Corporations
• Effect: Changes how you're taxed, not your liability protection

Correct terminology: "LLC taxed as S-Corp" or "LLC with S-Corp election"

How to Elect S-Corp Status

Step-by-Step Process:

1. Form your LLC (or already have one)
2. Get an EIN from the IRS (if you don't have one)
3. File Form 2553 with the IRS (Election by Small Business Corporation)
4. Timing: Must file by March 15th for current year, or within 2 months 15 days of LLC formation
5. Get confirmation from IRS (usually arrives in 4-8 weeks)
6. Set up payroll immediately

Common Timing Mistake:

If you miss the March 15th deadline, your S-Corp election won't take effect until the following tax year. File early to avoid this.

Operating Your S-Corp Correctly

Monthly Tasks:

• Run payroll for yourself (biweekly or monthly)
• Make payroll tax deposits
• Track business income and expenses
• Keep personal and business finances completely separate

Quarterly Tasks:

• File Form 941 (Employer's Quarterly Federal Tax Return)
• Review year-to-date numbers and adjust salary if needed
• Make estimated tax payments on distributions (no withholding on distributions)

Annual Tasks:

• File Form 1120S (S-Corp tax return) by March 15th
• Issue K-1 to yourself showing your share of income
• File W-2 and W-3 for your salary
• File state payroll and S-Corp returns
• Review salary vs. distribution split for reasonableness

Common S-Corp Mistakes

Mistake #1: Not Running Actual Payroll

You can't just pay yourself and call some of it "salary." You must run formal payroll with proper tax withholding and quarterly filings.

Mistake #2: Unreasonably Low Salary

Paying yourself $30,000 salary on $300,000 income is asking for an IRS audit. Be reasonable or you'll lose in court.

Mistake #3: Not Making Estimated Tax Payments on Distributions

Distributions aren't subject to self-employment tax, but they ARE subject to income tax. You still need to make quarterly estimated payments.

Mistake #4: Mixing Personal and Business Finances

Using your S-Corp account for personal expenses pierces the corporate veil and defeats the liability protection. Keep them completely separate.

Mistake #5: Electing S-Corp Too Early

If you're only earning $50,000 in 1099 income, the compliance burden outweighs the tax savings. Wait until you're consistently earning $100,000+.

State-Specific Considerations

Some states don't recognize S-Corp status or impose additional taxes:

States with S-Corp Complications:

• New York City: Unincorporated Business Tax may still apply
• California: $800 annual franchise tax + 1.5% entity-level tax
• Tennessee: Franchise and excise tax on gross receipts
• New Hampshire: Business enterprise tax and business profits tax

Always consult with a CPA in your state to understand state-specific implications.

Alternatives to S-Corp

Option 1: Stay as LLC/Sole Proprietor

Best if: 1099 income is below $80,000, income is inconsistent, or you don't want administrative burden

Option 2: Solo 401(k) Contributions

Alternative tax savings: Max Solo 401(k) contributions ($70,000 in 2026) to reduce taxable income without S-Corp complexity

Option 3: Professional Corporation

For some states: Professional corporations may be required for physicians (varies by state)

Decision Framework

Choose S-Corp if:

• You earn $100,000+ in net 1099 income consistently
• You expect this income level for 3+ years
• You're willing to handle additional compliance
• You have (or can hire) a CPA to help
• Tax savings will exceed $5,000+/year

Skip S-Corp if:

• 1099 income is below $80,000
• Income is highly variable or temporary
• You're already overwhelmed administratively
• You can't afford proper compliance (payroll service + CPA)
• You're in a state with unfavorable S-Corp treatment

Final Thoughts

S-Corp election is one of the most powerful tax-saving strategies for 1099 physicians earning six figures. The $10,000-20,000+ in annual tax savings can compound into hundreds of thousands over a career.

But it's not free money—it requires proper setup, ongoing compliance, and reasonable salary determination. Done wrong, you'll pay more in penalties and professional fees than you save.

Key takeaways:

• Don't elect S-Corp below $80,000-100,000 income
• Pay yourself a reasonable salary (50-70% of total income typically)
• Use a payroll service—don't DIY
• Work with a CPA who understands S-Corps
• Keep immaculate records and maintain corporate formalities
• Calculate your specific breakeven before deciding

If you're earning $150,000+ in 1099 income and plan to continue, S-Corp election is almost certainly worth it. Calculate your savings, understand the requirements, and implement it correctly—your future self will thank you.