Should Doctors Use an S-Corp for Side Income? Here’s the Pay Strategy

September 15, 2025

You’re picking up extra income.
Consulting. Locums. Courses. A small advisory gig.

An S-corp might help. It might not.
This guide gives you a clean way to decide—and a pay strategy you can actually run.

The fast answer

Use an S-corp when side-business profit is meaningful and repeatable, and you’re willing to run payroll and books.
Skip it when profit is small, sporadic, or you’d rather keep life simple.

If you want a deeper overview first, skim S-corporation tax benefits and the broader best tax structure for doctors (2025) comparison. If you’re brand-new to 1099 work, start with the 1099 contractor tax guide.

Quick decision rules

Use these as a first filter.

  • Under ~$40–$50k of annual profit? Probably stay sole prop/LLC taxed as sole prop for now.

  • $50k–$150k of profit? Run the numbers. Many doctors find value here.

  • $150k+ of profit? S-corp often pencils out if you can support a reasonable salary.

Other signals:

  • You already max Social Security at your W-2 job.

  • Your work has clear margins and repeatable contracts.

  • You’re fine with payroll filings and a clean book set.

What an S-corp actually does

  • You pay yourself a reasonable salary through payroll.

  • Remaining profit can be taken as distributions.

  • Wages face payroll taxes. Distributions do not.

  • You still pay income tax on all business profit.

  • You can sponsor retirement plans through the S-corp.

It’s a pay design, not a loophole.

The pay strategy (step-by-step)

  1. Form the entity you’re allowed to use in your state (PC, PLLC, PA, or LLC), then elect S-corp for tax.

  2. Open business banking. No commingling.

  3. Pick a salary number you can defend with duties, time, training, and market data.

  4. Run payroll on a cadence (twice monthly or monthly). Withhold and remit taxes.

  5. Reimburse expenses with an accountable plan (phone, home office, CME tied to the business).

  6. Take distributions quarterly once payroll and taxes are current.

  7. Fund retirement space: Solo 401(k) first; add a Cash Balance Plan if profit supports it.

  8. Keep minutes for major decisions. It’s boring. It works.

Tie your cadence to a simple calendar like this:

  • Weekly 15 minutes: reconcile.

  • Monthly 1 hour: payroll review and budget.

  • Quarterly: adjust salary if reality shifts; true-up distributions; check estimates.

Two rough examples (for feel, not perfection)

I’ll keep the math simple on purpose.

A) Side profit ~$60,000 for the year

  • Salary: $36,000

  • Distributions: $24,000

  • Outcome: You pay payroll taxes on $36k, not the full $60k. You still owe income tax on all $60k. Savings show up mostly in the Medicare layer.

B) Side profit ~$180,000 for the year

  • Salary: $110,000

  • Distributions: $70,000

  • If your W-2 already maxes Social Security, the potential savings on the $70k distribution are more noticeable.

  • Add Solo 401(k) deferrals and employer profit share to reduce current-year income.

Your exact numbers depend on state rules, other wages, and plan design. A tax advisor can model this with your real paycheck stubs and contracts. See Doctor tax-saving strategies (2025) for a fuller checklist.

Salary: how to keep it “reasonable”

  • Align with time, role, training, and similar market pay.

  • Use third-party sources for comp ranges. Save the PDF.

  • Revisit when contracts change.

  • Don’t starve salary to inflate distributions. That raises audit risk.

Retirement moves that make the S-corp pay you back

  • Solo 401(k): Employee deferral plus employer profit share.

  • Cash Balance Plan: When profits are high and you want bigger pre-tax space.

  • Backdoor Roth IRA still works next to the S-corp.

  • Use a donor-advised fund if you plan to give and want to bunch deductions this year.

For non-clinical projects and extra revenue ideas, skim how physicians are increasing income with non-clinical side businesses and strategies for multiple income streams.

QBI and the doctor wrinkle

The Qualified Business Income deduction creates more nuance.

  • Wages can reduce QBI; distributions don’t.

  • For many physicians, the business is treated as a specified service, and the deduction phases out at higher income levels.

  • The right mix of salary and distributions is a balancing act—one more reason to model with your numbers.

What to track from day one

  • Signed contracts and 1099s.

  • Invoices, receipts, and mileage.

  • A separate card for business spending.

  • An accountable plan for reimbursements.

  • Clean travel logs, especially on mixed trips—see tax deductions on business vacations (2025).

Risk and protection when you create a new entity

Your state and specialty matter. A brief risk review now saves drama later.

When not to elect S-corp

  • Profit is small or unpredictable.

  • You won’t keep up with payroll filings.

  • You need all the cash back in the business and can’t fund payroll tax.

If that’s you, keep it simple this year. Revisit if the work scales.

A short setup checklist you can follow this week

  • Choose the entity you’re allowed to use, then file the S-election.

  • Open banking. Connect a basic bookkeeping tool.

  • Set a draft salary and start payroll next cycle.

  • Create an accountable plan for reimbursements.

  • Turn on a Solo 401(k) if eligible.

  • Add calendar holds for weekly, monthly, and quarterly reviews.

If you plan to sell this side business later, read minimize taxes when selling a medical practice (2025) for timing and allocation ideas that apply to professional service exits too.

State taxes and future you

Side income can change your retirement math.

Where a tax advisor actually helps

  • Models salary vs distribution with your W-2, 1099s, and current brackets.

  • Sets payroll cadence and safe-harbor estimates so penalties don’t chew up savings.

  • Designs Solo 401(k) or a Cash Balance Plan that fits your cash flow.

  • Tunes QBI, charitable timing, and loss harvesting. See market losses & tax-saving opportunities.

  • Keeps you aligned with current IRS Tax Tips.

If you want broader money habits, The Richest Doctor is a quick read to keep handy.

Related reads

FAQ

Do I need an S-corp if I already have a PLLC or PC?
Maybe. The legal entity and the tax election are separate. Many doctors keep a professional entity for licensing and elect S-corp for taxes.

How do I set “reasonable salary”?
Match time and duties to market pay for similar work. Save your support. Revisit yearly.

What if profit swings a lot?
Start with a mid-range salary and adjust. Use quarterly distributions to true up.

Can I still do a backdoor Roth?
Yes. Keep pre-tax IRA balances out of the way or roll them into a plan to avoid the pro-rata rule.

Does an S-corp lower income tax?
No. It mostly targets the payroll-tax layer on profit above reasonable wages. Income tax still applies.

Is QBI gone for doctors?
Not always. Many physician businesses face limits, especially at higher income. Model with your facts.

What if I travel for this work?
Track business purpose and logs. Only the business portion is deductible. See business vacation rules.

Could I outgrow the S-corp?
Yes. As the team or risk grows, you may add another entity, change compensation, or consider different structures.

Should I buy equipment to get a deduction?
Only if it raises capacity or reduces future costs. Don’t spend a dollar to save cents.

Ready to talk strategy? Start here.

Visit contact physiciantaxsolutions.com to schedule a consultation and learn how we can help you take control of your tax strategy today.

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. physiciantaxsolutions.com assumes no responsibility for actions taken based on the information provided in this post.

 

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