Why This Decision Matters More Than You Think
When a physician transitions from W-2 employment to independent locum practice, one of the first decisions they face is how to structure their practice entity. The choice between an LLC (taxed as a sole proprietorship or partnership) and an S-Corporation has significant implications for self-employment tax, retirement contributions, and long-term wealth building.
And yet, many physicians make this decision based on a quick Google search or a conversation with a generalist accountant who doesn't specialize in physician finances. The result is often an entity structure that's either too simple for the income level or too complex for the situation.
The LLC: Simplicity With a Tax Cost
A single-member LLC is the simplest entity structure for a locum physician. It requires minimal paperwork, no payroll, and straightforward tax filing. All income passes through to your personal return, and you pay self-employment tax on the full amount.
For a physician earning $300,000 or more, that self-employment tax adds up quickly. The 15.3% rate (12.4% Social Security up to the wage base, plus 2.9% Medicare on all earnings) means you could be paying $20,000-$40,000 more in tax than necessary — depending on your income level and the current Social Security wage base.
The S-Corp: Tax Savings With Complexity
An S-Corporation allows you to split your income between a "reasonable salary" (subject to employment tax) and distributions (not subject to self-employment tax). For a physician earning $400,000, setting a reasonable salary of $200,000 and taking $200,000 in distributions could save $15,000-$25,000 per year in self-employment tax alone.
But the S-Corp comes with requirements: you must run payroll, file a separate corporate tax return, maintain corporate formalities, and pay yourself a salary that the IRS considers "reasonable" for your specialty and workload. Get the salary too low, and you risk an audit. Get it too high, and you lose the tax benefit.
When to Choose Which
The decision isn't purely mathematical. It depends on your income level, the states where you practice (some states have entity-level taxes that change the calculation), your retirement contribution strategy (S-Corp salary affects your Solo 401(k) contribution limits), and your long-term financial plan.
There's no universal answer — which is exactly why this decision should be made with a tax advisor who understands the specific dynamics of locum physician practice, not a generalist who applies the same template to every client.
The Coordination Factor
Your entity structure doesn't exist in isolation. It affects your retirement contributions, your state tax obligations, your bookkeeping complexity, and your audit risk. A good tax strategy coordinates all of these elements — not just the entity election in isolation.