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The Overview
Every year, physicians earning 1099 income as sole proprietors pay thousands more in self employment tax than they need to.
Not because they are doing anything wrong, but because no one set up the right entity for them. That gap between where you are and where you could be is not just expensive. It is frustrating, especially when you know the fix exists and you just need someone to handle it correctly.
Physician entity formation is one of the first and most consequential tax planning decisions you will make. The right structure, set up correctly from the start, creates the foundation for every other planning move your tax team can implement on your behalf. The wrong structure, or no structure at all, costs you year after year.
In This Guide
Why It Matters
Why Physician Entity Formation Matters for Your Taxes
If you earn 1099 income and have not formed a separate entity, the IRS treats you as a sole proprietor by default. Every dollar flows to Schedule C and is subject to self employment tax: 15.3% up to the Social Security wage base, plus 2.9% Medicare tax above it.
At physician income levels, that exposure adds up fast. A physician with net 1099 income who operates as a sole proprietor may be paying far more in self employment tax than they need to, simply because the right entity was never set up. And every year that passes without the right structure in place is money that does not come back.
Here is what that looks like at real physician income levels:
Scenario
$300,000
net self-employment income
Distribution · No SE Tax
Salary · FICA
$180,000 reasonable salary
$120,000 distribution
$3,400+
Medicare tax alone that goes away, Social Security savings stack on top depending on other W-2 income.
Medicare savings: $3,400+
Scenario
$500,000
net self-employment income
Distribution · No SE Tax
Salary · FICA
$250,000 reasonable salary
$250,000 distribution
$7,200+
Medicare tax alone that goes away, Social Security savings stack on top depending on other W-2 income.
Medicare savings: $7,200+
These are IRS rules, not estimates. The exact numbers depend on your specialty, geography, and income mix, which is why getting the entity and reasonable compensation right matters so much.
This is where generalist bookkeepers and online filing services fall short. They file your return, but they do not look at your entity structure and tell you it is costing you. They do not know which entity type your state requires for physicians. They treat your return like every other return, and you pay the price.
Forming an LLC (or PLLC or PC, depending on your state) and electing S-Corp status changes this equation entirely. With the right entity and election in place, only your reasonable salary is subject to FICA taxes. The remaining profit passes through to you as a distribution, subject to income tax but not self employment tax. For a deeper look at how the S-Corp election works and when it makes sense, see our Physician S-Corp Guide.
Entity formation also unlocks access to retirement plan stacking, Pass-Through Entity Tax (PTET) elections, the Augusta Rule, and other planning tools that require a formal business entity to implement.
Entity Types
Types of Entities for Physicians
Not every business entity serves the same purpose. Here is a plain language breakdown of the structures most relevant to physicians.
LLC
Limited Liability Company
Flexible default, but not available everywhere.
An LLC separates your personal assets from business liabilities and provides a flexible tax structure. By default, a single member LLC is taxed as a sole proprietorship, and a multi member LLC is taxed as a partnership.
The real tax benefit comes when the LLC elects to be taxed as an S-Corp.
Many states do not allow physicians to form a standard LLC for the practice of medicine. Because medical services are classified as professional services, a PLLC or Professional Corporation may be required.
PLLC
Professional Limited Liability Company
Required for physicians in NY, TX, and other states.
A PLLC functions like a standard LLC but is specifically designated for licensed professionals, including physicians. States like New York, Texas, and others require physicians to use PLLCs (or PCs) for clinical medical services.
The tax treatment of a PLLC is identical to an LLC, the difference is legal and regulatory, not tax. Your PLLC can still elect S-Corp status just like any other LLC.
PC
Professional Corporation
Required in California and certain other states.
A Professional Corporation is the required entity type for physicians in certain states. California, for example, does not allow physicians to form an LLC or PLLC for the practice of medicine. California physicians must use a Professional Corporation, often called a Medical Corporation.
A PC defaults to C-Corp tax treatment, which creates double taxation on distributed profits. To avoid this, most physician PCs elect S-Corp status by filing Form 2553 with the IRS, which allows pass through tax treatment just like an LLC taxed as an S-Corp.
CA Required
S-Corp
Tax Election · Form 2553
Not an entity, a tax election layered on your LLC, PLLC, or PC.
An S-Corp is a tax election made by an existing LLC, PLLC, or PC. Filing Form 2553 tells the IRS to tax your entity as an S-Corporation, so only your reasonable salary is subject to FICA and the remaining profit passes through as a distribution.
For most physicians with net self employment income above approximately $80,000 to $100,000, the S-Corp election is the foundation of effective physician tax planning. Our S-Corp tax structure overview covers the basics, and our full Physician S-Corp Guide goes deeper into FICA savings, reasonable compensation by specialty, and compliance requirements.
Our Physician S-Corp Guide covers FICA savings, reasonable compensation by specialty, and compliance requirements.
C-Corp
C-Corporation
Rarely the right fit for physician medical practices.
C-Corporations are rarely used for physician medical practices because of double taxation: income is taxed at the corporate level, then taxed again when distributed as dividends.
C-Corps may be relevant in limited situations, physician-owned businesses outside of medicine, entities in states that require a PC (which defaults to C-Corp treatment unless you elect S-Corp), or certain advanced planning involving Qualified Small Business Stock under Section 1202.
State by State
State by State Considerations for Physician Entities
This is where physician entity formation gets complicated, and where a generalist CPA or online filing service will almost always get it wrong. The entity type available to you depends entirely on your state's rules for licensed medical professionals.
Some key examples:
CA
California
Must use a Professional Corporation
California does not permit LLCs or PLLCs for physicians providing medical services. You must form a Professional Corporation (often called a Medical Corporation). An LLC may be used for non-clinical consulting or real estate holdings, but not for the practice of medicine.
$800 minimum franchise tax on LLCs and corporations regardless of income.
NY
New York
Must use a PLLC or PC
Standard LLCs are not available for medical practice. Physicians practicing in New York City should also be aware of the Unincorporated Business Tax (UBT), which applies to unincorporated businesses at approximately 4%.
NYC UBT applies to unincorporated businesses at ~4%.
TX
Texas
Must use a PLLC
Texas requires PLLCs for physicians providing medical services. There is no state income tax, but the Texas margin (franchise) tax may apply to entities above certain revenue thresholds.
Flexible States
Standard LLC often permitted
Some states allow physicians to operate under standard LLCs with no professional entity requirement.
State entity rules change, and the details matter enormously. For locum tenens physicians working across multiple states, entity formation decisions also need to account for multi-state filing requirements and where the entity is domiciled.
The Bottom Line
Do not assume you can "just form an LLC." Confirm your state's requirements for professional entities before filing anything, or work with a tax team that already knows the rules in your state.
Ownership Structure
Single Member vs. Multi Member Entities
Most physicians forming an entity for 1099 income will set up a single member LLC (or PLLC/PC) and elect S-Corp status. This is the most common path for a physician who is the sole owner of their practice or independent income stream.
Multi member entities come into play in two common scenarios:
Scenario
01
2 owners
Scenario 01
Dual Physician Couples
When both spouses are physicians with independent income, structuring the entity as a multi member LLC (taxed as a partnership) may provide planning flexibility around income splitting, retirement contributions, and PTET elections. The right structure depends on each spouse's income sources, employment arrangements, and planning goals. Our team works with dual physician households regularly and can walk you through the options.
Two physician spouses · Combined planning
Scenario
02
3+ owners
Scenario 02
Group Practices
Physician practice owners who co-own with other physicians typically operate as a multi member LLC, partnership, or PC with multiple shareholders. The operating agreement and ownership structure in these arrangements directly affect how income is allocated and taxed among the partners.
Co-owned practice · Partnership · Multi-shareholder PC
Is This You
Who Needs Physician Entity Formation
If any of the following describes your situation, entity formation should be on your near-term planning list.
01
Earning 1099 income
As an independent contractor, locum tenens, or consultant, and you haven't yet formed a business entity.
02
Sole proprietor above $80K–$100K
Your net self employment income exceeds $80,000 to $100,000 and you have not elected S-Corp status.
03
Starting or acquiring a private practice
You need the right entity in place before you begin seeing patients or signing contracts.
04
Formed an entity through an online service
You're not confident it's the right structure for your state or your current income level.
05
Dual physician household
You and your spouse are both physicians and want to evaluate whether a joint entity or separate entities make more sense.
If you are a 1099 physician or a physician practice owner, entity formation is almost always the first step toward meaningful tax planning.
Timing
When to Elect S-Corp Status
The S-Corp election is the single most impactful planning move for self employed physicians. Here is the short version of when it makes sense.
01
Income threshold
Your net self employment income is consistently above approximately $80,000 to $100,000.
02
FICA math works
The FICA tax savings outweigh the additional compliance costs, payroll processing, Form 1120-S filing, reasonable compensation documentation.
03
Operational commitment
You can commit to running payroll for your S-Corp and maintaining proper books.
Below that income threshold, the administrative costs may eat into the benefit. Above it, the gap between what you owe as a sole proprietor and what you would owe with S-Corp election widens as income rises. For the full breakdown including compliance requirements and common mistakes physicians make, see our Physician S-Corp Guide.
Deadline
Mar 15
Form 2553
The election window matters.
Form 2553 (the S-Corp election) is typically due by March 15 for calendar year entities. Late elections are possible in certain circumstances, but the deadline matters. If you are forming a new entity, your tax team should handle the election timing as part of the setup.
How We Handle It
How Doc Wealth Handles Entity Formation
We know how confusing this decision can be. Getting it wrong means starting over, and getting no guidance at all means overpaying indefinitely.
At Doc Wealth, entity formation is not a standalone legal filing service. It is an integrated part of your proactive, year round tax planning engagement.
01
Analyze your income and state.
We review your income sources, state of practice, and planning goals to determine if an entity is needed and whether S-Corp election makes sense for your situation.
02
Handle formation, EIN, and election.
We file the entity formation, apply for your EIN, and submit your S-Corp election as part of onboarding, coordinated with your overall tax plan timeline.
03
Set up physician payroll.
We set up physician payroll services so your reasonable compensation and payroll withholding are aligned from day one.
04
Integrate with year round planning.
Your entity is integrated into year-round tax planning so retirement contributions, PTET elections, and other planning moves are implemented on the right schedule.
Q&A
Frequently Asked Questions
You do not technically need an LLC to earn 1099 income, you can operate as a sole proprietor. However, operating without an entity could potentially create liability risk. In addition, operating as a sole proprietorship means all of your net income is subject to self employment tax, and you miss out on the FICA savings that come with S-Corp election. For most physicians earning above $80,000 to $100,000 in net self employment income, forming an entity and electing S-Corp status is one of the highest impact tax planning moves available.
The tax treatment is generally identical. The difference is regulatory. Many states require physicians (and other licensed professionals) to form a PLLC or PC rather than a standard LLC when the entity will provide medical services. Your state's rules determine which entity type you are eligible to form.
No. California does not allow physicians to form LLCs or PLLCs for the practice of medicine. Physicians in California must form a Professional Corporation (Medical Corporation). An LLC may be used for non-clinical activities like consulting or real estate, but not for medical services.
Generally, when your net self employment income consistently exceeds approximately $80,000 to $100,000. Below that level, the compliance costs (payroll, additional tax filings) may offset the FICA savings. Your tax team can run the numbers for your specific situation to determine the right timing.
Yes. If you already have an LLC or PLLC, you can elect S-Corp status by filing Form 2553 with the IRS. The election is typically due by March 15 for the current tax year, though late elections may be accepted in certain situations. If you formed the wrong entity type for your state, restructuring is possible but involves additional steps.
Formation timelines vary by state, ranging from a few days to several weeks. The entity filing itself is usually the fastest part. What takes longer is getting the EIN, setting up payroll, opening business bank accounts, and coordinating the entity with your broader tax plan. When Doc Wealth handles entity formation, all of these pieces are managed as a coordinated process.
Resources
Keep Reading
Take the Next Step
Set up the right entity once. Stop overpaying, every year.
This material is intended for educational and informational purposes only and does not constitute tax, legal, accounting, or financial advice. The content is general in nature and may not apply to your specific circumstances. Tax laws and financial regulations are subject to change and interpretation, and the application of these laws can vary based on individual situations. Before making any decisions, you should consult with a qualified tax advisor, legal counsel, or financial professional.