S-Corp vs. Partnership for Physician Groups

S-Corp vs Partnership for Physician Groups

A five physician orthopedic group earning $3.2 million splits everything equally, so each partner reports $640,000 on their personal return. How that $640,000 gets taxed, though, depends on a decision many groups never actively make: whether to operate as a partnership or elect S-Corp status. The two structures treat the same income very differently, and the difference compounds year after year. Once a structure is locked in, unwinding it brings its own tax considerations, so the choice is worth getting right early.

Most physician groups land in partnership taxation by default, not by design. The entity gets formed, the operating agreement gets signed, and the tax classification rides on whatever the attorney checked on the formation documents. The S-Corp election, when it makes sense, is an active choice that requires its own filing, its own payroll infrastructure, and its own compliance calendar. For the single physician version of that election decision, S-Corp for Physicians: Is It Right for You? covers it in detail. This piece walks through the tax mechanics of both structures, the advantages and pitfalls for physician groups, and the decision factors that determine which one fits your practice.

One important note before the mechanics: the S-Corp vs partnership decision for a group practice is fundamentally different from the solo physician S-Corp decision. A solo physician only needs to weigh their own reasonable compensation, retirement contributions, and state tax exposure. In a group, every physician's compensation, every partner's retirement goals, and the group's ownership structure all interact. A structure that works in one physician's favor can work against another through lost retirement deductions. The group decision requires modeling the net impact across all owners, not just running the numbers for the highest earner and assuming the answer applies to everyone.

In This Blog

• How Do Physician Groups Typically Structure Their Entity?

• What Are the Key Tax Differences Between S-Corp and Partnership?

• What Are the Pros and Cons for Physician Groups?

• Which Structure Fits Your Group?

• Next Steps for Physician Groups Evaluating a Change

• FAQs

How Do Physician Groups Typically Structure Their Entity?

The Default: Partnership Taxation

When two or more physicians form a multi-member LLC or PLLC and do not make any special tax election, the IRS treats the entity as a partnership by default. This is not something the group actively chooses. It is the automatic classification under the check the box regulations (Treasury Reg. 301.7701-3).

Under partnership taxation:

• The entity itself pays no federal income tax. It files Form 1065 (the partnership return) and issues a Schedule K-1 to each partner.

• Each partner's K-1 reports their share of income, deductions, credits, and self employment earnings.

• Partners are not employees of the partnership. They do not receive W-2s. Instead, they take guaranteed payments (which function like a salary for services) and/or distributive shares of profit.

• Self employment tax applies to guaranteed payments and, in most cases, to the ordinary business income flowing through on the K-1. For physician groups where all partners are actively working in the practice, this means the full income stream is generally subject to SE tax (up to the applicable thresholds).

Partnership taxation offers enormous flexibility. Partners can have unequal ownership percentages, special allocations of income or loss, different capital accounts, and tiered profit-sharing arrangements. This flexibility is one of the reasons most physician groups start here and many stay here.

But flexibility has a cost. The self employment tax exposure on partnership income is the single biggest line item that drives physician groups to consider an alternative.

When an S-Corp Election Enters the Picture

An S-Corp is not a different type of entity. It is a tax election. Your multi-member LLC or PLLC remains an LLC under state law. What changes is how the IRS taxes it.

When a multi-member LLC elects S-Corp status (by filing Form 2553), the entity is taxed under Subchapter S of the Internal Revenue Code.

The mechanics shift:

• Each owner becomes a shareholder, not a partner.

• The entity files Form 1120-S (the S-Corp return) instead of Form 1065.

• Shareholders who work in the business must be paid a reasonable salary via W-2 payroll. FICA taxes (Social Security plus Medicare) apply only to that salary.

• Profit above the reasonable salary passes through to the shareholders as distributions, which are not subject to self employment tax or the additional 0.9% Medicare surtax.

That split between salary and distributions is the core tax difference of S-Corp status. For a physician earning $500,000 through the practice, paying SE tax on all of it versus paying FICA only on a $275,000 reasonable salary changes the math meaningfully. The next section walks through how.

The S-Corp election is not automatic. The group must file Form 2553 with the IRS, typically by March 15 of the tax year in which the election should take effect (or within 75 days of the entity's formation). Late elections are possible under Rev. Proc. 2013-30, but they add complexity and are not guaranteed. We walk through the full late election relief process, including the reasonable cause requirements, in Late S-Corp Election Relief (Rev. Proc. 2013-30).

What Are the Key Tax Differences Between S-Corp and Partnership?

At a glance, the two structures line up like this on the factors that matter most to a physician group, with the detail below.

Factor	Partnership	S-Corp
Federal return	Form 1065, K-1 to each partner	Form 1120-S, K-1 to each shareholder
Owner compensation	Guaranteed payments and distributive share	Reasonable W-2 salary plus distributions
Self employment / FICA tax	Generally applies to the full distributive share for active partners	FICA on the salary only; distributions are not subject to FICA
Income and loss allocation	Flexible special allocations allowed (IRC 704(b))	Strict pro-rata by ownership; one class of stock
Basis includes entity-level debt	Yes (recourse and nonrecourse)	No (only direct shareholder loans)
Reasonable compensation required	No	Yes, benchmarked to specialty data
Ownership changes and buy ins	Flexible, with 754 basis step up options	Restricted by the single class of stock rule
Best fit	Unequal production, changing ownership, or entity debt	Stable groups with comparable earners

How Do the Two Structures Differ on Self Employment Tax?

This is the headline difference, and for most physician groups, it is the primary reason the S-Corp conversation comes up.

Under partnership taxation, each physician-partner's share of ordinary business income is generally subject to self employment tax. For 2026, the SE tax rate is 15.3% on the first $184,500 of combined wages and self employment income (12.4% Social Security plus 2.9% Medicare). Above that threshold, the 12.4% Social Security portion phases out, but the 2.9% Medicare tax continues on all earnings. And for high earners (single filers above $200,000, joint filers above $250,000), an additional 0.9% Medicare surtax applies under the Affordable Care Act.

For a physician partner earning $500,000 through the practice, the Medicare component alone (2.9% plus 0.9% on the amount above the threshold) can run $14,000 to $18,000 per year, depending on filing status and other income.

Under S-Corp taxation, FICA taxes apply only to the reasonable salary the physician pays themselves via W-2 payroll. The remaining profit passes through as a distribution that is not subject to FICA or the 0.9% additional Medicare tax.

Consider a simplified illustration. Dr. Patel is a physician shareholder in a five person S-Corp group. Her share of practice profit is $600,000, and the group sets her reasonable compensation at $300,000.

• Under the S-Corp, only the $300,000 W-2 salary is subject to FICA. The employer and employee split the 2.9% Medicare tax, and the 0.9% additional Medicare tax applies to wages above $200,000 (assuming single filing). The $300,000 distribution carries no FICA and no additional Medicare tax.

• Under partnership taxation, the full $600,000 is subject to SE tax, including the 2.9% Medicare component on all of it and the 0.9% additional Medicare tax on the amount above $200,000.

Same $600,000, taxed two different ways. That contrast is the mechanic behind the entire S-Corp conversation. What it comes to in any given year depends on each physician's compensation, filing status, other income, and the reasonable salary the group can defend, so it has to be modeled per physician rather than assumed from an example.

The S-Corp side also carries costs the contrast above leaves out. The group has to run payroll, file W-2s, and pay the employer's share of FICA on salaries, plus payroll processing fees, the employer's 1.45% Medicare match, and state unemployment taxes on wages. Those costs narrow the gap, which is part of why the election has to be modeled rather than assumed.

Reasonable compensation is also where the IRS looks most closely for S-Corp shareholders. For physicians, it is benchmarked against specialty specific market data (MGMA, AMGA, SullivanCotter surveys). A dermatologist in a high revenue practice cannot pay themselves $100,000 and call it reasonable. The salary must reflect what a physician of similar specialty, experience, and workload would earn in the open market.

Your tax team should be running the reasonable compensation analysis annually, not just at election time. The benchmarks vary significantly by specialty, and setting this number too low is the most common reason these returns draw a second look. We break down the MGMA data and how to apply it in Reasonable Salary by Specialty for Physician S-Corps.

Pass Through Income and Distribution Mechanics

Both partnerships and S-Corps are pass through entities. Neither pays federal income tax at the entity level. Income flows through to the owners' personal returns. But how that income flows through, and what the owners can do with it, differs in important ways.

Partnership Distributions	S-Corp Distributions
Partners can receive distributions in excess of their income allocation without triggering gain (as long as they have sufficient outside basis).	Shareholders receive distributions tax free to the extent of their stock basis (and, if applicable, their debt basis from direct loans to the entity).
Partnership basis includes the partner's share of entity level debt (recourse and nonrecourse). This means partners can take losses against debt funded basis, which matters for practices carrying significant liabilities (equipment loans, real estate debt, lines of credit).	S-Corp basis does not include the entity's third party debt. This is a critical distinction for physician groups that finance equipment, office buildouts, or real estate through entity level loans. Those loans increase basis in a partnership but not in an S-Corp.
Special allocations are permitted. One partner can be allocated a larger share of depreciation deductions while another receives a larger share of ordinary income, as long as the allocations have substantial economic effect under IRC Section 704(b).	Special allocations are not permitted. S-Corp income, loss, deductions, and credits must be allocated strictly pro rata based on share ownership. If five equal shareholders each own 20%, each gets exactly 20% of everything. No exceptions.
Guaranteed payments to partners are deductible by the partnership and reported as ordinary income (subject to SE tax) by the receiving partner.	There are no guaranteed payments in an S-Corp. Compensation to working shareholders comes through W-2 payroll.

The pro-rata allocation rule is one of the biggest structural limitations of S-Corp status for physician groups. If your group has partners who contribute unequal capital, work different hours, or bring in different revenue, the partnership structure gives you flexibility to allocate income and deductions accordingly. The S-Corp forces you into a rigid one-class-of-stock, pro-rata framework.

Fringe Benefits and Retirement Plan Implications

Both structures allow physician groups to sponsor retirement plans, but the mechanics differ.

Retirement plans:

• Both partnerships and S-Corps can sponsor 401(k) plans, profit-sharing plans, and cash balance plans.

• In a partnership, partners are treated as self-employed individuals for retirement plan purposes. Their earned income for contribution calculations is their net SE income after the deduction for half of SE tax. This affects the maximum employer contribution calculation.

• In an S-Corp, shareholders who are employees base their retirement contributions on their W-2 compensation. The employer profit-sharing contribution (up to 25% of W-2 wages) is limited by the salary amount. A physician who sets a lower reasonable salary also caps their employer contribution ceiling. This creates a tension: a lower salary reduces FICA, but it also limits retirement plan contributions.

Fringe benefits:

• Partners in a partnership who own more than 2% of the entity cannot receive tax free fringe benefits on the same terms as common law employees. They can deduct health insurance premiums above the line on their personal return, but the premiums are not excludable from income at the entity level.

• S-Corp shareholders owning more than 2% face the same limitation. Health insurance premiums paid by the S-Corp on behalf of a more than 2% shareholder must be included in the shareholder's W-2 wages (Box 1) and are then deductible on the shareholder's personal return (Form 1040, Schedule 1). The net tax effect is similar to the partnership treatment, but the reporting mechanics differ.

For physician groups evaluating cash balance plans or other defined benefit structures, the S-Corp salary sets the ceiling for contributions. If your group is running a cash balance plan and your physicians are in their 50s (where the IRS permitted contribution levels are highest), an artificially low S-Corp salary can cap the very retirement contributions that provide the largest deductions. This interaction needs to be modeled before the S-Corp election, not after.

What Are the Pros and Cons for Physician Groups?

Advantages of S-Corp Status

For physician groups where the math works, S-Corp status delivers several concrete advantages:

• Reduced FICA on distributions. This is the primary draw. The portion of profit paid as a distribution rather than salary is not subject to FICA. For groups where each physician earns well above the Social Security wage base, that difference shows up in the Medicare tax (2.9% plus 0.9%) on the distribution portion.

• Cleaner payroll based compensation. Every physician shareholder gets a W-2. Compensation is standardized, withholdings are automatic, and the quarterly estimate burden shifts partially to payroll withholding. For groups that struggle with quarterly payment discipline, this can simplify cash flow management.

• Potential PTET (pass through entity tax) benefits. Many states now offer a pass through entity tax election that allows the entity to pay state income tax at the entity level, generating a federal deduction that bypasses the $10,000 SALT cap. Both partnerships and S-Corps can generally make the PTET election, but in some states, the mechanics differ slightly. The S-Corp payroll structure can interact with PTET credits in ways that require careful modeling.

• Liability separation from income classification. Because S-Corp shareholders are employees for payroll purposes, the compensation vs. distribution split is clearly documented. This can simplify audit defense compared to the partnership guaranteed payment vs distributive share classification, which sometimes invites IRS scrutiny over whether guaranteed payments were properly characterized.

Advantages of Staying as a Partnership

Partnership taxation is not the default you failed to change. For many physician groups, it is the better structure by design:

• Flexible profit allocation. This is the partnership's standout feature for physician groups. If one partner generates 40% of the group's revenue and another generates 20%, the partnership agreement can allocate income accordingly without changing ownership percentages. S-Corps cannot do this. Income follows ownership, period.

• Debt basis for loss utilization. If the practice carries entity level debt (equipment loans, office lease obligations, lines of credit), partners include their share of that debt in their outside basis. This means partners can deduct losses in excess of their capital contributions, up to their total basis including debt. S-Corp shareholders cannot include entity level debt in their basis (only direct shareholder loans to the corporation count). For groups in early stage buildout with significant financing, this difference matters.

• No reasonable compensation requirement. Partnership physicians receive guaranteed payments or distributive shares. There is no IRS requirement to set a reasonable salary. This eliminates the annual reasonable comp benchmarking, the audit exposure on salary levels, and the payroll infrastructure requirements.

• Easier ownership changes. Adding or removing partners in a partnership is structurally simpler. New partners can buy in at negotiated prices, and Section 754 elections allow basis step ups that reflect the buy in price. S-Corps are limited to one class of stock, which restricts the creative deal structures physician groups often need for buy ins, buyouts, and succession planning.

• QBI deduction preservation (in limited cases). The Section 199A qualified business income (QBI) deduction allows a 20% deduction on qualified business income for pass through entities. The One Big Beautiful Bill Act (OBBBA), signed in July 2025, made this deduction permanent and widened the phase-out ranges. For 2026, the phase out begins at $201,750 (single) or $403,500 (married filing jointly) and ends at $276,750 (single) or $553,500 (MFJ). However, physician practices are classified as specified service trades or businesses (SSTBs), which means the QBI deduction phases out entirely once income exceeds the upper threshold. Most physician group members will exceed these thresholds, meaning the QBI deduction is fully phased out regardless of entity type. In the rare case where a physician partner's taxable income falls within the phase in range (part time physicians, physicians in lower cost specialties, or physicians with significant above the line deductions), the partnership structure can offer slightly more flexibility in managing QBI eligible income. But for the vast majority of physician groups, the SSTB phase out eliminates QBI as a meaningful differentiator between the two structures.

Common Pitfalls to Watch For

Physician groups that choose the wrong structure, or implement the right structure poorly, tend to fall into these traps:

• Setting S-Corp salaries too low. Reasonable compensation has to reflect specialty, geography, hours worked, and practice revenue. An emergency medicine physician paying herself $120,000 while distributing $400,000 is the kind of split the IRS scrutinizes, and underpaying can lead to reclassification of distributions as wages, plus penalties and back FICA.

• Ignoring the retirement plan interaction. Physician groups that elect S-Corp status and then try to maximize cash balance plan contributions often find that the reasonable salary they set is too low to support the contribution levels their actuary designed. The FICA reduction from a lower salary can be more than offset by lost retirement plan deductions. Model both together before making the election.

• Forgetting state level consequences. California imposes a 1.5% franchise tax on S-Corp net income (minimum $800). New York has its own S-Corp tax. Several states do not recognize the S-Corp election at all or impose additional taxes on it. For multi-state physician groups, the state tax layer can erode or eliminate the federal FICA reduction. We cover the California franchise tax, New York surcharges, and New Jersey quirks in detail in S-Corp State Taxes: CA Franchise Tax and NY/NJ Surcharges.

• Failing to update the operating agreement. When a multi-member LLC elects S-Corp status, the operating agreement needs to be revised to reflect the single class of stock requirement and eliminate any provisions that create de facto multiple classes (different distribution rights, liquidation preferences, etc.). Operating agreements drafted for partnership taxation often contain provisions that are incompatible with S-Corp rules.

• Locking in when the group is still growing. S-Corp status works best for stable groups with consistent ownership. If your group is adding partners every year, negotiating buy ins with creative financing, or using tiered profit sharing models to incentivize new partners, the partnership structure accommodates those arrangements far more naturally. If your group already elected S-Corp and the structure no longer fits, revocation is possible but comes with its own timing rules and tax consequences. We cover the revocation mechanics in Revoking an S-Corp Election.

Which Structure Fits Your Group?

Number of Owners and Ownership Flexibility

S-Corps are limited to 100 shareholders, all of whom must be US citizens or resident aliens (no foreign owners, no entity shareholders except certain trusts and estates). For most physician groups, the 100 shareholder cap is irrelevant. But the ownership flexibility constraint is not.

S-Corps can only have one class of stock. Every share carries the same distribution rights and liquidation rights. You can have voting and non-voting shares, but the economic rights must be identical.

This creates problems for physician groups that use tiered partnership structures:

• New partners who buy in at a discount and earn up to full parity over 3 to 5 years

• Senior partners who receive larger profit shares based on tenure, revenue generation, or administrative responsibilities

• Partners who transition to part time and receive a reduced income allocation without selling shares

All of these arrangements are straightforward in a partnership. All of them are difficult or impossible in an S-Corp without workarounds that risk violating the single class of stock rule.

If your group currently has, or plans to have, differentiated economic arrangements among physicians, partnership taxation is almost certainly the better fit.

Compensation Parity and Profit Sharing Models

Groups where all physicians earn roughly the same amount and share profits equally are the best candidates for S-Corp status. The math is clean: set a uniform reasonable salary, distribute profits equally, and the FICA treatment falls out the same for everyone.

Groups with significant compensation disparity face a harder question. In a partnership, you can pay guaranteed payments that reflect each physician's actual production or role. In an S-Corp, you need to set individual reasonable salaries for each physician-shareholder, and the distributions still flow pro rata based on ownership.

Consider a three physician group with $2.5 million in total collections:

• Dr. Alvarez generates $1.2 million in collections and works full time

• Dr. Bennett generates $800,000 and works four days per week

• Dr. Carter generates $500,000 and is semi-retired, working two days per week

In a partnership, you can allocate income to match production. Dr. Alvarez gets 48% ($1.2M of $2.5M), Dr. Bennett gets 32%, Dr. Carter gets 20%. After expenses, if the group nets $1.8 million, Dr. Alvarez takes home $864,000, Dr. Bennett takes $576,000, and Dr. Carter takes $360,000. Clean, flexible, and defensible.

In an S-Corp with equal ownership (33.3% each), each physician receives $600,000 in distributions regardless of production. You can differentiate through salary (paying Dr. Alvarez a higher W-2 salary than Dr. Carter), but the distribution portion must still split equally. Dr. Alvarez produces 2.4 times the revenue of Dr. Carter but receives the same distribution. The economics do not match the contribution, and the group will have internal friction.

Some groups solve this by adjusting ownership percentages to match production. But changing S-Corp ownership means buying and selling shares, which triggers valuation requirements and potential taxable events. And if production ratios shift year to year (as they often do when physicians adjust their schedules), you would need to restructure ownership repeatedly. In a partnership, you simply amend the allocation provisions in the operating agreement. No share transfers, no valuations, no taxable events.

State Tax Considerations

State taxes can shift the S-Corp vs partnership calculation significantly. Key state level factors:

• California: Imposes a 1.5% franchise tax on S-Corp net income (minimum $800 per year). Partnerships pay an $800 annual fee plus a fee based on gross receipts exceeding $250,000. For high-income physician groups, the S-Corp franchise tax can be substantial. California also does not conform to the federal QBI deduction, which removes one potential advantage.

• New York: Imposes a fixed dollar minimum tax on S-Corps based on New York gross receipts, plus an entity level tax on S-Corp income. New York also has a metropolitan commuter transportation mobility tax (MCTMT) that applies to employer payroll, which increases the cost of running W-2 payroll for S-Corp shareholders in the NYC metro area.

• New Jersey: Imposes a Corporation Business Tax (CBT) on C-Corps at graduated rates (6.5%, 7.5%, or 9% depending on net income), plus a 2.5% corporate transit fee surcharge for C-Corps with taxable net income exceeding $10 million (effective through 2028). S-Corps are exempt from the transit fee surcharge, and New Jersey S-Corp income passes through to shareholders who pay personal income tax at rates up to 10.75%. However, New Jersey does impose entity level minimum taxes on S-Corps based on gross receipts. For physician groups evaluating S-Corp status in New Jersey, the interaction between the entity level minimum tax and the high personal income tax rate requires careful modeling.

• Texas: No state income tax, which means the S-Corp election carries no state level tax penalty. But Texas does impose a franchise (margin) tax on entities with revenue above $2.65 million (2026 threshold, up from $2.47 million in 2024 to 2025). Both S-Corps and partnerships are subject to this tax, so the entity type does not change the franchise tax exposure.

• Florida: No state income tax. No S-Corp-specific penalties. Florida is one of the cleanest states for S-Corp elections.

• States that do not recognize S-Corp status: New Hampshire and Tennessee (for certain income types) treat S-Corps as C-Corps at the state level, meaning entity level state income tax applies. This can create double taxation at the state level that offsets the federal FICA reduction.

Your tax team needs to model the state level impact before the election. A federal FICA reduction can be largely consumed by California's franchise tax and payroll costs, so the net has to be worked out state by state rather than assumed.

Next Steps for Physician Groups Evaluating a Change

If your group is currently operating as a partnership and considering an S-Corp election (or the reverse), a handful of pieces are worth working through in order:

• The FICA model. This compares each physician shareholder's current SE tax exposure under partnership taxation against the projected FICA cost under S-Corp status, with reasonable compensation set at defensible levels rather than optimistic ones. It is worth running per physician, since the result varies with filing status, spouse income, and whether a physician already has income from other sources above the Social Security wage base.

• The retirement plan interaction. If your group sponsors or plans to sponsor a cash balance plan, defined benefit plan, or profit sharing plan with meaningful employer contributions, the S-Corp salary sets the ceiling for those contributions. That deduction is worth modeling alongside the FICA outcome, because in many cases the lost retirement deduction outweighs the FICA reduction, especially for physicians over 50.

• State level consequences. State franchise taxes, entity level taxes, and payroll cost changes apply in every state where the group operates or has nexus, and a state with no income tax does not necessarily mean no S-Corp cost. Texas has its franchise tax, and Nevada has a commerce tax for entities above $4 million in gross revenue. A state by state net impact schedule is the clearest way to see where the election actually nets out.

• Ownership flexibility. For a group with tiered buy ins, production based profit sharing, or plans to add partners in the next 3 to 5 years, the real question is whether S-Corp's single class of stock rule can accommodate those arrangements. If it cannot, partnership taxation preserves the flexibility.

• The bottom line. This is not a call to make from a blog post. The interaction between FICA exposure, retirement contributions, state taxes, QBI where it applies, and ownership structure is specific to your group's numbers, and a tax team can model the whole picture together.

Doc Wealth is physician founded, and our tax team of Tax Attorneys, CPAs, and Enrolled Agents models the full picture for your group: the FICA math across every owner, the retirement plan interaction, the state by state costs, and the structure that fits your group over a 5 to 10 year horizon, not just year one. This is proactive, year round tax planning, and when a question or deadline comes up you get prompt, dependable communication from the team that knows your group's file.

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FAQs

Can a physician group switch from partnership to S-Corp mid-year?

Technically, the S-Corp election can be made effective as of the beginning of the current tax year if filed by March 15 (or within 75 days of formation). Mid-year effective dates are not standard. If you miss the March 15 deadline, late election relief under Rev. Proc. 2013-30 may be available, but it is not guaranteed. Plan the election timing with your tax team well before the deadline.

What happens to existing partnership capital accounts when we elect S-Corp?

The transition from partnership to S-Corp taxation involves a deemed liquidation of the partnership and a deemed contribution of assets to the new S-Corp. Each partner's capital account converts to shareholder basis in the S-Corp. This transition must be handled carefully to avoid unintended taxable events. Your tax team should prepare a detailed transition memo.

Does the S-Corp election protect us from malpractice liability?

No. The S-Corp election is a tax classification, not a liability structure. Your liability protection comes from the underlying entity (LLC, PLLC, PC) and your malpractice insurance. The S-Corp election does not add or remove liability protection.

Can an S-Corp have partners with different ownership percentages?

Yes, an S-Corp can have shareholders with different ownership percentages. But all shares must carry the same economic rights (distributions and liquidation proceeds must be pro rata based on ownership). You cannot have one shareholder receiving 30% of distributions while owning 20% of shares. That arrangement requires partnership taxation.

Is there a minimum income level where the S-Corp election makes sense?

The general rule of thumb is that the S-Corp election starts making sense when the physician's income through the entity exceeds approximately $100,000 to $150,000 above the reasonable compensation amount. Below that, the payroll administration costs, additional tax return complexity (Form 1120-S vs. Form 1065), and potential state taxes can offset the FICA reduction. For physician groups, where individual incomes typically exceed $300,000, the S-Corp math almost always pencils at the individual level. The question is whether the group dynamics (ownership flexibility, retirement plans, state taxes) make it the right choice overall.

What is the QBI deduction, and does it matter for this decision?

The Section 199A QBI deduction provides a 20% deduction on qualified business income from pass through entities. The One Big Beautiful Bill Act (OBBBA) made this deduction permanent starting in 2026 and widened the phase out ranges. For 2026, the phase out begins at $201,750 (single) or $403,500 (married filing jointly) and fully phases out at $276,750 (single) or $553,500 (MFJ). Physician practices are classified as specified service trades or businesses (SSTBs), and for SSTBs the deduction is completely eliminated once income exceeds the upper threshold. Most physicians in group practice exceed these thresholds, so the QBI deduction is fully phased out and does not factor into the S-Corp vs partnership decision. It only matters for the small subset of physicians whose taxable income falls within the phase in range.

How does the PTET election interact with the S-Corp vs partnership decision?

The pass through entity tax (PTET) election is available to both partnerships and S-Corps in most states that offer it. The PTET allows the entity to pay state income tax at the entity level, generating a federal deduction that bypasses the $10,000 SALT cap. In practice, the PTET mechanics can differ slightly between partnerships and S-Corps in certain states (credit allocation, carryforward rules, interaction with payroll withholding). Your tax team should model the PTET impact under both structures as part of the overall analysis.

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.

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