Tax for Healthcare Professionals
Healthcare is an SSTB under IRC Section 199A(d)(2), meaning the 20% QBI deduction phases out completely above ~$241,950 single / ~$483,900 MFJ for 2026. An S-corp election on $300,000+ net income saves roughly $15,000-$25,000 annually in SE tax by splitting income between reasonable compensation and distributions. Locum tenens physicians filing in 4+ states must track income allocation by state, with temporary assignment travel expenses deductible only for assignments expected to last less than one year.
TaxKiln Editorial · Last reviewed:
Healthcare professionals are among the highest-earning self-employed taxpayers in the United States, and the tax code treats them accordingly. Health services are explicitly classified as a specified service trade or business (SSTB), which phases out the QBI deduction for most physicians. The S-corp election exists almost entirely for payroll tax planning, and locum tenens physicians face a multi-state filing puzzle that rivals any other trade.
Common business structures
- Sole proprietorship (Schedule C) — simple but all net profit subject to SE tax at 15.3% (up to SS wage base) plus 2.9%+ Medicare
- Single-member LLC electing S-corp (Form 2553) — the standard structure for physicians with $250,000+ net; splits income into W-2 salary (subject to payroll tax) and distributions (not subject to SE/payroll tax)
- Partnership / multi-member LLC — group practices with multiple providers; guaranteed payments plus distributive shares on K-1; buy-in/buy-out provisions govern ownership changes
- Professional Corporation (PC) — required in some states for licensed professionals; can elect S-corp treatment; state-specific rules vary on who can be a shareholder
Key mechanics
S-Corp Election and Reasonable Compensation for Physicians
For healthcare professionals with substantial net practice income — typically $250,000 or more — the LLC-with-S-corp-election structure is the primary payroll tax planning tool. The mechanics are straightforward: the physician is both the owner and an employee of the S-corp, pays themselves a W-2 salary ("reasonable compensation") subject to payroll taxes, and takes additional profit as distributions not subject to Social Security or Medicare tax.
The savings calculation: on $300,000 net practice income, a Schedule C filer pays SE tax on the entire amount (15.3% up to the $184,500 SS wage base, then 2.9%+ Medicare above that). With an S-corp paying $180,000 in reasonable compensation, SE/payroll tax applies only to the $180,000 salary — the remaining $120,000 in distributions avoids the 12.4% Social Security component and the 2.9% Medicare component. Net savings: approximately $17,000-$20,000 per year.
The IRS enforces the "reasonable compensation" requirement aggressively for physicians. Compensation must reflect what a similarly qualified physician would earn as an employee in the same specialty, region, and practice setting. BLS Occupational Employment and Wage Statistics by specialty and region provide the benchmark. Setting compensation too low invites reclassification of distributions as wages — plus penalties.
The S-corp carries compliance costs: payroll processing, quarterly payroll tax filings (Forms 941), annual W-2/W-3, corporate tax return (Form 1120-S), and K-1 preparation. These costs ($3,000-$5,000+ annually) must be weighed against the payroll tax savings. Below roughly $100,000-$120,000 net income, the savings rarely justify the complexity.
S-corp shareholders who provide services must receive reasonable compensation as W-2 wages before taking distributions; setting compensation below market value triggers reclassification and penalties. (IRC Section 1366 (pass-through of S-corp income); Rev. Rul. 74-44 (reasonable compensation); Watson v. Commissioner (8th Cir. 2012); David E. Watson, P.C. v. United States)
Locum Tenens: Multi-State Income and Travel Deductions
Locum tenens physicians — those working temporary assignments through staffing agencies or direct hospital contracts — receive 1099-NEC income from each engagement and face multi-state filing obligations in every state where they physically perform services.
Each state where the physician works can tax the income earned there. The home/resident state taxes all worldwide income but typically provides a credit for taxes paid to other states, avoiding double taxation. The allocation is generally based on days worked in each state relative to total working days, though states use varying methodologies. Four states worked means potentially four non-resident state returns plus the home state return.
Travel expenses for locum tenens assignments are deductible if the assignment is "temporary" — meaning it is expected to last (and does last) less than one year at a single location. Transportation to the assignment location, lodging, and 50% of meals are deductible. If an assignment exceeds or is expected to exceed one year, it becomes "indefinite" and travel expenses to that location are no longer deductible — the location becomes a second tax home.
The one-year rule is strict and based on realistic expectation at the time of acceptance. If you accept a 6-month assignment that extends to 14 months, travel deductions may be retroactively disallowed from the point the extension made the assignment indefinite. Documentation of the original assignment duration and each extension is critical. Staffing agency contracts with defined end dates provide the strongest substantiation.
Travel expenses for temporary work assignments (expected duration under one year) are deductible; assignments expected to last one year or more are indefinite, and travel to that location is non-deductible commuting. (IRC Section 162(a)(2); Rev. Rul. 93-86 (one-year rule for temporary assignments); IRS Publication 463 (Travel, Gift, and Car Expenses))
Retirement Plan Stacking: Solo 401(k) + Cash Balance Plans
High-earning healthcare professionals have unique retirement plan opportunities because their income levels allow maximum contributions to stacked retirement vehicles. The Solo 401(k) allows up to $24,500 in employee deferrals (2026) plus employer contributions of 25% of net SE compensation, for a total addition limit of $72,000. With the SECURE 2.0 enhanced catch-up for ages 60-63, total contributions can reach $83,250.
For physicians earning $300,000+ who want to shelter more income, a defined benefit cash balance plan stacks on top of the 401(k). Cash balance plans allow contributions of $100,000-$300,000+ per year depending on age, actuarial assumptions, and plan design. The contributions are tax-deductible, and the combination of Solo 401(k) + cash balance plan can shelter $150,000-$350,000+ annually for a physician in their 50s.
The cash balance plan requires an actuarial consultant for plan design and annual compliance ($2,000-$5,000/year), and the contribution amounts are not optional — once the plan is adopted, minimum funding requirements apply. The plan works best for physicians with stable, predictable high income. Volatile income makes the mandatory contribution commitment risky.
Health Savings Accounts (HSAs) add another $4,400 (self-only) or $8,750 (family) for 2026, with triple tax benefit: tax-deductible contribution, tax-free growth, tax-free withdrawal for medical expenses. For physicians who can afford to pay medical expenses out-of-pocket and let the HSA compound, it functions as a supplemental retirement account.
Self-employed healthcare professionals can stack Solo 401(k), cash balance defined benefit plan, and HSA contributions to shelter $150,000-$350,000+ annually, depending on age and income. (IRC Section 401(a) (qualified plans); IRC Section 415(c) (defined contribution limits); IRC Section 415(b) (defined benefit limits); IRC Section 223 (HSA); SECURE 2.0 Act Section 109 (enhanced catch-up))
Professional Expense Deductions: CME, Malpractice, and Licensing
Self-employed healthcare professionals (Schedule C or entity filers) can deduct a wide range of professional expenses that W-2 employees lost access to when the TCJA suspended miscellaneous itemized deductions through 2025 (now permanent under OBBBA). This is one of the genuine tax advantages of independent practice over employment.
Continuing Medical Education (CME) is deductible when it maintains or improves skills in your current specialty. A board-certified internist attending a cardiology conference to maintain general knowledge: deductible. A family medicine physician pursuing a surgery residency to change specialties: not deductible (qualifies the taxpayer for a new trade). The distinction turns on whether the education maintains/improves existing skills versus qualifies for a substantially different profession.
Malpractice insurance is fully deductible, including tail coverage (extended reporting period coverage purchased when changing employers or retiring). For locum tenens physicians, the staffing agency typically provides occurrence-based coverage during the assignment, but tail coverage for prior claims-made policies remains the physician's personal expense and deduction.
DEA registration ($888 for three years), state medical license fees, board certification and maintenance of certification (MOC) fees, hospital credentialing costs, and professional society memberships (AMA, specialty societies) are all deductible as ordinary and necessary business expenses. The aggregate of these professional fees can reach $5,000-$10,000+ annually for a physician maintaining licenses in multiple states.
Self-employed healthcare providers deduct CME, malpractice insurance, licensing, and professional fees as ordinary and necessary business expenses; W-2 employees generally cannot deduct these post-TCJA. (IRC Section 162(a) (ordinary and necessary business expenses); Reg. 1.162-5 (education expenses); IRS Publication 535 (Business Expenses))
Deductions
| Category | Examples | Schedule C line |
|---|---|---|
| Malpractice and Professional Insurance | Malpractice insurance (occurrence or claims-made), tail coverage, general liability, workers' comp (if employees), cyber liability for telehealth, disability insurance premiums if structured through the business | Line 15 (Insurance) |
| Licensing and Credentialing | DEA registration ($888/3 years), state medical licenses (each state), board certification + MOC fees, hospital credentialing, IMLC (Interstate Medical Licensure Compact) fees, NPI registration | Line 27a (Other expenses — licensing and regulatory) |
| CME and Professional Development | Conference registration, travel to CME events (airfare, hotel, 50% meals), medical journals, UpToDate/DynaMed subscriptions, specialty textbooks, simulation training fees | Line 27a (Other expenses — education) / Line 24a (Travel) |
| Medical Equipment and Technology | Diagnostic equipment, EHR/EMR system, telehealth platform, medical instruments, ultrasound machine — Section 179 up to $2,560,000 or 100% bonus depreciation | Line 13 (Depreciation — Form 4562) |
| Office and Clinical Space | Office/clinic rent, utilities, cleaning, medical waste disposal, practice management software, billing service fees, answering service | Line 20b (Rent — other business property) / Line 27a (Other expenses) |
| Health Insurance (Self-Employed) | Self-employed health insurance deduction for the physician + spouse + dependents — deducted above-the-line on Form 1040 Line 17, not on Schedule C; limited to net SE income | Form 1040 Line 17 (not Schedule C — above-the-line deduction) |
Vehicle treatment
Vehicle expenses for healthcare professionals depend on the practice model. A physician driving between multiple clinic locations, hospital rounds, and nursing home visits during the workday incurs deductible business mileage at 72.5 cents/mile (2026) or actual expenses. Commuting from home to a single primary office is non-deductible. Locum tenens physicians driving to temporary assignments deduct transportation as travel expense. For physicians with both a home office (telehealth) and external practice locations, the home office establishes the tax home — drives from home office to external locations are business miles, not commuting.
Depreciation examples
Example: Dr. Hassan sets up a solo practice and purchases: a portable ultrasound machine ($28,000), EHR system hardware ($8,500), exam room equipment and furniture ($12,000), and a laptop for telehealth ($2,200). Total: $50,700. Under Section 179, the entire $50,700 is expensed in year one. Alternatively, 100% bonus depreciation achieves the same result. Under MACRS without Section 179: the ultrasound and EHR hardware are 5-year property (~$10,140/year each), furniture is 7-year property (~$1,714/year). For an established practice adding a $65,000 digital X-ray system, Section 179 expense in year one is almost always optimal to maximize the current-year deduction.
State variance
Texas
No state income tax — TX is a major physician recruitment advantage and one of the largest healthcare employment markets. The franchise tax (margin tax) applies to entities but the $2.47M total revenue exemption covers most solo and small group practices. No state-level SSTB classification or QBI limitation to worry about.
California
Top marginal rate 13.3% plus SDI (State Disability Insurance) at 1.1% on wages up to $153,164 for 2026. CA does not conform to the federal QBI deduction, so the SSTB classification has no CA impact — all income taxed at ordinary rates regardless. CA Medical Board licensing fees and mandatory CME requirements create additional deductible expenses. Telehealth income sourced to where the clinician is physically located.
New York
NY state income tax up to 10.9%, plus NYC residents face an additional personal income tax up to 3.876%. Combined federal + NY + NYC marginal rates can exceed 50% for high-earning physicians. NY has aggressive departure audit practices — physicians relocating to FL or TX should document the genuine change of domicile thoroughly. NY PTET election available for S-corps and partnerships to work around the SALT cap.
Florida
No state income tax. FL is the second most common relocation state for high-earning physicians (after TX). FL does not impose SDI or state-level payroll taxes beyond federal. The combination of no state income tax, no estate tax, and strong asset protection laws (unlimited homestead exemption) makes FL particularly attractive for physicians in asset-protection-sensitive specialties.
Common audit triggers
- Multi-state income allocation errors — locum tenens physicians working in 4+ states who fail to file non-resident returns in all states where services were performed, or who mis-allocate income between states
- S-corp reasonable compensation set below market — physicians paying themselves $100,000 W-2 salary on $400,000 net income when BLS data shows the specialty median at $250,000+; the IRS reclassifies distributions as wages and assesses payroll tax plus penalties
- Temporary vs indefinite assignment duration — locum assignments that extend beyond one year retroactively lose travel deduction eligibility; the IRS examines contract terms and actual duration to determine if the assignment was realistically temporary
- CME travel mixed with personal vacation — attending a 3-day conference in Hawaii followed by a 10-day vacation; only the conference days and directly related expenses are deductible; the personal vacation portion is non-deductible
- Retirement plan over-contributions — stacking Solo 401(k) + cash balance + SEP-IRA without proper coordination can exceed individual plan limits or trigger excess contribution penalties
Frequently asked questions
What happens if I miss the April 15 tax deadline?+
Do I need a CPA or can I file my own taxes?+
How do quarterly estimated tax payments work?+
At what income level does the S-corp election make sense for physicians?+
I do locum tenens work — do I need to file in every state I practice in?+
Can I deduct my medical school loans?+
Is telehealth income sourced to where I am or where my patient is?+
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