S-Corp vs. Sole Proprietor: Does an S-Corp Actually Save You Money?
At some point over the course of your 1099 work, someone will tell you that you're leaving money on the table by not setting up an S-corp. It could be a colleague, a guy at a conference, or even a CPA. It gets repeated like dogma. For some locums derms an S-corp is a clear benefit. For others, the overhead eats the savings and you've bought yourself a pile of paperwork and administrative headaches for a few hundred dollars. It all comes down to the numbers.
If you’ve already decided to proceed as a sole prop, check out my Sole Proprietor Checklist. This post assumes you're already operating as one and deciding whether to take the next step. White Coat Investor's breakdown of locums business structures is good reading alongside it, especially the section on whether you should form a corporation at all.
What an S-corp actually does
A sole proprietor (or single-member LLC, taxed the same way) pays self-employment tax on all net business income. An S-corp restructures that. You become an employee of your own company, pay yourself a "reasonable salary" through payroll, and take the rest of the profit as a distribution. Payroll taxes apply to the salary but not the distribution. That gap is the whole source of the savings.
For example, if you net $400,000 and pay yourself a $250,000 salary, only that $250,000 gets hit with payroll tax. The other $150,000 comes out as a distribution and avoids it.
A note on self-employment taxes
For a high earner, most of your self-employment tax is already capped.
The 12.4% Social Security portion only applies to the first $184,500 of earnings (the 2026 wage base). Above that, all that's left is the 2.9% Medicare tax, plus the 0.9% surtax over $200,000. Once your salary clears that wage base, an S-corp stops saving you 15.3% on distributions and starts saving you about 2.9% to 3.8%. And remember, you have to pay yourself a “reasonable salary” with the S-corp (see below).
S-corp costs and administration hassle
Running an S-corp isn't free:
Payroll. You have to run formal payroll to pay yourself, which usually means a service like Gusto or ADP. Figure a few hundred dollars a year plus the federal and state payroll filings that come with it.
CPA fees. You'll pay one to set the entity up correctly, then pay again every year to file the S-corp's separate return (Form 1120-S) on top of your personal return. Costs can vary significantly from CPA to CPA.
State taxes and fees. Let’s use California as an example. The state charges a 1.5% franchise tax on S-corp net income, with an $800 minimum. On $400,000 of income that's $6,000 to the state, which a sole proprietor never pays. Depending on where you practice, this line alone can erase the federal savings.
So do the math for yourself. If an S-corp election saves you $5,000 federally but costs $3,000 in overhead and $6,000 in California franchise tax, you're not coming out ahead. In a no-income-tax state with lower fees, the math is more likely to work in your favor.
What’s a “reasonable salary”?
Potential S-corp savings can tempt people to pay themselves a tiny salary and funnel everything into distributions. Don't. The IRS requires "reasonable compensation" for your role, and physician pay is easy to benchmark. A board-certified dermatologist claiming a $60,000 salary and taking $340,000 in distributions is asking for a reclassification, back taxes, and penalties.
This is a big reason an S-corp is hard to justify for a lot of physicians.
So who should actually consider an S-corp?
Generally speaking, an S-corp tends to make sense if you're netting high six figures purely from 1099 work, you're in a state with low or no S-corp-level tax, and you plan to keep at this for years so the setup effort amortizes. It tends not to be worth it if your locums income is modest or sporadic, you also hold a W2 job, you're in a high-fee state like California, or you're only doing this for a year or two before heading back to employment.
The S-corp is a legitimate tool, but it gets oversold. Run your own numbers with a CPA before you form one, and if someone swears it's a no-brainer for everyone, proceed with caution. They haven't done your math.
I'm a dermatologist sharing my own experience, not a lawyer, accountant, or financial advisor, and nothing here is legal, tax, financial, or medical advice. Consult a qualified professional about your specific situation.
