Tax Strategy for Physicians Earning $500,000 or More

A physician earning $500,000 or more occupies a narrow tax position. Ordinary income is high, the Section 199A deduction has usually phased out entirely, payroll tax is already capped, and the decisions that matter are all made before December 31. By the time a return is being prepared in March, the year is closed.

Entity Structure

A physician-owned practice is almost always best held in a professional corporation or LLC taxed as an S corporation. The S election converts the portion of profit above reasonable salary into a distribution not subject to the 2.9% Medicare tax or the 0.9% additional Medicare tax under IRC Sec. 3101(b)(2). On $250,000 of distributions, that is roughly $9,500 per year in permanent savings.

Reasonable Compensation

Set salary against specialty-specific survey data for the clinical work actually performed, then treat the residual as return on ownership: the practice real estate, the ancillary revenue, the staff leverage, and the enterprise value. For most single-physician practices that lands between $250,000 and $400,000. See how reasonable compensation is documented.

Retirement Plans Are the Largest Lever

A 401(k) alone is not meaningful at this income. The structure that moves the needle is a 401(k) with profit sharing, reaching roughly $72,000 in 2026, paired with a cash balance plan where contributions are actuarially determined by age. A physician in her early fifties can commonly fund $150,000 to $250,000 on top of the 401(k). At a 37% federal rate plus state, a $200,000 cash balance contribution defers $80,000 or more of tax.

The cost is staff coverage, often 5% to 7.5% of pay, which is deductible and still nets out favorably at physician income levels. Our cash balance plan guide walks through the arithmetic.

Accountable Plan

An S corporation physician cannot deduct unreimbursed business expenses personally. A written accountable plan under Treas. Reg. Sec. 1.62-2 lets the practice reimburse the home office used for charting, mileage between practice sites and hospitals, continuing medical education, licensing, dues, and phone and internet.

Reimbursements are deductible to the practice and untaxed to the physician when substantiated within a reasonable period. For a physician with two hospital affiliations, this is routinely $12,000 to $25,000 per year that would otherwise be lost. See our accountable plan setup guide.

The Augusta Rule

IRC Sec. 280A(g) lets a physician rent a personal residence to the practice for up to fourteen days per year, with the practice deducting the rent and the physician excluding it from income entirely. Partner meetings and annual planning retreats qualify when they are real meetings.

Documentation carries this strategy: a comparable venue quote, a written rental agreement, an agenda, and an attendance record for each date. At $1,800 per day for fourteen days, that is $25,200 deducted and received tax-free. See the Augusta Rule for business owners.

Real Estate and Cost Segregation

Physicians who own their medical office building should hold it in a separate LLC leasing to the practice, which separates liability and preserves flexibility if the practice is later sold while the building is retained.

The building is then a cost segregation candidate. Medical space carries heavy specialty electrical, operatory and lab plumbing, dedicated HVAC, casework, and site improvements. Studies commonly reclassify 25% to 35% of depreciable basis into five, seven, and fifteen-year property, fully deductible in year one under the restored 100% bonus depreciation. See our medical office cost segregation guide.

One caution: rent paid by a practice to a related-party landlord is recharacterized as non-passive under Treas. Reg. Sec. 1.469-2(f)(6), so the loss offsets practice income rather than unrelated passive income. Employed physicians without a practice often use short-term rentals instead, where material participation produces non-passive losses against W-2 income.

QBI: Medicine Is an SSTB

Health is a specified service trade or business under IRC Sec. 199A(d)(2), so the 20% deduction phases out above the income thresholds. OBBBA made Sec. 199A permanent and widened the phase-in range beginning in 2026, but a physician at $500,000 or more of taxable income is past the top of the range and receives nothing.

Driving taxable income below the threshold with retirement contributions and depreciation is realistic in the $500,000 to $600,000 range and unrealistic above roughly $700,000. Separating a genuinely non-SSTB activity, such as a rental to unrelated tenants, produces untainted qualified business income. Crack-and-pack arrangements that shift administrative income to a related entity have been challenged and are addressed by specific anti-abuse rules.

Frequently Asked Questions

Should a physician elect S corporation status?

If you own the practice, almost always yes. The S election removes Medicare tax on profit distributed above a reasonable salary, which is roughly 3.8% of every dollar shifted. On $250,000 of distributions that is about $9,500 per year. Employed physicians with no practice entity get no benefit.

What is a reasonable salary for a physician S corporation?

Most single-physician practices land between $250,000 and $400,000, benchmarked to specialty compensation survey data for the clinical work actually performed. The residual profit is treated as return on ownership. Very low salaries relative to specialty data are the most commonly challenged position in this area.

Can a physician still claim the QBI deduction?

Rarely. Medicine is a specified service trade or business under IRC Sec. 199A(d)(2), so the deduction phases out above the income thresholds. A physician earning $500,000 or more is past the phase-in range and receives nothing, even after the OBBBA changes that took effect in 2026.

How much can a physician contribute to retirement plans?

A 401(k) with profit sharing reaches roughly $72,000 in 2026. Adding a cash balance plan commonly brings total contributions to $250,000 or more for a physician in her fifties, because cash balance limits are actuarially determined by age rather than a flat cap.

Does cost segregation help a physician who owns the medical office building?

Yes, but the loss usually offsets practice income rather than outside income. Rent from your own practice to your own building LLC is recharacterized as non-passive under Treas. Reg. Sec. 1.469-2(f)(6). Studies on medical office buildings typically reclassify 25% to 35% of basis.

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