When you have a limited liability company (LLC), you have multiple choices on how to tax the income received through the entity. LLCs are popular for physicians, especially for side gig income, but it can be confusing to decide which tax election they should use for their LLC. The most common taxation of an LLC is as a pass-through entity, meaning all income generated from the business is treated as personal income and flows through on your tax return. However, for a subset of physicians, it will make more sense to elect to have your LLC taxed as an S corp. Below, we cover considerations on how to decide if this S corporation taxation structure is the best fit for your LLC business.
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LLCs for Physician Side Gigs and Businesses
Before covering how to tax your LLC, it’s worth a quick assessment if an LLC is the best business entity for your side gig or business as there are several options available for how to structure your business.
LLCs are popular because they offer a lot of flexibility compared to other options such as a sole proprietorships or corporations. With this flexibility, a business set up as an LLC can take advantage of different aspects of the other types of business structures as the business grows and changes. The option in how to have your LLC taxed is one such example.
While the LLC business entity can be a great choice for many physician entrepreneurs, there are scenarios where an LLC may not make sense or be the best choice. Examples of some of these scenarios include if you have a very small, infrequent side gig or a larger more complex business, potentially with investors. If there’s any question about what structure is right for you, it’s worth considering other options and talking to an accountant and/or attorney to help guide you.
Learn more about if you need an LLC for your physician side hustle or business.
Taxation Options for LLCs, and How It Usually Works
If you look at a W9 form, you’ll see that there’s a separate set of checkboxes for how you can elect to have your LLC taxed, including as a disregarded entity, an S corporation, a C corporation, and a partnership.
For most physicians and other small business owners, the LLC is a pass-through entity for tax purposes, especially for side gigs. The default tax treatment of a single member LLC by the IRS is as a sole proprietor, and the default tax treatment of an LLC with more than one member is as a partnership.
In these situations, LLCs don’t provide any tax advantages, though they do provide several other advantages to physicians, which include:
Providing asset protection
Adding a layer of privacy protection for personal information
Giving credibility to your side gig
Flexibility in ownership and management with low administrative requirements
Learn more about the advantages of an LLC for your side gig income.
In a scenario where all of your income runs through an LLC and passes through to your personal return, it is reported as self-employed income on your taxes. This means that you pay self-employment taxes as both the employer and the employee on all the income generated.
In 2024, this currently comes to 15.3% between Social Security (12.4%, with 6.2% paid as the employer and 6.2% as the employee) and Medicare taxes (2.9%, with 1.45% paid as the employer and 1.45% paid as the employee).
However, another option you can choose when forming your LLC is to treat your LLC as an S corporation for tax purposes. While this option does not make sense for everyone, it can benefit entrepreneurs earning higher incomes with their side gigs or businesses to elect to tax their LLC as an S-corporation to save on the payroll taxes mentioned above.
It’s important to note, as mentioned above, that you have the flexibility to change the taxation structure of your LLC by electing to tax it as an S-corp later when it makes financial sense to do so. Doing so, however, may have other tax implications, so make sure you work with a tax professional when assessing a change.
How Taxation as an S Corp Works
When you choose to be taxed as an S-corp, your business is seen as a separate entity with you as an employee. That means you can choose to receive some of your income as an employee (with that part subject to employment taxes on both the employer and employee side), and some of that income as the owner of a company as a dividend (not subject to self-employment taxes). This effectively will save you employment taxes on whatever portion of your business’ earnings that you don’t take as a W2 salary on payroll.
Advantages of Having Your LLC Taxed as an S Corp
Self-Employment Tax Savings
If your business generates a lot of income, the amount of self-employment taxes not owed on the portion paid out as dividends rather than salary can really add up.
Keep in mind that you cannot just say that all the earnings are being paid out as dividends and you are not taking a salary. The IRS requires that you pay yourself a reasonable income for the job that you do.
It is very important to get advice from a licensed professional about what amount of salary is considered "reasonable," as the IRS will (rightfully so) not look kindly on anything perceived to be done for the purposes of tax evasion. If it feels you didn't set a reasonable salary, it may reclassify some of your dividend income as salary, in which case they may charge you not just the self-employment taxes on that, but also any relevant penalties and interest on those earnings.
Eligibility for the QBI Deduction
Traditionally, the savings on payroll taxes were the main reason why people would elect to have their LLCs taxed as S-corporations.
However, in recent years, there is another powerful reason why some businesses choose to be taxed as an S Corp, and that is to take advantage of the 20% Qualified Business Income (QBI) deduction if they are not otherwise eligible to do so. In 2018, with the passage of the Tax Cut and Jobs Act, this deduction came into place and allows owners of qualifying businesses and income levels to deduct up to 20% of their net business income from their income taxes.
However, the income limitations related to this deduction can preclude a lot of high earning physicians from being able to take advantage of it under a normal LLC structure. This is a nuanced discussion, but the essence of it is that in 2024, if you make more than $483,900 as married filing jointly or more than $241,950 as single, you can not qualify for the Qualified Business income deduction unless you have a non SSTB (specified service trade or business) AND you have business property or there is W2 income being paid through that business. This W2 income which can only be earned if you put yourself on payroll as you would with an S corporation.
Learn more about the Qualified Business Income (QBI) deduction.
If you do qualify to take QBI on this basis, you can deduct the greater of 50% of the W2 wages your company pays employees OR 25% of the W2 wages + 2.5% of the cost of your business property, provided that the calculated deduction doesn’t exceed 20% of the business income. Depending on the W2 salary you pay yourself, you can see how this could turn into a very large deduction, one that you never would’ve been eligible for if you hadn’t elected S Corp status.
The QBI deduction can be quite complicated, so make sure to work with a tax professional to guide you through the process and considerations.
Should I Have My LLC Taxed as an S Corp?
While there are advantages to choosing this taxation option for an LLC as outlined above, being treated as an S-corp is not without its own hassles. These include:
Eligibility to Elect Taxation as an S Corp Isn’t Guaranteed
The S corporation status is not appropriate or even allowed for every business. For example, if you want to have investors, you aren't able to offer different classes of shareholders with an S corporation. In addition, there are limits to the number of shareholders and what type of entities can be shareholders in S-corps.
Additionally, the number of owners you have for your LLC and whether they reside in the US determines whether they meet criteria for eligibility for S corporation status.
Additional Payroll and Corporate Tax Returns
S corporations need to run payroll to pay their employees. This includes having software to help calculate taxes to withhold, submitting tax payments to the IRS at regular intervals to avoid penalties, and filing quarterly and annual payroll returns and forms.
Additionally, the S corporation is required to file a completely separate tax return every year (Form 1120), instead of the earnings just passing through on Schedule C with your personal income tax for your side gig income. This tax return has different tax deadlines than personal returns, and your accountant may charge you extra for it.
Increased Administrative Burden and Costs
One of the benefits of an LLC is a high degree of flexibility with a low complexity of administrative requirements. When choosing to tax an LLC as an S corporation versus sole proprietorship, you lose some of this advantage.
There can be additional documentation, record keeping, and meeting requirements for S-corps. All of these things can add additional costs from accounting and payroll, as well as the additional administrative burdens. These typically aren’t worth the hassle unless you are making significant income.
Potential Loss of Maximized Tax-Advantaged Retirement Savings
One of the biggest tax advantages for self-employed income for physicians is the ability to contribute to more tax-advantaged retirement accounts such as the solo401k and the defined benefit plan. How much you earn in salary from your side gigs will determine how much you can contribute to most of these options.
If you don't designate enough of your side gigs earnings as W2 earnings (which are subject to the payroll taxes), you will lose out on your ability to maximize your contributions to those tax-advantaged retirement accounts, which may be bigger deductions than the payroll tax savings.
Therefore, you should factor in all of these considerations when making the decision on how to have your LLC taxed.
When Should I Start Considering Taxing my LLC as an S-corporation?
Because of the factors mentioned above, in very general guidance, most doctors in our physician online communities have said that their accountants have recommended that they be making at least 6-figures before considering having their LLC taxed as an S corp to make it potentially worth the savings in payroll taxes.
Working with a trusted accountant can help you determine the trade off between the taxation options available for LLCs and whether it's right for you.
If you choose to have your LLC taxed as an S corp, there’s a two-step process for this election. You must first file a Form 8832, which will cause your LLC to be taxed as a corporation. This is not the same thing as being an S corporation. You must also then file a Form 2553 to complete the election of the S-corp taxation status. Again, an accountant can help walk you through this process.
Conclusion
Although there’s no shortage of doctors who are told to consider an S-corporation for the purpose of tax benefits by business gurus or tax strategists, the fact is, it will likely only make sense for a subset of those physicians. Understanding the benefits of saving on payroll taxes and potentially being eligible for the QBI deduction and can help you make the right decision for you. If you make a lot of money in your side gig, it's certainly worth doing the exercise and seeing how much money you save in taxes by going this route, and then you can decide if that amount justifies the requirements associated with having the S-corp status.
Additional Side Gig Business Resources
For additional resources on starting and running your doctor side gig business, explore:
If you want to be alerted of side gig opportunities, join our Physician Side Gigs Facebook group and sign up for our side gig databases. Both the community and databases are free for physicians to join.
You can also check out the IRS’s guidance for Limited Liability Companies (LLCs).