Same job, wildly different tax bills

A nurse earning $900,000 as a W-2 employee pays Medicare tax on every dollar. Her practice's owner earning the same amount through an S corporation can avoid most of it. The difference comes down to how the tax code labels their income.

How S corporations split income

S corp owners take money two ways: a salary (which faces payroll tax) and a distribution (leftover profit that does not). The distribution skips the entire payroll tax system, including the uncapped Medicare surcharge that W-2 workers cannot escape.

The IRS requires reasonable compensation

Owners cannot simply zero out their salary and take everything as profit. The IRS requires a wage that matches what someone doing the same job would earn elsewhere. But reasonable is a range, not a fixed number, leaving room to maneuver.

“reasonable compensation”

A real example: the anesthesiologist

An anesthesiologist earning $900,000 through her practice might pay herself a $300,000 W-2 salary and take $600,000 as an S corp distribution. That $600,000 skips payroll tax and the uncapped Medicare surcharge entirely, and the IRS cannot challenge it.

Billing Medicare while skipping Medicare tax

The irony is stark: an anesthesiologist bills Medicare for services, collects from Medicare, and generates most revenue from Medicare patients. Yet the Medicare tax funding that program does not touch the majority of what she earns through S corp distributions.

“they're billing Medicare for so many services and they themselves aren't paying the Medicare tax on it”

Who can use this strategy

Dentists, veterinarians, consultants, lawyers, engineers, real estate brokers, and specialty medical practices all use this legal structuring. It has quietly become a wealth-building tool for owner-operators of profitable service businesses.

W-2 employees have no escape route

A hospital-employed anesthesiologist earning $900,000 has no S corp to route income through and no way around the uncapped Medicare surcharge. The tax burden on identical work looks completely different depending on the corporate structure.

Who cannot use this strategy

Passive investors, most gig workers, and owners whose salary really is most of the business income cannot use this approach. A solo consultant grossing $180,000 with $30,000 in expenses cannot credibly pay herself $40,000 and call the rest profit without inviting an IRS audit.

Check your K-1 before year-end

If you own a profitable small business you still run, the salary-versus-distribution split on your K-1 is worth reviewing with a CPA. Set the wage too low and you invite an audit. Set it too high and you send the government money the code does not require.