Two doctors, same work, different taxes

An internist earning W-2 wages pays 37% federal tax plus 0.9% Medicare surtax on high earners. Her colleague who owns her practice through an S corporation lands an effective federal rate under 30%.

“Two internists. Same waiting room, same procedures, same billing codes.”

Congress carved out a tax break in 2017

Section 199A gave pass-through business owners a 20% deduction on qualified business income. But Congress deliberately excluded doctors, lawyers, and other service professionals from claiming it on their core professional fees.

Practice owners reclassify income streams

A doctor-owner separates ancillary services like in-office imaging, labs, and dispensed drugs from clinical fees. The IRS treats these as non-service income, qualifying them for the 20% deduction that clinical work cannot claim.

Real estate and distributions cut the bill further

The owner leases her medical office building to her S corporation, creating deductible rent and qualifying rental income with depreciation shields. Distributions to owners escape payroll tax entirely, unlike W-2 wages.

Salaried doctors cannot reclassify income

A hospital-employed internist receives only W-2 wages. Every dollar is taxable as wages, subject to full payroll tax and the 37% top bracket, with no way to separate or restructure the income.

“She cannot reclassify wage income.”

Economists say the code favors owners

Princeton and University of Chicago economists highlighted this gap on Bloomberg, noting that US tax rules systematically favor business owners over employees doing identical work, with medicine as the clearest example.

Employees have limited workarounds

Salaried doctors can max 401(k)s, fund HSAs, use tax-loss harvesting, and run legitimate side businesses through separate entities. But ownership structure remains the fundamental dividing line for tax treatment.

“Ownership is the dividing line. Everything downstream sits on that side.”

Restructuring requires professional guidance

Anyone considering a move from employment to ownership should work with a CPA experienced in service-business tax rules, as the mechanics are complex and the stakes are high.