July 10, 2025
Tax Planning and Management Best Practices for Medical Practice Owners
- by Andrew Ashton, Director of Accounting
When it comes to tax planning, many medical practice owners focus on deductions and “write-offs.” While important, the most significant opportunities—and risks—often lie in how practice profits are allocated and distributed, especially in multi-owner groups with complex revenue streams.
This article explores key tax management considerations for provider-owned medical practices, with a focus on Partnerships and S-Corporations (S-Corps). It also addresses how compensation models like “eat-what-you-treat” impact tax efficiency and equity.
Partnerships: Flexibility with Risk
(IRS Form 1065)
One of the main benefits of Partnership taxation is the flexibility it provides. Partners can allocate income and expenses in almost any manner they agree upon—regardless of ownership percentages.
However, this flexibility comes at a cost: in most professional service firms like medical practices, nearly all income is subject to self-employment tax (Social Security and Medicare).
Real-World Example:
Imagine an equally owned (50/50) two-owner practice with $1,000,000 in net income.
➤ Provider A generates 60% of the net income ($600,000)
➤ Provider B generates 40% ($400,000)
If net income is split evenly by ownership, each is allocated $500,000 in taxable income. That means Provider B pays tax on $100,000 more than they earned or received—a situation that can lead to frustration and inefficiency.
Bottom Line: Accurate income allocation is essential to avoid inequities and unnecessary tax exposure.
S-Corporations: Payroll, Distributions & Compliance
(IRS Form 1120-S)
S-Corps are a popular structure because they allow owners to potentially reduce self-employment tax liability.
Owners are typically paid in two ways:
1️⃣ W-2 Wages (Payroll): Must be “reasonable compensation” per IRS rules
2️⃣ Shareholder Distributions: Not subject to self-employment tax
After paying reasonable wages, remaining profits may be distributed as a tax-advantaged shareholder distribution.
However, applying this structure within an “eat-what-you-treat” model—where compensation is based on productivity—can introduce complexity. Since distributions must align with ownership, practices must be careful to ensure payments and reporting don’t conflict with internal compensation agreements.
Tip: A robust internal accounting system or profit-center reporting tool is essential to ensure fairness and IRS compliance.
Key Takeaways for Medical Practice Owners
➤ Tax structure impacts everything. From how you’re paid to how much you owe, entity selection is foundational.
➤ Compensation models must be supported by accounting. Productivity-based models require thoughtful tax and income tracking.
➤ Don’t confuse equity with equality. Equal ownership doesn’t mean equal contribution—or equal tax liability.
➤ Be prepared for IRS scrutiny. Inaccurate compensation or distributions can lead to penalties or audits.
Work with Experts Who Understand Medical Practices
Tax planning is not a one-size-fits-all exercise. The right strategy must reflect your practice structure, revenue model, and owner preferences.
At DoctorsManagement, we work exclusively with provider-owned medical groups to deliver tailored tax solutions that reduce risk and improve after-tax income. Our licensed CPAs and tax professionals understand your unique challenges—and how to solve them.
Ready to align your tax strategy with your business model?
Contact DoctorsManagement today to schedule a consultation.
*This blog post was created with assistance from ChatGPT. The initial draft was written by Andrew Ashton, CPA and was edited using feedback from the AI.
