If you are a new surgeon getting ready to start a practice, you want to make the right decisions from the very beginning. One of your key considerations should be what business structure you will use and how that impacts your tax rates.
You know you will be producing a significant income, so you must make smart tax-related decisions that help you maximize your after-tax income and savings.
There are different tax consequences based on different business models, which we’ll explore in more detail in this article. Plus, it’s important to talk with an experienced tax professional and a financial advisor specializing in assisting surgical professionals in developing comprehensive tax planning strategies to ensure you make the right decisions about your business structure.
Choosing the Right Business Entity
One of the most important decisions you’ll make for your financial future involves selecting the right business entity. Following is a list of questions to consider as you begin formulating your new practice:
- How will my practice’s projected revenue influence my choice of a business entity?
- What impact does the status of my employees have on selecting the appropriate business entity?
- What are my needs for asset protection, and how do they shape the decision on the business structure?
- How does the location of my practice in a particular state impact my choice of a business entity?
- What are the operational costs and management responsibilities associated with each type of business entity, and how do they align with my practice model?
- Do I prioritize stability or flexibility in ownership, and how does this preference influence my practice’s choice of a business structure?
Types of Business Entities for Surgeons
It’s important to understand the tax ramifications of each type of business entity:
In a sole proprietorship, your income is taxed as personal income. This means you report business income and expenses on Schedule C of your tax return, and the net income is subject to self-employment taxes and federal and state income taxes.
As a C-Corp, your business would be taxed as a separate entity. The corporation pays corporate income tax on its profits. If you receive dividends from the corporation, those dividends are also taxed on your tax return, leading to double tax results.
In a partnership, the business itself is not taxed. Instead, profits and losses are passed through to the partners. You would report your share of the partnership’s income or loss on your personal tax return. This income is also subject to self-employment taxes.
An S-Corp is similar to a partnership because it is a pass-through entity for tax purposes. You would report your share of the corporation’s income on your personal tax returns. However, unlike a sole proprietorship or partnership, not all income distributed by an S-Corp is subject to self-employment tax. Only your salary from the S-Corp is subject to employment taxes, while dividends are taxed at a potentially lower rate.
Other Tax Strategies to Consider
One of the simplest ways to cut taxes is by funding retirement plan contributions, which reduce your taxable income. Planning your withdrawals carefully can also produce tax benefits, especially if you plan to retire early.
You also have the option to convert pre-tax retirement savings to Roth accounts for additional tax benefits.
Hiring Family Members
Employing family members lets you shift income to a lower tax bracket and deduct their salaries from your business taxes. This is relatively straightforward, but be sure that their employment is legitimate and well-documented.
Use your medical equipment in a gift-leaseback arrangement. This involves transferring equipment to a family member and leasing it back, creating a rental deduction for your business and income for your family member while avoiding payroll taxes.
Hidden Business Deductions
Several lesser-known deductions can also benefit your practice:
- Augusta Rule: Rent your home tax-free for up to 14 days a year for business purposes.
- Home Office: Deduct a portion of your home expenses if you use it primarily for business.
- Mileage: Deduct travel from your home office to other work locations.
- HSA: Health Savings Accounts offer triple tax benefits for qualified medical expenses.
About Surgeons Capital Management
Why is it important to have a specialized team to oversee your wealth?
Your hard work and dedication to your career as a surgeon deserve a financial team committed to growing and safeguarding your assets, both now and into your retirement years.
As financial advisors specializing in serving surgeons, we are wholeheartedly committed to ensuring the pursuit of your financial goals is our number one priority. Our commitment to you is built on the following key business principles:
- Always do what is best for each client. This is not an optional business practice. Your financial needs are our number one priority.
- We care about and want to know our select and specialized clientele well. All surgeons are not the same. We take a personal interest in learning about your surgical practice, your business concerns, and what the future holds for you. That’s why we attend 15+ surgical and professional association meetings each year. They help us stay current on the most important financial and industry matters.
- Our vision is to become the nation’s leading financial advice and services provider to successful surgeons, their families, and their practices. Our mission is to exceed your expectations for service, professionalism, and concern for your financial well-being.
- We never forget what you expect and deserve from us: always act with utmost integrity, honesty, and respect for your financial interests.
- We work collaboratively with you and accept personal responsibility for addressing your most complex financial problems and concerns.
Think of us as your financial partner, here to support and guide you every step of the way.
Duly-registered and duly-licensed financial professionals with Surgeons Capital Management offer securities through Equitable Advisors,LLC (NY, NY 212-314-4600), member FINRA/SIPC (Equitable Financial Advisors in MI & TN), offer investment advisory products and services through Equitable Advisors, LLC, an SEC registered investment advisor, and offer annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC, Equitable Network Insurance Agency of Utah, LLC, Equitable Network of Puerto Rico, Inc.). Equitable Advisors and Equitable Network are affiliates and do not provide tax or legal advice or services. Surgeons Capital Management is not a registered investment advisor and is not owned or operated by Equitable Advisors or Equitable Network. PPG-6336888.1 (2/24) (Exp. 3/27)