If you're a private practice doctor or dentist in the Frederick area, you've spent years building a practice, managing staff, and serving patients. What you probably haven't spent much time on is whether your business structure is costing you tens of thousands of dollars in unnecessary taxes every year. For many medical and dental professionals, it is — and the fix is simpler than you think.
At Mercer Flanagan & Company, we work with private practice owners across Frederick, Urbana, Mount Airy, Thurmont, and surrounding communities who are excellent clinicians but are leaving serious money on the table at tax time. This article explains why — and what to do about it.
When a doctor or dentist operates as a sole proprietor or single-member LLC, every dollar of net profit is subject to self-employment tax — currently 15.3% on the first $160,200 of earnings and 2.9% above that. On top of federal and Maryland income tax, that's a significant burden. For a physician or dentist earning $300,000 or more in net practice income, the self-employment tax alone can cost $20,000 to $30,000 or more per year.
The frustrating part is that this is largely avoidable with the right structure.
An S-Corporation election — available to both corporations and LLCs — changes how your practice income is taxed in a way that dramatically reduces self-employment tax exposure. Here's how it works in plain terms:
Without an S-Corp, all of your net practice income flows directly to your personal tax return and is subject to self-employment tax in full.
With an S-Corp, you split your income into two buckets: a reasonable salary you pay yourself as an employee of your own practice, and distributions of remaining profit. You pay payroll taxes (the equivalent of self-employment tax) only on the salary portion — not on the distributions.
For a dentist netting $400,000 per year who pays herself a reasonable salary of $180,000, the distributions of $220,000 are not subject to self-employment tax. At the current rate, that's over $6,000 in annual savings — every year, for the life of the practice. Over ten years, that's $60,000 or more staying in your pocket.
Not sure if an S-Corp makes sense for your practice specifically? Our S-Corp vs LLC comparison page walks through the tradeoffs in detail.
This is the question the IRS cares about most with S-Corps, and it's one of the most important things to get right. The IRS requires that S-Corp owner-employees pay themselves a salary that reflects what they'd earn doing the same work for someone else. For physicians and dentists, that number is generally significant — you can't pay yourself $40,000 and take $360,000 in distributions. The IRS has challenged that approach successfully in tax court.
What constitutes reasonable compensation for a medical professional depends on your specialty, years of experience, geographic market, and hours worked. Getting this number right requires professional judgment — it needs to be defensible if questioned, but also optimized so you're not voluntarily overpaying payroll taxes. This is exactly the kind of analysis our tax planning team does for practice owners.
The S-Corp election is often the biggest single win, but it's far from the only opportunity. Private practice doctors and dentists have access to a range of tax strategies that general tax preparers frequently overlook.
High-income medical professionals can shelter far more income through retirement plans than most people realize. A solo 401(k) or defined benefit pension plan can allow physicians and dentists to defer $50,000 to $200,000+ per year from taxable income, depending on age, income, and plan type. This is one of the most powerful tax reduction tools available to practice owners — and it builds personal wealth at the same time.
Medical and dental practices invest heavily in equipment — imaging systems, dental chairs, lasers, diagnostic tools, and technology. The Section 179 deduction and bonus depreciation rules allow practices to immediately expense rather than slowly depreciate these investments, creating large deductions in the year of purchase and significantly reducing taxable income.
Many private practice physicians and dentists handle administrative work — reviewing records, managing billing, continuing education — from a home office. When properly documented, this creates a legitimate deduction that is frequently missed.
CME courses, licensing fees, board certification costs, professional memberships, and medical journals are all fully deductible business expenses. So are travel costs when CME requires attending out-of-town conferences. These add up quickly and are often underreported.
If you use a personal vehicle to travel between practice locations, make hospital rounds, or attend professional events, the business-use portion is deductible — either by mileage rate or actual expense. Many physicians with hospital privileges and a private office have significant vehicle deduction opportunities they're not capturing.
Some physicians and dentists own the real estate their practice occupies through a separate LLC, leasing it back to the practice. When structured properly, this creates additional tax advantages — including the ability to build equity in real estate with pre-tax practice income and potentially qualify for the 20% qualified business income (QBI) deduction. This is a more advanced strategy that requires careful structuring, but for the right practice it can be highly effective.
Maryland has its own tax considerations that affect Frederick area physicians and dentists. Maryland does not conform to all federal tax provisions, which means some federal deductions and elections require separate analysis for state purposes. Maryland also has a relatively high income tax rate, making tax planning even more valuable — every dollar shifted out of ordinary income has both federal and Maryland state tax savings attached to it.
Our team stays current on Maryland tax law and knows how federal strategies like S-Corp elections interact with Maryland's pass-through entity tax rules — including Maryland's PTE election, which can create additional savings for practice owners.
Many private practices use a bookkeeper to manage day-to-day accounting and a payroll service to handle employee wages. These are useful tools, but they don't replace a CPA who is actively looking at your overall tax picture and making strategic recommendations.
A bookkeeper records what happened. A CPA plans what should happen. The S-Corp election, retirement plan selection, equipment purchase timing, reasonable compensation analysis — none of these come from a bookkeeper. They come from a CPA who understands small business tax strategy and takes the time to apply it to your specific situation.
If your books also need organizing, our team can handle that too. Well-maintained books are the foundation that makes tax planning possible — and if your QuickBooks setup isn't clean, we can fix that.
The S-Corp election makes the most financial sense once your practice net income consistently exceeds roughly $80,000 to $100,000 per year. Below that threshold, the administrative costs of running payroll and filing a separate S-Corp tax return may outweigh the self-employment tax savings. Above it, the math usually works strongly in your favor — and the higher your income, the greater the savings.
There are also timing considerations. S-Corp elections generally need to be made by March 15 of the tax year you want them to take effect, though late elections are sometimes permitted. If you're thinking about making the switch, sooner is better than later — every year you wait in the wrong structure is money you don't get back.
Business structure decisions made today affect what happens when you eventually sell or transition your practice. The way your practice is structured as an S-Corp, C-Corp, or LLC has significant implications for how sale proceeds are taxed — and how much of the sale price you actually keep. Getting the structure right early, and planning proactively for an eventual transition, can make a six-figure difference in after-tax proceeds when the time comes.
For practice owners thinking about the long game, our Fractional CFO services provide the kind of ongoing strategic financial oversight that helps you build practice value, manage cash flow, and plan a transition on your terms.
Private practice medicine and dentistry are businesses — often highly profitable ones — and they deserve the same strategic tax and accounting attention that any successful business receives. If you've been filing as a sole proprietor or simple LLC, paying a bookkeeper to keep the books, and handing everything to a general tax preparer at year end, there's a very good chance you're significantly overpaying.
At Mercer Flanagan & Company, we've served Frederick area small business owners and professionals since 1971. We understand the financial pressures of running a private practice — overhead, staffing, insurance, equipment — and we know how to structure your taxes to keep more of what you earn.
Schedule a consultation or call us at 301-662-6992. We'll take a look at your current structure and give you an honest assessment of what you could be saving.