Tax Planning for Medical and Dental Practice Owners: Entity Structure, Retirement Plans, and Physician-Specific Strategies

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Medical and dental practice owners are among the highest-earning small business owners in the country, with average net incomes of $250,000-$500,000+ depending on specialty. This high income creates both a larger tax bill and more opportunities for strategic tax planning. The central challenge is the SSTB classification under IRC 199A: because medical and dental services are specified service trades, the 20% QBI deduction phases out completely at $366,950 single / $633,900 MFJ (OBBBA thresholds plus $100,000 phase-out range), meaning most established physicians and dentists receive no QBI benefit. This makes other strategies more important: maximizing retirement plan contributions (defined benefit plans can shelter $200,000-$350,000 per year depending on age), optimizing the S-Corp salary split to minimize payroll taxes, and structuring practice expenses to capture every available deduction and credit. The combination of these strategies can reduce a physician’s effective tax rate from 40%+ to 30% or below, saving $50,000-$150,000 annually.

✓Key takeaway

Key tax considerations for medical/dental practices:

Issue	Impact
SSTB classification	QBI deduction phases out above $266,950 (single) / $533,900 (MFJ)
S-Corp election	Reduces SE/payroll tax on distributions above reasonable salary
Defined benefit plan	Shelter $200,000-$350,000/year in tax-deferred contributions
401(k) + DB combination	Total contributions can exceed $300,000/year
Section 105 HRA	Tax-free health expense reimbursement for employees
R&D credit	Available for clinical research, new treatment protocols
Entity restrictions	Many states require professional corporation (PC) or PLLC

Retirement plan comparison for high-income physicians:

Plan Type	2025 Max Contribution	Best For
Solo 401(k)	$70,000 ($23,500 + 25% of net SE income)	Solo practitioners
SEP-IRA	$70,000 (25% of W-2 or net SE income)	Simple setup, no employees
Defined benefit plan	Up to $280,000/year (actuarially determined)	Physicians over 40 who want to maximize contributions
401(k) + Cash balance DB	$70,000 + $200,000+ = $270,000+	Maximum tax deferral for high-income practices
SIMPLE IRA	$16,500	Not ideal for high-income physicians (too low)

How can physicians and dentists minimize their tax bill?

Hypothetical example

Round numbers. A 50-year-old physician owns a single-specialty medical practice as an S-Corp. The practice has net income of $600,000 before the physician’s compensation, with 5 clinical employees.

Strategy 1: S-Corp salary optimization

Item	All W-2 (No S-Corp)	S-Corp Optimized
Practice net income	$600,000	$600,000
Owner W-2 salary	$600,000 (all salary)	$300,000 (reasonable compensation)
S-Corp distribution	$0	$300,000
Payroll tax (employer FICA on salary)	$22,950 (6.2% on $176,100 + 1.45% on all)	$13,350
Employee payroll tax (FICA)	$22,950	$13,350
0.9% Additional Medicare (over $200K)	$3,600	$900
Total payroll tax savings		~$22,200/year

Note: The $300,000 salary must be defensible as “reasonable compensation” for the physician’s services. The IRS scrutinizes physician S-Corp salaries closely.

Strategy 2: Defined benefit plan + 401(k) combination

Plan	Contribution	Tax Savings (37%)
401(k) deferral (age 50+, with catch-up)	$31,000 ($23,500 + $7,500 age 50+ catch-up)	$11,470
401(k) employer match (e.g., 6% of $300K salary)	$18,000	$6,660
Cash balance defined benefit plan (age 50, actuarially determined)	$200,000	$74,000
Total retirement plan contributions	$250,000	$92,130

The defined benefit plan contribution is determined by an actuary and depends on the physician’s age, target benefit, and years to retirement. Older physicians get larger contributions because they have fewer years to fund the benefit.

Age	Approximate DB Contribution (annual)
35	$80,000-$120,000
40	$120,000-$160,000
45	$160,000-$220,000
50	$200,000-$280,000
55	$250,000-$350,000
60	$300,000-$400,000+

Strategy 3: Practice expense optimization

Deduction	Amount	Details
Medical equipment (Section 179 / bonus)	$100,000	Imaging equipment, surgical tools, dental chairs
Office build-out (QIP, 15-year, bonus)	$50,000	Interior renovations, exam room modifications
Continuing education (IRC 127)	$5,250/employee	Tax-free to employees; deductible to practice
Employee health insurance	$60,000	Fully deductible
Malpractice insurance	$25,000	Fully deductible
Staff uniforms and scrubs	$5,000	Deductible if required and not suitable for everyday wear
EHR software and IT	$15,000	Section 179 or bonus depreciation
Practice management software	$8,000	Deductible or depreciable

Strategy 4: Section 105 HRA for the physician owner If the practice is structured as a C-Corp (or the physician’s spouse is employed by the S-Corp and the physician is covered as a dependent):

Item	Tax Treatment
Health insurance premiums	Deductible to the practice (IRC 106)
Unreimbursed medical expenses (HRA)	Tax-free to the employee; deductible to the practice
S-Corp owner (>2% shareholder)	Health insurance premiums are included in W-2 but deductible on page 1 of Form 1040

Total annual tax savings from all strategies:

Strategy	Annual Tax Savings
S-Corp salary optimization	$22,200
Defined benefit plan + 401(k)	$92,130
Practice expense optimization (incremental)	$15,000
Other credits and deductions	$5,000
Total	$134,330

Additional strategies for multi-physician practices:

Strategy	Details
Group practice entity structure	Partnership or S-Corp with multiple physician-owners
Ancillary services (lab, imaging)	Separate LLC or in-house; additional revenue stream with different tax characteristics
Real estate holding company	Practice leases building from physician-owned LLC; rental income qualifies for QBI if NOT an SSTB
Captive insurance company	For practices with 5+ physicians; premium payments are deductible; claim reserves build tax-deferred
Buy/sell agreements	Funded with life insurance; IRC 101 death benefit exclusion

Common mistakes by medical practice owners:

Mistake	Cost
No retirement plan (or only a SEP)	Missing $100,000-$200,000 in annual tax-deferred contributions
S-Corp salary too low (IRS audit risk)	Reclassification of distributions as wages + back payroll taxes + penalties
S-Corp salary too high (unnecessary payroll tax)	Paying $10,000-$20,000 more in payroll tax than necessary
No cost segregation on owned medical office	Missing $50,000-$150,000 in first-year accelerated depreciation
Failing to claim the R&D credit	Missing $10,000-$30,000 in annual credits for clinical innovation
Ignoring the real estate holding company strategy	Missing the QBI deduction on rental income (practice income is SSTB, but rental income may not be)

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Tax Planning for Medical and Dental Practice Owners: Entity Structure, Retirement Plans, and Physician-Specific Strategies." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-tax-planning-medical-dental-practice-owners

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.