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Tax Planning for Physicians in Los Angeles: S-Corps, Retirement Plans, and the 199A Question
For most physicians practicing in Los Angeles, the §199A deduction phases out before it can help — that's the short version of the 199A question. The more useful conversation is about where the actual tax savings live: retirement plan contributions that can shelter six figures annually, and for the right practice structure, an S-corp election that reduces payroll taxes on distributions.
Here's how those pieces fit together.
Does the §199A deduction apply to physicians?
Probably not, and it's worth understanding exactly why.
Under IRC §199A, business owners can potentially deduct up to 20% of qualified business income (QBI). But medicine is explicitly listed as a "specified service trade or business" (SSTB) — alongside law, financial services, and consulting. That classification matters because the §199A deduction for SSTBs phases out once taxable income exceeds a threshold (adjusted annually for inflation) and disappears entirely above the phase-out ceiling.
For most attending physicians in Los Angeles — with income commonly in the $300,000 to $700,000+ range — taxable income will exceed that ceiling completely. The result: zero §199A deduction, regardless of entity structure.
This surprises physicians who hear "pass-through deduction" and assume it applies to them. It generally doesn't at their income level. What it does change is where you direct the planning effort.
When does an S-corp make sense for a physician?
An S-corp election isn't about the 199A — it's about payroll taxes.
Self-employed physicians operating as sole proprietors or single-member LLCs pay self-employment tax on their full net profit: 15.3% up to the Social Security wage base, then 2.9% Medicare on every dollar above it, plus the 0.9% Additional Medicare Tax on earnings over $200,000 (single) or $250,000 (married filing jointly). On a $500,000 net profit, the Medicare component alone adds up fast.
With an S-corp, income splits into two buckets: a W-2 salary (subject to FICA) and distributions (not subject to FICA). The savings come from keeping a portion of income outside payroll tax reach. For a practical look at how that split is structured, see how to pay yourself from an S-corp.
The catch: the IRS requires physician-shareholders to pay themselves a reasonable salary, and for physicians, that bar is high. You can't pay yourself $90,000 W-2 and take $450,000 in distributions. Market compensation for your specialty, hours, and geographic area is the starting point — and the IRS scrutinizes service businesses more closely than most.
California adds another layer. Physicians who want to operate through a corporation in California must use a professional medical corporation (PMC) — not a standard LLC. The S-corp election is made at the federal level, but California levies a 1.5% franchise tax on the S-corp's California net income, with an $800 minimum. You run that cost against the payroll tax savings to determine whether the structure pencils out. SBZ Tax's S-corp and business tax services cover both the federal election and California-specific entity requirements.
For many physicians in the $400,000–$800,000 range, the payroll tax savings outweigh the compliance costs — but it's a calculation, not a given.
What retirement plans actually move the needle?
This is where physicians have the most leverage, and where planning effort has the highest return.
401(k) with profit sharing. A solo 401(k) or group 401(k) with a profit-sharing component allows both employee deferrals and employer contributions. The combined annual limit adjusts for inflation each year — check the current figure, but it has been in the $65,000–$70,000+ range in recent years. Meaningful, but for a physician earning $500,000+, it's a small percentage of income.
Cash balance plan. This is the real lever. A cash balance plan is a type of defined benefit pension plan that permits contributions well above 401(k) limits — sometimes $150,000 to $300,000 or more annually, depending on your age and compensation. Older physicians benefit particularly, because the actuarially determined contribution limit increases with age. Contributions are fully deductible at both the federal and California level.
Combined with a 401(k) profit-sharing plan, a high-income Los Angeles physician can potentially shelter $200,000–$350,000 of income per year in a well-structured arrangement. That's the real story — not the 199A question.
SEP-IRA. Simpler and lower-limit (25% of compensation up to an annual cap, no separate employee deferrals). Useful for solo practitioners who want minimal administration, but the 401(k)/defined-benefit combination generally produces better outcomes for high earners.
If you're running a practice with employees, plan design gets more complex — nondiscrimination rules affect how much you can contribute relative to staff. Tax planning services that account for this from the start prevent expensive mid-course corrections.
How do these strategies interact — and what gets missed?
The retirement plan is the primary lever. The S-corp is the secondary one. Running them independently often produces a suboptimal result.
Here's a concrete example: the W-2 salary you pay yourself from the S-corp determines your allowable 401(k) employee contribution. Set the salary too low to maximize payroll tax savings, and you limit retirement plan contributions. Set it optimally for the retirement plan, and the payroll tax savings shrink. There's a crossover point — finding it requires modeling your actual numbers.
One edge case worth knowing: if your taxable income sits near the §199A phase-in range — uncommon for most Los Angeles physicians, but possible in lower-income years or during the transition from residency to practice — retirement plan contributions that reduce taxable income can potentially restore a partial §199A deduction. That's a secondary consideration, but it illustrates why these questions belong in the same conversation, not in separate tax software fields.
Physicians with equity interests in ambulatory surgery centers or other ancillary businesses may also have passive income from entities where the SSTB classification doesn't apply and §199A is potentially available. That's a separate analysis for each entity.
SBZ Tax works with physicians and high-income professionals across Los Angeles on tax planning that accounts for both the federal and California picture. We also offer fractional CFO services for practices that want ongoing financial strategy beyond annual prep, and monthly bookkeeping to keep records clean enough to support these structures.
To start a conversation, call 818-748-2020 or email hello@sbztax.com. The office is open Monday through Friday 9 AM–8 PM and weekends 9 AM–7 PM, with remote consultations available nationwide.
Frequently asked questions
Can a physician in California form an S-corp?
Yes, but the required entity is a professional medical corporation (PMC) under California law — not a standard LLC. The S-corp election is then made at the federal level via Form 2553. Both California franchise tax obligations and federal requirements apply, and the 1.5% California S-corp income tax is part of the cost-benefit calculation.
Why does the §199A deduction phase out for physicians?
Medicine is explicitly classified as a "specified service trade or business" (SSTB) under IRC §199A(d)(1)(A). That means the deduction phases out above the annual income threshold and disappears completely above the phase-out ceiling. At income levels typical for most Los Angeles attending physicians, the deduction is usually zero regardless of entity structure.
What's the maximum I can contribute to a cash balance plan?
It depends on your age and annual compensation — an actuary determines the limit each year. As a general reference, physicians in their 50s and 60s can often contribute $200,000 to $300,000+ annually. The plan must be established formally and funded consistently; unlike a 401(k), a defined benefit plan isn't something you can fund opportunistically in good years and skip in lean ones.
How does the reasonable compensation requirement affect S-corp planning for physicians?
The IRS requires that S-corp owners who provide services pay themselves a reasonable salary — roughly, what you'd pay a hired physician to perform the same work. For most specialties, that's a significant number, and low-salary/high-distribution arrangements are a recognized audit trigger for physician S-corps. See S-corp reasonable salary rules for more on how the IRS approaches this.
Is this type of planning useful for physicians early in their career?
It depends on income level. Residents and fellows generally can't contribute much, and the setup costs may not be justified yet. The payoff accelerates once you're in a high-income attending position — that's typically when the combined retirement plan and S-corp strategy generates the most meaningful savings. Structuring correctly early is still worth doing; unwinding the wrong structure later has its own costs.
This article covers general federal and California tax concepts — it's not advice tailored to your specific situation. Tax rules change frequently, and outcomes depend on your income, entity structure, filing status, and individual circumstances. Work with a licensed tax professional before making any structural or planning decisions.