S-Corp for Locum Tenens: When the FICA Savings Are Worth It

Consider electing S-corp taxation once your net self-employment profit is reliably well above ~$80,000/year. At that level the FICA/SE-tax savings on distributions start to clearly exceed the added compliance cost (payroll service, Form 1120-S preparation, and quarterly Form 941 / annual Form 940 filings). The mechanism: the S-corp pays you a reasonable W-2 salary (subject to FICA), and the remaining profit passes through as distributions that bear no Social Security, no Medicare, and no self-employment tax. The election is layered on top of an LLC/PLLC/PC by filing Form 2553 with the IRS; it is fundamentally a CPA-modeled decision, not a do-it-yourself one.

The locum-specific nuance is critical. A full-time locum physician or CRNA netting, say, $350,000 is already far past the 2026 Social Security wage base of $184,500, so the 12.4% Social Security cap is hit whether you are a sole proprietor or an S-corp. The real S-corp savings for high earners is the 2.9% uncapped Medicare tax avoided on the distribution portion (plus the 0.9% Additional Medicare on amounts a salary keeps below the $200,000 single / $250,000 MFJ threshold) — NOT the 12.4% Social Security piece. State the lever honestly: it is roughly 2.9% (not 15.3%) of the distribution slice.

Landmine: a single-member LLC by itself is a disregarded entity with zero federal tax savings — its only benefit is liability separation, and even that does NOT shield your personal malpractice liability. The tax lever is the S-corp election on top of the LLC/PLLC/PC, never the LLC alone.

There is no statutory percentage. The '60/40 rule' and 'salary = two-thirds of profit' are myths with no basis in the Internal Revenue Code or the Regulations. Reasonable salary is a facts-and-circumstances determination — what a similar employer would pay to hire someone else to perform the same clinical services (market-replacement cost). The IRS states plainly in Fact Sheet FS-2008-25 that distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered, and that there are no specific guidelines for reasonable compensation in the Code or the Regulations.

IRS Fact Sheet FS-2008-25 lists the nine factors courts weigh: (1) training and experience; (2) duties and responsibilities; (3) time and effort devoted to the business; (4) dividend history; (5) payments to non-shareholder employees; (6) timing and manner of paying bonuses to key people; (7) what comparable businesses pay for similar services; (8) compensation agreements; and (9) the use of a formula to determine compensation.

Locum-specific application: because a locum clinician IS the entire revenue engine — virtually 100% of profit derives from the owner's personal professional services, with little capital or non-owner labor — the reasonable salary must be high (a large fraction of net profit). This is the opposite of a business with employees and capital, where a smaller owner salary can be justified. CPAs commonly benchmark to MGMA and locum-agency hourly/daily compensation surveys and BLS specialty wage data for the clinician's specialty and region.

Underpaying is the single biggest S-corp audit trigger. Zero or token salary with large distributions is the #1 pattern the IRS scrutinizes, and the courts have repeatedly recharacterized distributions as wages. In David E. Watson, P.C. v. United States (8th Cir. 2012), a CPA who paid himself $24,000 while taking ~$200,000 in distributions had his reasonable compensation reclassified to $91,044; the controlling test is whether payments were truly remuneration for services, and an intent to limit wages is not controlling. Reclassification brings back payroll taxes (both halves), interest, and accuracy-related penalties (typically 20%, up to 40%). This is a CPA-required determination.

Net profit below ~$80,000 generally is NOT worth the hassle — the compliance cost eats the savings. It becomes clearly worth it from the low-to-mid six figures upward. Typical annual S-corp overhead: Form 1120-S preparation ~$1,500-$2,500, a payroll service (e.g., Gusto or ADP) ~$500-$900/year to run W-2 payroll and file Form 941 (quarterly) and Form 940 (annual), plus state payroll registration. CPA-cited breakeven figures cluster at $60,000-$80,000 net profit depending on the compliance-cost assumption and the savings rate.

Worked example (locum hospitalist, single, 2026 — illustrative; CPA-modeled). Net business profit before owner comp: $300,000.

As a sole proprietor / disregarded SMLLC: SE base = $300,000 x 92.35% = $277,050. SE/Medicare taxes ~ 12.4% x $184,500 (capped) + 2.9% x $277,050 + 0.9% Additional Medicare on the amount over $200,000 ~ $22,878 + $8,034 + ~$693 ~ $31,600 (half of the SE tax is deductible above the line).

As an S-corp: pay a reasonable salary of $170,000 (a defensible market-replacement wage, CPA-benchmarked to specialty/region) and distribute the remaining ~$130,000. FICA on a $170,000 salary ~ 15.3% x $170,000 ~ $26,010 (under the $184,500 cap, so the full 12.4% still applies), but the ~$130,000 distribution escapes the 2.9% Medicare entirely (~$3,770 saved on that slice) and avoids the 0.9% Additional Medicare. Gross FICA/Medicare difference versus the sole prop in this scenario: roughly $5,600/year ($31,600 - $26,010), against which you net ~$2,500-$3,400 of annual compliance cost — leaving a few thousand dollars of real savings.

The lever scales with income: the more profit that can prudently sit in distributions above a defensible salary, the larger the 2.9% Medicare savings. A clinician netting $500k+ who can defend a $200,000 salary saves materially more (2.9% on ~$300k of distributions ~ $8,700/yr). A CPA must run the actual numbers — salary level, state taxes, and retirement-plan interactions all swing the result.

Not all states follow the federal S-corp election, and several impose entity-level taxes that erode or eliminate the federal FICA savings. The federal election does not automatically carry over for state tax purposes, and locums who work in multiple states multiply this complexity. This is a CPA-required flag — verify each work state and the professional-entity rules there.

California recognizes the S-corp but imposes a 1.5% franchise tax on net income with an $800 minimum per year. New York requires a separate state S-election (Form CT-6), and New York City does not recognize S-corps at all (it taxes them as C-corps under the General Corporation Tax). Tennessee does not exempt S-corps and applies a franchise tax (0.25%, $100 minimum) plus a 6.5% excise tax on net earnings. New Hampshire does not recognize the federal S-election and taxes S-corps like C-corps (7.5% Business Profits Tax plus 0.55% Business Enterprise Tax), which can wipe out the federal savings. Texas does not honor the S-election for its franchise ('margin') tax — the tax is imposed at the entity level regardless of federal pass-through status. As an example of how fast this changes, Louisiana repealed its corporate franchise tax for S-corps and began passing S-corp income through to shareholders effective January 1, 2026.

Entity-form landmine: many states require physicians to use a professional corporation (PC) or PLLC rather than a plain LLC, and a few restrict S-elections for PCs. NY, PA, and CA (medical/professional corporation), among others, require a professional entity. PC/PLLC requirements and S-corp recognition both vary by state — state medical-board and state-attorney verification is required.

Two counterweights make a too-low salary expensive, and one common QBI assumption is simply wrong for most full-time locums.

Retirement contributions are based on W-2 wages, not distributions. The IRS treats distributions / shareholder draws as NOT earned income for retirement-plan purposes, so pushing salary down to cut FICA also shrinks the base for your solo 401(k) employer profit-sharing (25% of W-2 wages) and SEP-IRA (25% of W-2 wages). In 2026 a solo 401(k) allows a $24,500 employee deferral plus a 25%-of-W-2-wages employer contribution, with the total annual addition capped at $72,000 under Sec. 415(c); to reach the $72,000 cap on the 25% employer contribution alone you would need $288,000 in W-2 wages ($288,000 x 25%). SECURE 2.0 landmine: if your prior-year FICA (W-2) wages exceeded $150,000 (2026) — true for most locums — your catch-up contributions ($8,000 at ages 50+, or the $11,250 super catch-up at ages 60-63) must be Roth. So a salary set purely to minimize FICA can cost more in lost tax-deferred retirement space than it saves; the CPA must optimize salary against both FICA savings AND retirement-contribution capacity.

QBI is $0 for most full-time locums — lead with that. Physicians, CRNAs, and AAs are a Specified Service Trade or Business (SSTB). For 2026 the SSTB QBI/Sec. 199A deduction fully phases out above $276,750 single / $553,500 MFJ (Rev. Proc. 2025-32; OBBBA widened the phase-in range to $75,000 single / $150,000 MFJ above the $201,750 / $403,500 threshold), so most full-time locums get a $0 QBI deduction regardless of sole prop vs. S-corp. Do NOT present QBI as an S-corp benefit for high earners. For lower-income locums below the phase-out, the S-corp salary/distribution split interacts with QBI through the W-2 wage limitation in complex ways — CPA territory. (Never use the stale pre-OBBBA $276,750 / $553,500 figures.)

For a calendar-year entity that wants the S-corp election effective for the current year, Form 2553 is generally due no more than 2 months and 15 days after the beginning of the tax year — roughly March 15 — or at any time during the preceding tax year. A newly formed entity has 2 months and 15 days from the date it begins its first tax year to elect. Critically, there is NO Form 7004 extension for Form 2553, so this deadline is effectively hard.

If you miss it, the IRS provides late-election relief under Rev. Proc. 2013-30: you can file within 3 years and 75 days of the intended effective date with a reasonable-cause explanation and shareholder statements confirming consistent S-corp treatment. But relief is not automatic, and the cleanest path is simply to file on time. Because the election interacts with payroll setup, state registration, and your reasonable-salary plan, coordinate the timing with your CPA before you elect.