Modern medical and dental careers are rarely a single W-2 job for life. Many physicians and dentists earn income from several sources at once: an employed position, locum tenens assignments, moonlighting shifts, telehealth work, consulting, expert witness fees, or a side practice. Each of those income streams can be structured in different ways, and the structure has real consequences for how much tax you pay and what retirement and deduction opportunities you can access.
The question of how to handle this income, as a W-2 employee, as a 1099 independent contractor, or through an S corporation, comes up constantly. There is no single right answer. The best structure depends on how much non-employee income you have, how stable it is, and what you are trying to accomplish. Here is how to think it through.
The Three Structures, in Brief
W-2 employment is the simplest. Your employer withholds taxes, pays half of your Social Security and Medicare taxes, and may offer benefits and a retirement plan. You have little administrative burden and few deduction opportunities, because the law permanently disallows most unreimbursed employee business expenses.
1099 independent contractor income is what you typically receive from locum work or moonlighting where you are not an employee. You are now effectively running a small business. You owe self-employment tax, which covers both halves of Social Security and Medicare, but you can also deduct legitimate business expenses and, importantly, open retirement plans that an employee cannot.
S corporation is an election you can make for a business entity. You become an employee of your own corporation, which pays you a reasonable salary subject to payroll taxes, and remaining profit can be distributed in a way that is not subject to self-employment tax. This is the primary appeal of the S corporation: potential payroll tax savings on the portion of income above a reasonable salary.
Why 1099 Income Opens Doors
The move from purely W-2 income to having 1099 income is significant, because self-employment income unlocks tools that employees simply cannot use.
- Business deductions. Legitimate expenses tied to the contract work, such as licensing, malpractice coverage for that work, continuing education, professional dues, and equipment, become deductible against that income.
- Powerful retirement plans. A self-employed physician can open a SEP IRA or, often better, a solo 401(k). In 2026 these allow contributions well beyond what a typical employee deferral permits, with the solo 401(k) in particular allowing both an employee deferral and a generous employer contribution, up to the overall defined contribution limit. For a physician with substantial 1099 income, this is one of the most valuable benefits of contractor status.
For many physicians, simply having a properly structured solo 401(k) for their moonlighting income is worth more than any other single move.
When the S Corporation Makes Sense, and When It Does Not
The S corporation is where physicians most often get both over-sold and under-informed. The payroll tax savings are real, but they apply only to the income above a reasonable salary, and the savings have limits because the Medicare portion of payroll tax has no income ceiling.
Against the potential savings, an S corporation carries real costs: running payroll, additional tax filings, payroll service fees, and in some states meaningful entity-level taxes and fees. In California, for example, an S corporation faces a state-level tax and an annual minimum, which erode the federal savings.
As a general matter, the S corporation tends to make sense only once your self-employment income is high enough and stable enough that the payroll tax savings clearly exceed the added cost and complexity. Below that level, the simpler sole proprietor or single-member LLC approach, taxed as self-employment income, is often the better choice. The reasonable salary requirement is not optional either, and setting it too low to maximize savings invites scrutiny.
The QBI Wrinkle for Physicians and Dentists
There is one more consideration specific to medicine and dentistry. The qualified business income deduction, which lets many pass-through business owners deduct twenty percent of their business income, is now a permanent part of the tax code. But it phases out for what the law calls a specified service trade or business, a category that explicitly includes the field of health.
In practice, this means that once a physician’s or dentist’s taxable income rises above certain thresholds, in the mid-hundreds of thousands of dollars and indexed each year, the QBI deduction on their professional income disappears entirely. For most established practitioners, that means the QBI deduction is not available on clinical income, which removes one factor that might otherwise favor a particular structure. It is a detail worth understanding rather than assuming.
Matching the Structure to the Situation
A few general patterns tend to hold.
- Occasional moonlighting on top of a W-2 job, paid on a 1099, usually argues for at least a solo 401(k) to capture the retirement benefit, with simple sole-proprietor treatment.
- Substantial, ongoing 1099 income may justify an S corporation once the numbers clearly support it.
- The right answer can change as your mix of income evolves, so it is worth revisiting rather than setting once and forgetting.
The interaction of self-employment tax, retirement contributions, state entity costs, and the QBI rules is genuinely complex, and the optimal structure is best confirmed with a tax professional who can run your specific numbers.
A Long-Term Perspective
Physicians and dentists increasingly earn income in varied and flexible ways, and how that income is structured is not a trivial administrative detail. Handled well, it lowers the tax bill, opens powerful retirement savings, and turns scattered income streams into a coherent part of a financial plan. Handled by default, it often means paying more tax than necessary and missing retirement opportunities that contractor income makes available.
The goal is to structure each stream of income so that it is taxed efficiently and put to work toward your long-term wealth, rather than leaving value on the table out of habit or inertia.
At Carrara, we help physicians and dentists organize multiple income streams efficiently, coordinating entity structure, retirement plans, and tax strategy with their tax professionals so the whole picture works together.
This article is provided for educational purposes only and does not constitute tax, legal, or investment advice. The right structure depends on individual facts and on rules that change over time. Please consult qualified tax and legal professionals regarding your specific situation.