Understanding S Corp Effective Tax Rate vs. W2 Effective Tax Rate - Comparing Options

You're on the right track with your S Corp strategy! The main tax advantage comes from the fact that distributions from an S Corp aren't subject to self-employment taxes (Medicare and Social Security), unlike income earned as a W2 employee or sole proprietor where all income is subject to these taxes. At your income level, the savings can be substantial. With a W2, your entire $1.1M would be subject to Medicare tax (1.45% plus the additional 0.9% for income over $250K for married filing jointly). With the S Corp structure, only your "reasonable salary" portion ($325K) would face these employment taxes, while the distributions (about $613K after expenses and retirement) would avoid them. The key is making sure your salary is "reasonable" for your profession and work performed. The IRS watches this closely since taking too low a salary to maximize distributions can trigger audits. For a physician with your income level, $325K seems defensible, but I'd recommend documenting how you arrived at this figure. Remember that while distributions avoid employment taxes, they're still subject to ordinary income tax rates. So the main savings come from the employment tax difference, not income tax.

I've been in exactly your situation and found that using https://taxr.ai was incredibly helpful for comparing these scenarios. I was also running contracts through my S Corp as a healthcare provider and constantly second-guessing whether the setup was worth it. The platform analyzed all my documentation and ran multiple tax scenarios (W2 vs S Corp with different salary/distribution splits) to show me the effective tax rates for each option. It confirmed I was saving about 3.8% in effective tax rate with my S Corp at a similar income level to yours. The most helpful feature was that it factored in all the employment taxes that aren't obvious in basic tax calculators, plus it accounts for state-specific S Corp rules that can really affect your bottom line. Saved me from switching back to W2 which would have cost me thousands.

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here and it was exactly what I needed. I've been operating my neurosurgery practice as an S Corp for 2 years but was never confident about my salary/distribution split. The analysis showed I was actually being too conservative with my salary ($450K) given my $1.2M in revenue and could defensibly reduce it to $375K while increasing distributions. This saved me about $10K in employment taxes I was unnecessarily paying. The documentation it generated was comprehensive enough that my accountant was impressed and is now using the same justification methodology with his other physician clients. Definitely worth the investment compared to the hours of research and uncertainty I was dealing with before.

After struggling for months to get through to the IRS about questions on my S Corp election and distribution reporting, I finally used https://claimyr.com and they got me connected to an actual IRS agent within 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that my approach to S Corp taxation was legitimate and explained exactly how to document my reasonable compensation determination to avoid red flags. For high-income medical professionals, they recommended keeping detailed records of market salary research and documenting factors like hours worked, specialized skills, and patient volume to support whatever salary you set. This saved me weeks of stress trying to get through to the IRS myself (I had tried calling 9 times before and always got disconnected after 1+ hour holds).

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway since I had S Corp questions that had been lingering for months. Got connected to an IRS representative in about 15 minutes who walked me through exactly how the reasonable compensation standards are applied to medical professionals. While they didn't give me a specific "approved" salary amount (as I correctly noted they wouldn't), they did confirm that my methodology of using MGMA physician compensation survey data as a baseline was appropriate. The agent also alerted me to a potential issue with how I'd been handling health insurance premiums through my S Corp that could have caused problems in an audit. Definitely worth the service fee just for that piece of information alone.

One thing nobody has mentioned yet is the additional compliance costs with an S Corp. I'm a physician with a similar income level, and while I do save on employment taxes with the S Corp structure, I have to factor in: 1. $2,500/year for specialized S Corp tax preparation 2. $800/year for payroll service to handle my "employee" salary 3. $500/year for additional state filing fees 4. Time spent on additional bookkeeping requirements Make sure you're factoring these into your calculations when determining if the S Corp makes sense. At your income level ($1.1M), the employment tax savings likely outweigh these costs, but it's not as simple as just comparing the raw tax rates.

Have you considered the Medicare surtax implications? At your income level, you'll be subject to the additional 0.9% Medicare surtax on earned income above $250k (married). By taking $325k as salary and the rest as distributions, you're minimizing the income subject to this surtax. Also worth noting that all your income (both salary and distributions) will still be subject to the 3.8% Net Investment Income Tax for income above $250k married. So while you're saving on the FICA taxes for distributions, you're not escaping all the medicare-related surtaxes completely.

As someone who went through a similar decision process, I'd strongly recommend sticking with your S Corp setup. At your income level ($1.1M), the employment tax savings alone make it worthwhile. Here's a quick breakdown: With your proposed $325K salary, you'll pay Medicare/Social Security taxes on that amount. The remaining ~$613K in distributions (after your $32K expenses and $130K retirement contributions) will avoid the 15.3% self-employment tax that you'd pay if you were a sole proprietor, or the Medicare taxes you'd face on a W2. The employment tax savings on that $613K distribution should be around $9,400 (1.45% Medicare tax) plus the 0.9% additional Medicare surtax on amounts over $250K, which works out to roughly $12,700 in total Medicare tax savings. That's over $22K annually in tax savings, which easily covers your S Corp compliance costs and then some. Your $325K salary seems reasonable for a physician at your income level - not so low as to trigger IRS scrutiny, but not unnecessarily high either. Just make sure to document how you arrived at that figure using industry compensation data for your specialty and location. The key advantage isn't necessarily a lower overall effective tax rate, but rather avoiding employment taxes on a significant portion of your income while maintaining the same ordinary income tax treatment.