Physicians, dentists, chiropractors, therapists, optometrists, and other healthcare providers spend years mastering clinical skills. Financial management is rarely part of the curriculum. But the accounting and tax obligations of a medical practice are substantial, and the cost of getting them wrong is high. This guide covers the key areas every medical provider needs to understand.
Choosing the Right Business Structure
Most medical providers practice through a professional corporation (PC) or professional limited liability company (PLLC), which are required by most state licensing boards for licensed professionals. Within that structure, the question of how the entity is taxed is equally important.
Many physician practices elect S corporation status, which allows the owner to take a reasonable salary (subject to payroll taxes) and distribute remaining profits without self-employment tax. For a physician or dentist generating $300,000 or more in net income, the S corporation election can save $10,000 to $25,000 or more per year in payroll taxes. The exact benefit depends on your income level and the reasonable salary requirement.
Group practices, hospital employment models, and partnership arrangements introduce additional complexity. If you are joining a group practice or buying into an existing one, the accounting and tax review should happen before you sign anything.
Managing Accounts Receivable in a Medical Practice
Medical practices that bill insurance companies operate with accounts receivable that is fundamentally different from most other businesses. You bill a claim, negotiate a contracted rate, wait for payment, deal with denials and appeals, and collect patient responsibility separately. The gap between billed charges and collected revenue can be significant.
For accounting purposes, most small practices use cash basis accounting, recording revenue when payment is actually received. Larger practices may use accrual accounting, which requires estimating contractual adjustments and bad debt allowances. Either way, your accounting system must clearly track what was billed, what was adjusted, and what was actually collected by payer.
Deductible Expenses for Medical Practices
Medical practices have a wide range of deductible operating expenses. Common deductions include staff salaries and payroll taxes, medical malpractice and liability insurance premiums, continuing medical education and professional licensing fees, medical supplies and equipment, electronic health record (EHR) and practice management software subscriptions, office rent and utilities, marketing and patient acquisition costs, billing and collections services, and professional fees including CPA, attorney, and consulting fees.
Medical equipment and technology purchases can often be expensed immediately using Section 179 or bonus depreciation rather than depreciated over several years, which can significantly reduce taxable income in a year when you invest in your practice.
Retirement Planning: A Major Tax Tool for Physicians
High-income medical providers have access to some of the most powerful retirement savings vehicles in the tax code. A Solo 401(k) for a solo practitioner, a defined benefit pension plan, or a profit-sharing plan for a group practice can shelter very large amounts of income from taxation while building long-term security.
Defined benefit plans are particularly powerful for physicians who start later in their career and need to catch up on retirement savings. In some cases, a defined benefit plan can shelter $100,000 to $200,000 or more per year in contributions, generating an immediate tax deduction of the same amount. These plans require actuarial calculations and careful administration, but for the right candidate the tax savings are extraordinary.
Payroll Compliance for Medical Practices
Medical practices that employ staff have full payroll compliance obligations including federal and state withholding, Social Security and Medicare taxes, federal and state unemployment taxes, and periodic payroll tax deposits. Late or incorrect deposits result in penalties. Many practices outsource payroll to a payroll service provider, which reduces risk but does not eliminate the owner’s responsibility for ensuring compliance.
Physicians who employ family members, including a spouse, should work with a CPA to structure those arrangements correctly. When done properly, employing a spouse can generate additional retirement plan contributions and other tax benefits. When done incorrectly, it creates IRS scrutiny.
Healthcare-Specific Tax Issues
Medical providers face some tax issues unique to their industry. Physicians who receive speaking fees, consulting income, or royalties from drug or device companies must report this as self-employment income and pay the appropriate taxes. Practices that sell products, including vision products, skincare, supplements, or durable medical equipment, may have sales tax obligations. Group practices must carefully document and value any buy-in arrangements to avoid gift tax or below-market loan issues.
How Peters Bandura LLC Can Help
Our firm provides accounting and tax services to medical and healthcare providers including individual practitioners and small group practices. We help providers structure their entities for maximum tax efficiency, set up accounting systems that handle insurance billing complexity, design retirement plans that minimize current-year taxes, ensure payroll compliance, and provide year-round planning so high-income providers are not caught off guard by large tax bills.
Medical and healthcare practices have complex accounting and tax needs. Peters Bandura LLC has the experience to help.