Doctors: Is Your Physician Group Causing You to Pay Higher Taxes in 2025?

Classifying doctors as employees can significantly increase their tax burden

An increasing number of doctors are banding together to form medical “super groups,” and the benefits can be significant: economies of scale, greater leverage in negotiations with insurance companies and large hospitals, administrative support that leaves doctors free to focus on patient care, and a competitive advantage in the market.

According to recent reports, more than 70% of practicing physicians in the U.S. are now employees rather than practice owners. While this shift offers some advantages, it also carries a major downside: Many physician groups are unknowingly causing their doctors to pay higher taxes than necessary. Here’s why—and what doctors can do to minimize their tax burden while still benefiting from physician group structures.

The Pass-Through Deduction: A Significant Tax Break for Independent Contractors

Many large physician groups favor an employment model, where the group is structured as a corporation that employs individual doctors. Until recently, few physicians paused to consider the difference between becoming a 1099 independent contractor or a W2 employee of their physician group.

Independent contractors work for an entity without being an employee. In exchange for giving up employee benefits like health insurance, 401(k) matches, and job security, independent contractors can benefit from significant tax advantages, higher income potential, and greater flexibility in choosing their work arrangements.

The Tax Cuts and Jobs Act (TCJA) introduced a 20% pass-through deduction for qualified business income (QBI), benefiting small business owners, including independent contractors, who operate as pass-through entities (sole proprietorships, single-member LLCs, or S corporations). This deduction can result in significant tax savings, reducing taxable income substantially.

However, physicians are classified as “specified service trade or businesses” (SSTB), meaning the deduction is phased out at higher income levels. In 2025, the QBI deduction is still available but may change depending on tax law updates. The most recent income limits for full eligibility are $232,500 for single filers and $465,000 for joint filers (adjusted for inflation). Above these thresholds, the deduction phases out.

Physicians earning above this threshold should consult with tax professionals on potential strategies, such as real estate investment trusts (REITs), retirement plan contributions, and income splitting to legally lower taxable income and qualify for the deduction.

Expanded Deductions for Independent Contractors

Even for doctors whose incomes exceed the QBI threshold, independent contractor status provides substantial tax advantages. Independent contractors can deduct nearly all business-related expenses before taxes are assessed, including:

• Medical equipment and scrubs
• Continuing education and licensing fees
• Malpractice insurance
• Home office and telemedicine expenses
• Health insurance premiums (including family coverage)
• Mileage and travel for work-related purposes
• Retirement contributions (such as SEP-IRAs, Solo 401(k)s, and defined benefit plans)

These deductions reduce taxable income, self-employment taxes, and overall tax burden, often making up for the lack of employer-provided benefits.

The Self-Employment Tax Consideration

One key consideration for independent contractors is the Self-Employment Tax. Employees and employers each pay 7.65% in payroll taxes toward Social Security and Medicare. Independent contractors, however, are responsible for the full 15.3% self-employment tax. While this can seem like a disadvantage, independent contractors can deduct half of this tax, reducing taxable income.

Additionally, independent contractors have the flexibility to contribute more pre-tax income to retirement plans, potentially reducing overall taxable income more than a standard W2 employee’s contributions.

Corporate Structure Matters: Avoiding an Inefficient Tax Setup

Many physician groups were originally structured as C corporations to simplify administrative functions, but this can lead to an inefficient tax structure for doctors. In such cases, the group typically distributes 100% of its taxable income to avoid corporate tax, forcing high-income doctors to pay at the top individual tax rate (currently 37%) with few deductions.

Doctors who contract with the physician group through their own LLC or S corporation could save upwards of $150,000 per year on incomes ranging from $500,000 to $600,000, simply by taking advantage of deductions available to independent contractors.

Should You Switch? Factors to Consider Before Changing Your Employment Status

While tax savings are important, doctors must also weigh other factors before transitioning from employee to independent contractor:

• Tax Withholding Responsibilities: Employees have taxes withheld automatically, while independent contractors must pay estimated taxes quarterly.
• Benefits and Stability: Employers offer health insurance, paid time off, and retirement benefits. Contractors must secure these independently, which could mean higher out-of-pocket costs.
• IRS Scrutiny on Worker Classification: The IRS enforces strict guidelines on classifying workers as independent contractors. If a physician group dictates work schedules, patient loads, and procedures, it may not meet the independent contractor test. Compliance is crucial to avoid penalties.
• Negotiation Leverage: Contractors should negotiate higher compensation to offset the loss of employer-paid benefits.

A skilled certified public accountant (CPA) can help weigh these factors, ensuring tax benefits outweigh lost perks from employee status.

Overcoming Administrative Concerns in Physician Groups

Some physician group administrators may be reluctant to allow doctors to switch to independent contractor status, fearing it could weaken the group’s negotiating power. However, how doctors are paid does not impact a group’s bargaining ability or operational control—it simply changes their tax structure.

A more valid concern is IRS classification compliance. To mitigate risk, physician groups should consult tax professionals to determine the best structure that allows doctors to optimize tax savings while remaining compliant.

Final Thoughts: Proactive Tax Planning for Physicians in 2025

With potential tax law changes on the horizon, now is the time for doctors to reassess their employment status. Physician groups and individual doctors should consult with tax strategists who specialize in medical professionals to develop customized plans that minimize tax burdens while maintaining financial security.

By structuring contracts wisely, utilizing available deductions, and planning for tax-efficient compensation, doctors can significantly reduce their tax liability and maximize earnings in 2025 and beyond.

For expert tax planning and advice, contact physiciantaxsolutions.com

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. physiciantaxsolutions.com assumes no responsibility for actions taken based on the information provided in this post.