Why Most Physicians Start With an LLC – and Why That Might Be Costing You

When you step into the world of independent contracting as a physician—whether taking 1099 income from a hospital or running a side practice—the first legal question you face is usually: “What entity should I form?”

For many doctors, the answer is a Limited Liability Company (LLC). And on the surface, that makes sense: it's simple, flexible, and provides a layer of liability protection. But here's the kicker—while the LLC keeps things simple legally, the default tax treatment can quietly cost you tens of thousands of dollars every year.

The Default LLC: Legally Separate, Taxed Like You Never Left

A single-member LLC is a “disregarded entity” for federal tax purposes. That means while your LLC is legally separate under state law, the IRS treats all of its income as if it were yours personally.

Every dollar of your net earnings flows straight to Schedule C of your Form 1040. And here's the sting: those dollars are subject to the self-employment tax—a combined 15.3% for Social Security and Medicare.

For example, if you earn $300,000 as a 1099 physician, here's what happens under the default LLC structure:

• Social Security tax (12.4%) on the first $168,600: $20,906.40

• Medicare tax (2.9%) on all $300,000: $8,700

• Additional Medicare surtax (0.9%) on the $100,000 above $200,000: $900

• Total self-employment tax: $30,506.40

And that's before you even calculate federal income tax.

Simplicity Is the Upside

There's no doubt the default LLC keeps your life simple:

• No payroll system.

• No separate corporate return.

• Just one line of business income and expenses on your tax return.

For a physician just starting out or making relatively modest 1099 income, that simplicity may be worth it.

But Simplicity Comes at a Price

Once your 1099 income climbs past $150,000–$200,000, the cost of that simplicity really starts to sting. Every extra dollar is taxed not just by federal and state income tax, but also by Medicare.

You're effectively leaving money on the table compared to physicians who choose smarter tax planning.

The Bottom Line

The default LLC may be a decent starting point. But for higher-earning physicians, it's rarely the best long-term strategy.

The good news? There's a smarter way to structure your entity that lets you:

• Keep the liability protection of an LLC.

• Maintain a professional image with hospitals and banks.

• And most importantly, reduce the tax drag on your income.

That smarter option is the S-Corporation election—and we'll dive into it in Part 2 of this series.

👉 Next in the series: “How Doctors Save Thousands by Electing S-Corp Status.”