Side Practice Turned Big: Converting Your Solo Gig Into Tax Smart Status

The way most physicians run their side practice is a tax disaster waiting to happen.

If your “little” consulting gig, locums work, or telemedicine side practice is now throwing off serious money, treating it like a glorified hobby is costing you tens of thousands per year in unnecessary tax and risk. The fix is not complicated. But you must stop thinking like an employee and start running this like a real business.

Here is how to convert your solo gig into a tax‑smart, legally solid operation.

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Step 1: Admit You Are No Longer “Just Moonlighting”

Most physicians wake up late to this reality. The pattern is almost always the same:

• Year 1: Extra $20k doing telemed or expert witness work. You 1099 it, file a Schedule C, move on.
• Year 3: Now $120k–$200k on the side. Still on Schedule C, no entity, paying full FICA on every dollar, zero protection if you get sued.
• Year 5: CPA finally says, “We should really talk about an S‑Corp.” Translation: you have already lit a lot of money on fire.

You must draw a line in the sand. Once your side practice hits roughly $75k–$100k of net profit (after expenses) consistently, it is no longer a casual arrangement. It is a business, and it should be structured like one.

Ask yourself three blunt questions:

1. Did my side income exceed $75k–$100k last year or will it this year?
2. Do I expect this to continue or grow?
3. Would a lawsuit in this side gig ruin me personally?

If you answered “yes” to #1 and #2 and even hesitate on #3, then you are overdue for a real structure and a tax plan.

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Step 2: Stop Being a Raw Schedule C Target

Running a six‑figure side practice on Schedule C as a sole proprietor is the worst of both worlds:

• You pay:

  • Ordinary income tax on 100% of profit
  • Self‑employment tax (15.3% up to the Social Security wage base, 2.9% Medicare above that, plus 0.9% additional Medicare at higher income) on 100% of profit

• You get:

  • No liability shield
  • Extra audit risk (Schedule C with higher income is catnip for the IRS)
  • Fewer planning options

You are essentially walking around with a sign that says: “Please tax me more and sue me personally.”

The fix is straightforward: separate the hustle from you.

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Step 3: Pick the Right Entity – And Stop Overcomplicating It

For a physician side practice (consulting, locums, telemedicine, aesthetics, concierge, expert witness), 90% of the time you are choosing between three setups:

Structure	Tax Form	Best For
Sole Proprietor	Schedule C	Very small / temporary gigs
LLC (disregarded)	Schedule C	Liability shield only
LLC taxed as S-Corp	1120-S + K-1	Established, profitable gig

The minimum: Single‑member LLC (disregarded)

This is the entry point if you are just crossing into serious income:

• Legal shield between business and personal (not perfect, but much better than nothing).
• Keeps your tax reporting simple: still Schedule C on your 1040.
• Gives you a “container” to add an S‑Corp election later.

For many physicians in the $50k–$100k net range, starting here and then electing S‑Corp once you see stable income is smart.

The upgrade: LLC taxed as an S‑Corporation

This is where real tax leverage starts.

Mechanics in plain English:

• You form an LLC with your state.
• For federal tax, you file Form 2553 to have it taxed as an S‑Corp.
• The S‑Corp must pay you:
  • A reasonable salary (subject to payroll taxes)
  • The remaining profit as distributions (not subject to Social Security/Medicare taxes)

Those distributions are where the savings live.

Rough rule of thumb: S‑Corp starts becoming attractive when you have at least $100k–$150k of consistent annual profit after expenses. Below that, the admin cost often eats the savings.

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Step 4: Understand the S‑Corp Salary Game (Without Getting Cute)

This is where physicians either save a lot of money or get themselves audited.

The IRS rule is blunt: if you materially work in your S‑Corp, you must pay yourself a reasonable salary before taking distributions.

What is “reasonable”? Not a made‑up number. It is what you would pay someone else with your training, doing your job, in your market, for the hours you actually work.

Build a defendable salary number

Walk through this logically:

1. Define the role:
   “Board‑certified internist providing telemedicine consults ~10 hours/week.”

2. Find comparable data:

   • MGMA, AMGA, or other compensation surveys
   • Telemedicine company rate sheets (e.g., $120–$180 per consult)
   • Local job postings for similar part‑time roles

3. Translate hours + rate into salary:
   Example:

   • 10 hours/week × 48 weeks = 480 hours
   • If comparable comp is ~$180/hour → 480 × $180 = $86,400
     That is a reasonable salary number.

4. Document it: save the survey screenshots, job postings, and your worksheet as a PDF in your tax file. If the IRS asks, you show your work.

You do not pay yourself $20k and call it good while pulling $180k in distributions. That is how you become a case study in an IRS training manual.

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Step 5: Run the Numbers – Why This Actually Works

Let us do a concrete example. Assume your side practice is netting $200,000 after business expenses.

Scenario A: Schedule C (sole proprietor)

• $200,000 flows onto Schedule C
• Subject to:
  • Income tax on $200k
  • Self‑employment tax on $200k
    • Roughly 15.3% on first ~$160k (varies by year), then 2.9% Medicare + 0.9% additional on high income

Back‑of‑envelope SE tax: roughly $25k–$30k.

Scenario B: S‑Corp with reasonable salary

• You set salary at $110,000 (defendable using data)
• Remaining $90,000 is S‑Corp distribution

Payroll taxes apply to the $110k only. The $90k avoids Social Security and Medicare taxes. That alone can save you ballpark $10k–$15k annually, sometimes more.

Is this perfect math? No. But it is directionally accurate. Once your CPA runs your actual numbers, you will see quickly whether the S‑Corp margin justifies the increased accounting and payroll cost.

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Step 6: Mechanics – How to Actually Convert Your Side Gig

Concept without execution is just an expensive thought experiment. Here is the operational checklist.

1. Form the entity

• Choose a name: ideally “Your Name, MD, PLLC” or “Your City Medical Consulting LLC” depending on state rules for professional entities.
• Check state-specific requirements:
  • Some states require a professional corporation (PC) or PLLC for physicians.
  • Some states have restrictions on who can own a medical practice entity.

File formation documents with your state’s Secretary of State (or equivalent). Many physicians use an attorney or a reputable formation service rather than DIY. I recommend that for medical entities.

2. Get your EIN

• Go to IRS.gov and apply for an Employer Identification Number (EIN) for the new entity.
• This is free. If a site tries to charge, you are in the wrong place.

3. Elect S‑Corp status (if appropriate)

Your CPA should do this, but understand the basics:

• File IRS Form 2553 (S‑Corp election).
• There are strict deadlines (usually 2 months and 15 days after the beginning of the tax year you want it effective).
• If you miss it, there are late election relief options, but they are annoying.

4. Open separate business accounts

Non‑negotiable:

• Business checking account in the LLC/PLLC name
• Business savings (optional but helpful)
• Business credit card or charge card

All side practice income flows into this business account. All related expenses get paid out of it. Your personal account is now off‑limits for business activity.

5. Set up payroll

If you are an S‑Corp, you must run actual payroll. Not “I wrote myself a check and called it salary.”

Use a payroll service (Gusto, QuickBooks Payroll, ADP, whatever your CPA likes):

• Set your salary (annual or per pay period)
• Withhold federal, state tax, Social Security, Medicare
• Remit payroll taxes on schedule
• File quarterly payroll returns (Form 941, state equivalents)
• Issue W‑2 to yourself at year end

Then, quarterly or as cash allows, you take owner distributions on top of salary.

6. Move your 1099s and contracts to the entity

Do not forget this part. You want the checks flowing to the entity, not you personally.

• Clinical services: have the hospital, telemed platform, or locums agency issue 1099s to “Your PLLC” with the entity EIN.
• Consulting/law firms: update W‑9s to the entity.
• Contracts: adjust future agreements to list your entity as the contracting party, with you as member/owner or medical director.

This is what creates separation. If everything still flows to your Social Security number, you have not really converted.

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Step 7: Dial In Your Deductions Like a Real Business

Once you have a real structure, you need to start thinking like an owner. That means systematically capturing legitimate business expenses connected to your side practice.

Typical categories for physicians:

• Professional expenses

  • State medical license fees attributable to side practice
  • DEA fees (if used for that practice)
  • Board certification/maintenance fees (if tied to that clinical work)
  • Malpractice tail or supplemental coverage for the side gig

• Home office (if you qualify)

  • Dedicated room used regularly and exclusively for managing the side practice (chart review, billing, telemed visits)
  • Percentage of rent/mortgage interest, utilities, internet, etc.
  • Do not get greedy. But do not ignore it either if it is legitimate.

• Technology

  • Laptop or tablet used primarily for the business
  • EMR subscription for your private patients
  • Telemedicine software / HIPAA‑compliant systems
  • Secure messaging platforms

• Travel and CME specifically for this business

  • Conference directly tied to aesthetics/OB consulting/med‑legal work
  • Related airfare, hotel, and reasonable meals while traveling

• Support services

  • Billing service
  • Virtual assistant time
  • Legal and accounting fees for the business

The point is not to invent expenses. It is to stop donating legitimate deductions back to the IRS because you still think of this as “just moonlighting.”

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Step 8: Use the Retirement and Health Tools Properly

This is where a side practice can quietly supercharge your long‑term wealth if you are intentional.

Solo 401(k) through your entity

If you have 1099 or S‑Corp income from your side practice, you can typically set up a solo 401(k) as long as you have no non‑spouse W‑2 employees in that entity.

Benefits:

• Employer side contributions from the entity, often on top of any 401(k) at your W‑2 job.
• Potential to shelter tens of thousands of dollars annually from current taxation.

Your contribution space is constrained by overall IRS limits and coordination with your primary employer’s plan. This needs a CPA who has done this for physicians before. But the opportunity is big.

Health insurance and HSAs

If your side practice is your only source of self‑employed income and you buy your own health insurance, your entity structure affects how:

• Self‑employed health insurance deduction is handled
• Health Savings Account (HSA) eligibility is determined

If you are W‑2 at a hospital with benefits and the side gig is extra, this may be less central, but your CPA still needs the full picture to optimize.

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Step 9: Protect Yourself – Liability, Compliance, and Licensing

Do not fix your taxes and ignore your neck.

Key protections:

• Malpractice coverage

  • Confirm your current policy actually covers your side work. It often does not.
  • If you do telemed across state lines, make sure coverage matches that footprint.
  • If you do expert witness work, ask your carrier explicitly about coverage.

• Entity is not a magic force field

  • If you commit malpractice, plaintiffs will come after you personally regardless.
  • Entity + proper contracts + appropriate insurance is the triad. You need all three.

• Compliance basics

  • HIPAA compliance for any patient‑related work
  • Proper documentation practices, even in tiny side practices
  • State corporate practice of medicine rules (some states are very strict)

This is not just defensive lawyering. A compliant, well‑structured entity makes you more attractive to higher‑quality contracts and institutional clients.

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Step 10: Build a Simple, Repeatable System

If this feels like “one more full‑time job,” you are overcomplicating it. The goal is a light but disciplined system.

Here is a minimal, effective setup I see work well:

Monthly:

• Reconcile business checking and credit card.
• Categorize income and expenses in accounting software (QuickBooks, Xero, or even a well‑built spreadsheet if you are small).
• Move cash:
  • Salary via payroll if S‑Corp
  • Owner distribution if there is surplus
  • Transfer a fixed percentage of gross revenue to a tax savings sub‑account (e.g., 30%–40%).

Quarterly:

• Meet or at least email with your CPA. Short update:
  • Year‑to‑date profit
  • Any big contracts coming
  • Any changes in your W‑2 compensation
• Pay estimated taxes for the entity / yourself as directed.
• Adjust salary if you badly under‑ or overshot your hours.

Annually:

• Review entity structure with CPA and, every 2–3 years, with an attorney.
• Recalculate “reasonable salary” using fresh comp data.
• Reevaluate:
  • Solo 401(k) contribution strategy
  • Whether to add spouse as employee (sometimes helpful, sometimes not)
• Confirm malpractice and liability coverage still fit your actual practice pattern.

You are not building an empire. You are building a clean, tax‑smart machine that runs with maybe 2–3 hours of your attention per month.

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Example: Turning a Telemed Side Gig Into a Proper Business

Let me make this real.

Dr. Patel, hospitalist:

• W‑2 job: $280k
• Telemedicine side work: started at $25k/year, grew to $160k net after platform fees and minor expenses
• Still using Schedule C, paying full self‑employment tax on $160k, no entity, no solo 401(k)

What we actually did:

1. Formed “Patel Telemedicine PLLC” in her state.
2. Got EIN, opened business checking and credit card.
3. Filed S‑Corp election effective Jan 1.
4. Shifted all telemed contracts to pay the PLLC, not her personally.
5. Set salary at $105k based on comp data for part‑time telemed hospitalist work.
6. Ran payroll twice monthly through Gusto.
7. Took quarterly distributions of remaining profit (~$55k–$60k after taxes and expenses).
8. Established a solo 401(k) for the S‑Corp and contributed:
   • Employer contribution of roughly 20% of her S‑Corp salary (subject to plan and IRS limits).
9. Built a simple monthly routine to reconcile books and review numbers.

Result:

• Immediate several‑thousand‑dollar annual savings from reduced payroll tax on distributions.
• Additional tax deferral through solo 401(k) contributions on top of her hospital’s 401(k).
• Clean separation of side gig for legal and financial purposes.

This is not theoretical. Variations of this are exactly what smart physicians are doing once their “little side practice” grows up.

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When NOT to Bother With S‑Corp Status

Let me be clear: not everyone needs this.

Skip the S‑Corp and keep life simple if:

• Your side income is truly small or sporadic — under ~$60k–$75k net, with no expectation of growth.
• You already have very complex entity structures through a group practice, and your attorney/CPA wants specific integration.
• Your state has brutal rules or extra taxes on S‑Corps or professional corporations that kill the savings.

In those cases, you might:

• Still form an LLC for liability and organization.
• Keep filing Schedule C.
• Still run a tight expense, documentation, and retirement plan game.

Entity choice is a tool, not a religion. Use it where it actually moves the needle.

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Visual: When an S‑Corp Usually Starts Making Sense

Approximate Sweet Spot for Considering S-Corp Election

Category	Value
$0-50k	5
$50-100k	40
$100-150k	75
$150-250k	90
$250k+	95

(Values represent a rough “likelihood S‑Corp helps” score out of 100, not exact rules. The higher the income, the more likely S‑Corp is beneficial.)

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Process Flow: Converting Your Solo Gig

Side Practice Conversion Flow

Step	Description
Step 1	Side gig income growing
Step 2	Consider simple LLC
Step 3	Consult CPA and attorney
Step 4	Form LLC or PLLC
Step 5	Obtain EIN
Step 6	Elect S Corp if appropriate
Step 7	Open business bank accounts
Step 8	Set up payroll system
Step 9	Move contracts and 1099s to entity
Step 10	Implement bookkeeping and tax plan
Step 11	Net profit over 75k?

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Two Non‑Negotiables Before You Pull The Trigger

1. Get a physician‑experienced CPA.
   Not your cousin who mostly does restaurants. Someone who can say, “For hospitalists in your state, with your mix of W‑2 and 1099, here is the typical structure.” If they have never set up a solo 401(k) or explained “reasonable compensation” for S‑Corps, move on.

2. Get a lawyer who knows medical entities in your state.
   A cheap online LLC filing can create nasty problems if your state requires professional entities, has corporate practice of medicine rules, or needs specific ownership structures for physician practices.

You need both. Paying for good advice on the front end is cheaper than fixing a sloppy DIY job after the IRS or your state board takes an interest.

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FAQ

1. Can I retroactively elect S‑Corp status for my existing side practice to “fix” last year’s taxes?
Sometimes, but do not count on it. The IRS allows late S‑Corp elections in limited circumstances under specific relief provisions. You must demonstrate reasonable cause and consistent treatment as an S‑Corp from the intended effective date. That usually means you already ran payroll, kept separate books, and behaved as if you were an S‑Corp. If last year everything hit your personal account, no payroll, no minutes, no separate books, your odds are poor and the cleanup can be messy. Use a tax attorney or highly experienced CPA before you try any retroactive election games.

2. If I already have a W‑2 job with a 401(k), can my S‑Corp side practice still sponsor a solo 401(k)?
Yes, in many cases, but the details get technical fast. The annual elective deferral limit (the part you choose to defer from your pay) is shared across all 401(k) plans you participate in. However, employer contributions (profit sharing) depend on the sponsoring entity’s net income and are calculated separately. That means your S‑Corp can often make additional employer contributions on your behalf, even if you max out the employee portion at your W‑2 job. Controlled group rules, ownership relationships, and overall income limits all matter. This is exactly the kind of coordination work you want a physician‑savvy CPA to model for you before you set anything up.

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Key takeaways:

1. Once your side practice clears ~$75k–$100k of consistent profit, a real entity and tax structure stop being optional.
2. For many physicians, an LLC taxed as an S‑Corp with a defendable salary, clean payroll, and a solo 401(k) turns a messy side gig into a tax‑efficient business.
3. The combination of proper entity choice, disciplined bookkeeping, and targeted professional advice will save you more in taxes and risk than it costs, if you implement it like a serious owner instead of an overworked employee with a “little side thing.”