Dr. Side Hustle: When to Upgrade to an S-Corp?
When does it actually make tax-sense to make the switch?
These days, doctor’s don’t just wear white coats - some also wears hats with their side gig logos stitched on. :)
It’s no longer unusual to see a physician putting in 40 hours at a W-2 job while running a side hustle like consulting, survey or speaking gigs.
That’s been my story as well. And one of the questions I hear all the time is
“When should I upgrade my side hustle from a sole prop to an S-Corp?
In this article, I’ll focus on the tax side of that transition.
A Case Study: Meet Dr. Hustler
Dr. Hustler is a single California ER doctor, pulling in $500,000 from his W-2 job. On the side, he’s hustling with a consulting gig that nets him $60,000.
The burning question: should Dr. Hustler incorporate his side hustle into a S Corp?
The Tax Benefits:
#1. Medicare Tax Savings:
As a sole proprietor (Schedule C), every dollar of that $60,000 is hit with self-employment tax.
With an S-corp, only the salary portion is subject to payroll taxes. The leftover portion is self-employment tax-free.
Let’s say Dr. Hustler pays himself a $30,000 in salary and leaves $30,000 as an S-corp profit. That profit skips the 3.8% Medicare taxes (2.9% base Medicare + 0.9% additional Medicare tax), saving him about $1,140.
And what about Social Security savings? Sorry, no luck here. With $500k W-2 wages, Dr. Hustler has already maxed out his Social Security tax for the year. His sole prop income wasn’t subject to Social Security tax, so the S-corp provides no additional benefit in that department. In fact, as we’ll see, it actually makes things worse (see The Tax Cost #1)
#2: Pass-Through Entity Tax (PTET) Deduction
California let’s S-corp pay state income tax at the entity level, which then becomes a juicy federal deduction.
PTET rate: 9.3%
Applied to $30k S-corp profit = $2,790 federal deduction created. Not bad for filing some extra forms.
The Tax Costs:
#1: Extra Social Security Tax.
Here’s the major downside.
As a sole prop, no extra Social Security tax was charged on the $60,000, since Dr. Hustler’s W-2 already maxed him out.
But once the S-corp pays him a $30,000 salary, Social Security tax kicks back in on the salary (only on the employer side, 6.2%)! That’s an extra $1,860 out the door. Ouch!
#2: Potentially reduced Qualified Business Income (QBI) Deduction
At $500k W-2 income, Dr. Hustle is already too “wealthy” to qualify for the QBI deduction.
Translation: no benefit from the QBI deduction either way.
For doctors with lower W-2 wages, though, switching to an S-corp can actually shrink the QBI deduction since profit looks smaller after pulling out salary.
#3: Admin & paperwork costs (the “Co-pay”)
S-Corp tax returns: $1000+
Payroll service (even Quickbooks): $600+ per year
State fees (like California’s Franchise tax), incorporation costs, registered agent fee,.. easily another $1000 annually.
#4: State level Franchise Tax
California adds more pain:
1.5% tax on S-corp net profit (on $30k profit = $450)
$800 minimum franchise tax every year.
The Break-Even Point
The math, usually only starts working in your favor once your side gig is netting north of $80k-$100k, especially when you already have a high W-2 income like Dr. Hustler. Anything less than that, and you’re probably just donating money to the government with no real tax benefits.
The Diagnosis
Side hustle netting under six figures? Stick with sole prop - it’s lean, cheap, and mostly paperwork-free.
Side hustle over six figures? Now, the S-corp might finally be worth the “co-pay”
Either way, don’t self-diagnose. Let your tax pro run the labs (a.k.a., projections) before you commit to treatment.
Disclaimer: click here
Are there also additional Medicare taxes on the SCorp salary?