Lands on Form 1120-S and a W-2 — the year Schedule C stops being your return
If your contract income is under the Social Security wage base, this article is not for you. Below $184,500 the arithmetic here is a different arithmetic, because the 12.4% you would be avoiding is still running. Most of the case for an S corporation is made in that range, and it is not the range locum physicians are in.
The pitch is always the same figure: 15.3%. Pay yourself a salary, take the rest as a distribution, save 15.3% on the distribution.
At $400,000 of contract income that figure is not close to right, and the real one is small enough to work out on a single sheet before anyone charges you for the structure.
The short answer
| The rate actually saved | 3.8%, not 15.3% |
|---|---|
| Saved on | The gap between net earnings and your salary |
| Why not 12.4% too | Social Security stopped at $184,500 for 2026 |
| The 3.8% | 2.9% Medicare + 0.9% Additional Medicare |
| Break-even | Annual cost ÷ 0.038 = the gap you need |
| What it can cost you | Qualified business income, below the threshold |
| What it can also cost | Retirement plan headroom, at any income |
| What it cannot survive | A salary the IRS calls unreasonable |
Where the 15.3% goes
Self-employment tax is not one rate. It is 12.4% for Social Security and 2.9% for Medicare, and only the second one runs the whole way up.
"The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total."
And the ceiling on the first:
"For earnings in 2026, this base limit is $184,500."
Above that, wages and distributions are identical for Social Security: both are over the cap, both pay nothing more. The 12.4% is not being saved by the S corporation. It had already stopped.
What is left is Medicare's 2.9%, which has no ceiling, plus the Additional Medicare Tax of 0.9% on wages and self-employment income above $200,000 — $250,000 for married filing jointly, $125,000 for married filing separately.
2.9% + 0.9% = 3.8%. That is the whole prize.
The arithmetic, on $400,000
A contract physician, single, $400,000 of net profit and no other wages.
As a sole proprietor:
| Net profit | $400,000 |
|---|---|
| × 92.35% → net earnings from self-employment | $369,400 |
| Social Security, 12.4% capped at $184,500 | $22,878.00 |
| Medicare, 2.9% of $369,400 | $10,712.60 |
| Additional Medicare, 0.9% above $200,000 | $1,524.60 |
| Total | $35,115.20 |
As an S corporation, salary set at $250,000:
| Social Security, 12.4% capped at $184,500 | $22,878.00 |
|---|---|
| Medicare, 2.9% of $250,000 salary | $7,250.00 |
| Additional Medicare, 0.9% above $200,000 | $450.00 |
| Distribution of $119,400 — employment tax | $0 |
| Total | $30,578.00 |
Saved: $4,537.20.
Which is exactly 3.8% of $119,400 — the gap between net earnings of $369,400 and a salary of $250,000. The formula reproduces the table:
Saving = 0.038 × (net earnings from self-employment − salary)
Nothing else in the two columns moved. The Social Security line is identical in both, because it was already at the cap in both.
The break-even
An S corporation is not free. It needs payroll run and filed through the year, a second tax return on Form 1120-S, state formation and annual filings, and in some states an entity-level tax or minimum fee. Those costs vary too much by state and provider to print a number here — but you know yours, or can get a quote in an afternoon.
Then:
Break-even gap = annual cost ÷ 0.038
| If it costs you | You need a gap of about |
|---|---|
| $2,000 a year | $52,600 |
| $3,000 a year | $79,000 |
| $4,000 a year | $105,300 |
| $5,000 a year | $131,600 |
And the gap is constrained at the top by what counts as a reasonable salary — so the achievable gap, not the arithmetic one, is what goes into that division.
Reasonable compensation is the whole ceiling
The gap is only as large as the salary is small, and the salary has a floor that is not yours to choose freely.
"S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee."
The IRS names the factors: training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, the timing and manner of paying bonuses, what comparable businesses pay for similar services, compensation agreements, and the use of a formula.
Read that list against a solo locum practice honestly. The corporation's gross receipts are generated by one physician's personal services. There is no capital, no equipment, no staff producing revenue. That is the fact pattern where a low salary is hardest to defend, and the consequence is written into the Form 1120-S instructions:
"Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
A saving that is recomputed against the salary you should have paid was never a saving.
The two things it costs you
Qualified business income. Wages you pay yourself are an expense of the corporation, so they come out of the income the 20% deduction is computed on. Below the threshold, where the deduction is unrestricted, an S corporation reduces it. The cost is real and it lands exactly where the employment-tax saving is smallest.
For a physician that cost fades as income rises, for an unwelcome reason: health is a specified service trade or business, and above the top of the phase-in range — $276,750 for most returns, $553,500 for married filing jointly in 2026 — the deduction has already gone to zero. There is nothing left for the salary to reduce.
Retirement headroom. This is the one that catches physicians, because it works against the same lever. In an S corporation the employer contribution is measured against your W-2 wages. On Schedule C it is measured against net earnings from self-employment. Set the salary low enough to make the 3.8% worth having and you may have capped the contribution that saves you far more than 3.8%.
At locum income the deferral is usually the larger decision. Work out what salary the plan needs before you work out what salary the employment tax wants, because the two pull in opposite directions and only one of them is worth 3.8%.
What changes on the rest of your return
An S corporation election is not a wrapper around the same return. Schedule C stops being where your practice income is reported. The business files Form 1120-S and issues you a Schedule K-1 and a W-2. Payroll becomes a recurring obligation with its own deadlines, and it does not pause in a quiet quarter.
Estimated tax does not disappear either — it splits. The salary is withheld through payroll; the distribution is not.
None of that is a reason against it. It is the part of the decision that the 15.3% headline leaves out, and it is why the honest version of this article ends by handing you a formula rather than an answer:
0.038 × your gap, against your annual cost, with your retirement plan and your state in the room. Then take the sheet to a qualified tax professional and ask them to break it.
Common questions
How much does an S corporation actually save at locum income?
Why does the 15.3% figure not apply?
What is a reasonable salary?
What happens if I set the salary too low?
What is the break-even?
Does it affect my qualified business income deduction?
Does that matter for a physician above the threshold?
Does it change what I can put into a retirement plan?
Do I still pay quarterly estimated tax?
Is this a decision I can make from an article?
This article is for educational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional about your situation.