Running a Direct Primary Care (DPC) practice means wearing a lot of hats. You’re the physician, the office manager, the HR department, the bookkeeper, the marketer, and sometimes even the janitor. Because you’re doing so many different jobs, your tax strategy shouldn’t look anything like a traditional employed doctor’s.
Two factors have a massive impact on how much you pay in taxes each year:
1. Your entity structure
2. How you set your reasonable salary
When these two things are optimized, DPC owners regularly save $10,000–$30,000+ per year, without seeing more patients or working more hours.
This guide breaks everything down in simple, practical language so you can understand what matters most and what steps to take next.
Why Your Entity Structure Matters (More Than You Think)
When most DPC owners launch, they choose the simplest possible structure, usually a basic LLC that defaults to Schedule C taxation. That’s perfectly fine in the beginning.
But as your practice grows, your entity determines:
- How much self-employment tax you pay
- Whether you’re overpaying the IRS
- Whether you can take advantage of tax-efficient distributions
- How easily you can add partners
- How your retirement strategy works
The good news? You don’t need to choose the “perfect” structure when you’re just getting started. You just need to understand when it’s time to level up.
The 3 Most Common Tax Setups for DPC Clinics
Here’s a simplified breakdown of the entity types you’ll actually encounter as a DPC owner.
1. Schedule C (Sole Proprietor or Single-Member LLC) – This is where most DPC owners begin.
If it’s just you, and you form an LLC or PLLC with yourself as the owner, the IRS treats you as a Schedule C business.
Pros:
- Easy
- Cheap
- No separate business tax return
- Perfectly fine for year one
Cons:
- ALL of your profit is hit with 15.3% self-employment tax
- No separation between your business income and your personal income
- Becomes expensive once you’re profitable
Rule of thumb: When your practice starts netting $80K+ in profit, you should definitely look at switching.
2. Partnership (Two or More Owners in the LLC) – If your spouse, friend, or another clinician is listed as an owner on the LLC, you’re a partnership by default.
That means:
- You must file Form 1065
- Each partner gets a K-1
- Their share of profit is usually subject to self-employment tax
Common mistake: Two spouses open a DPC together → file only one Schedule C → IRS letter shows up later with penalties for failure to file a partnership return.
If there are two owners, the IRS expects a partnership return.
3. S-Corporation (Where the Tax Savings Usually Are) – An S-corp is not a separate type of business. It’s simply a tax election (Form 2553) that changes how your existing LLC or corporation is taxed.
Here’s why DPC owners love S-corps:
**Only your W-2 salary is subject to self-employment tax. Your distributions are NOT.**
Example: If your clinic nets $250,000, and your reasonable salary is $80,000:
- Self-employment tax applies only to the $80,000
- The remaining $170,000 flows to you without self-employment tax
This is how DPC practices save five figures per year legally, cleanly, and consistently.
The Biggest Tax Burden for DPC Owners: Self-Employment Tax
Self-employment tax is:
- Social Security + Medicare
- 15.3%
- Paid by self-employed people instead of employers
If you’re Schedule C → SE tax hits ALL your profit. If you’re S-Corp → SE tax only applies to your salary. That one difference is why entity structure matters so much.
Reasonable Compensation: The Secret to S-Corp Success
Once you’re an S-corp, the IRS requires you to pay yourself a “reasonable salary.” This salary must reflect the work you actually do in your business.
Many CPAs use an outdated shortcut: The “60/40 Rule”
60% salary / 40% distributions This isn’t actually an IRS rule, it’s just a lazy industry habit. For DPC owners, it often results in paying way too much salary and too much tax.
Retirement Planning: How Salary Impacts Your 401(k)
Lower salary = lower self-employment tax. But salary also affects your:
- Employee 401(k) contribution
- Employer match
- Profit-sharing
- Cash balance plan eligibility
There are trade-offs:
- If your goal is to save on taxes now → lower salary helps.
- If your goal is to max out retirement → higher salary may help.
Most DPC owners choose a middle path where the salary is low enough to save tax but high enough to fund retirement. This is why annual planning is crucial.
How to Optimize Your Entity & Salary (Simple Steps)
Step 1: Evaluate your practice
- What’s your net profit?
- Is it stable?
- Are you paying yourself consistently?
Step 2: Choose the right structure
- Schedule C for early startup
- S-Corp for profitable, growing practices
- Partnership for multi-owner clinics
Step 3: Set a documented, defensible salary – Use a real compensation study, not a guess.
Step 4: Review annually – Your practice will change. Your strategy should too.
FAQ: Tax Strategy for DPC Owners
Q1: Do I need an S-Corp from day one?
No. Most DPC owners start as Schedule C and switch once profitable.
Q2: What profit level makes an S-Corp worth it?
Around $80K+ in net profit is usually the turning point.
Q3: Is the 60/40 rule required?
No. It’s not an IRS rule. A role-based comp analysis is more accurate and often more tax-efficient.
Q4: My clinic isn’t profitable yet. Should I be paying myself a salary?
No. Reasonable compensation applies when you take distributions and have the cash flow.
Q5: My spouse and I both own the clinic. Does that change anything?
Yes. You may be a partnership by default and need a separate tax return.
Q6: Can outsourcing to an MSO reduce my salary?
It changes your role mix, but you still need a formal compensation analysis.
Q7: When should I hire a CPA?
Once you’re close to break-even or planning for S-corp status.
Final Takeaway: You Don’t Need to Be a Tax Expert, You Just Need a Strategy
Entity structure and reasonable compensation aren’t about tax tricks, they’re about creating a sustainable, financially healthy DPC practice.
When your structure is aligned with your growth and your salary reflects the work you actually do, you:
- Reduce unnecessary taxes
- Increase your take-home pay
- Build long-term wealth
- Free up mental energy for your patients
Most DPC owners don’t need more complexity, they need clarity, consistency, and a strategy built specifically for the direct care model.
If you ever want help evaluating your own setup, I can help you create a clean, easy-to-understand version of this strategy for Goodman CPA at any time.
Let’s make 2026 your strongest year yet. Book a Year-End Tax Strategy Session with us.