Business Entities vs. Tax Elections: What Locums Docs Need to Know
New locums docs often wonder about business entities and tax elections. Should you form an LLC? What about an S-corp?
Here's the first thing to understand: business entities and tax elections are two different decisions. Below, we cover the basics, assuming the typical locums situation — just you, no partners, no employees.
Business Entity
"Business entity" refers to the type of entity you have — not how you're taxed.
For a locums doc, this narrows down to two choices: stay a sole proprietor, or form a limited liability company (LLC). Below are some comments on each. As always, this is general information, not legal advice.
Sole Proprietor
If you don't create an entity, you're a sole proprietor by default. There's no legal entity separate from you — you sign contracts, provide services, and get paid in your own name.
This is the simplest way to operate. The catch: you retain all liability yourself.
Limited Liability Company (LLC)
If you choose, you can form a business entity: an LLC or a corporation. For locums docs, the LLC is the right choice — a corporation is overkill.
People form a business entity for liability protection, not tax purposes. It takes some setup work, but if you form and properly operate an entity, the entity (not you) bears liability, and you generally can't be sued personally for liability related to the business.
Here's the giant catch for locums docs: malpractice liability is always personal. No business entity can shield you from it, and malpractice is by far your main source of liability risk — you don't have an office where someone could slip on a banana peel.
Important: Confirm current state-by-state rules — some states restrict or prohibit physicians from practicing under an LLC or LLP structure. LLC laws vary by state. Consult an attorney familiar with the laws in your state before forming an entity.
Tax Election
"Tax election" refers to how you're taxed.
For a locums doc, this narrows down to two choices: stay taxed as a sole proprietor, or elect to be taxed as an S corporation.
Taxed As Sole Proprietor
If you don't make a tax election, you're taxed as a sole proprietor by default. This is simpler — no payroll to run for yourself, no separate business tax return. You file a Schedule C with your Form 1040, reporting gross revenue, deductible expenses, and net income.
Taxed as a sole proprietor, you have:
Higher self-employment tax (downside)
More income eligible for the 20% QBI deduction, if you meet the requirements (upside)
In some cases, a higher maximum contribution to your locums retirement account (upside)
Taxed As S Corporation
You can also elect to be taxed as an S corporation instead of a sole proprietor. (A C corp election is technically possible too, but rarely makes sense for a solo locums doc.)
As an S corp, your earnings split into salary and profit: you pay yourself a salary for the work you do, and the remainder is treated as profit from owning the business.
This is more complex — you'll need to run payroll for your own salary and file a separate business tax return. So why bother? The main reason is self-employment tax savings. As an S corp, you only pay self-employment tax on your salary, not on the profit portion.
Taxed as an S corp, you have:
Lower self-employment tax (upside)
Less income eligible for the 20% QBI deduction (downside)
In some cases, a lower maximum contribution to your locums retirement account (downside)
Beware: self-employment tax savings from an S corp election can be offset by higher income tax in some situations. You (with your advisors) need to run a cost-benefit analysis specific to your own numbers.
To learn more about locum tenens taxes, check out our complete guide.
Ready to put this into practice? If you're an ER physician or high-income professional looking for straightforward, evidence-based financial guidance, we'd love to connect. Schedule a free intro call with Yahara Wealth Management — no pressure, no sales pitch, just a conversation.
This content is for general educational purposes only and does not constitute legal, tax, or personalized financial advice. Business entity and tax election decisions depend on your individual circumstances — consult a qualified attorney, CPA, or financial advisor before making changes to your business structure or tax elections.