Locum tenens physicians and CRNAs often wonder which business structure best fits their contract work. Should you remain a sole proprietor, form an LLC, or elect S-corporation status? Each structure has tax, liability, and administrative implications. Choosing the right entity affects how you report income, separate business obligations from personal assets, and handle payroll and filings.
This guide compares sole proprietorship, LLC, and S-corp structures from a CPA’s perspective. We’ll explain the differences, pros and cons, and considerations specific to healthcare contractors so you can make an informed decision.
What Are the Structure Options for Locum Tenens Contractors?
There are three common structures for self-employed healthcare professionals:
- Sole Proprietorship: You operate under your name (or a DBA). Income and expenses are generally reported on Schedule C with your individual tax return.
- Limited Liability Company (LLC): You create a legal entity under state law. For federal tax purposes, a single-member LLC is typically treated as a “disregarded entity” by default (taxed similarly to a sole proprietorship), and it may later elect S-corp taxation if beneficial.
- S-Corporation (S-Corp): Not a “type” of business by itself, but a federal tax election. An LLC or corporation can elect S-corp status by filing IRS Form 2553 (if eligible).
Each option affects taxes and liability differently. Understanding each will help you pick the structure that matches your goals.
Sole Proprietorship (Default for 1099 Income)
If you do nothing formal, you are generally a sole proprietor by default.
Pros:
- Simple setup (often no entity filing required)
- Minimal paperwork (commonly Schedule C reporting)
- Full control of business decisions
Cons:
- No entity-level liability separation (personal assets may be exposed to business obligations)
- Net earnings are generally subject to income tax and self-employment tax
- Not designed for multiple owners
Most 1099 healthcare contractors start as sole proprietors. It’s straightforward, but it doesn’t provide an entity layer between you and many business liabilities.
Limited Liability Company (LLC)
Forming an LLC creates a separate legal entity under state law. By default, a single-member LLC is typically taxed like a sole proprietorship for federal income tax purposes (pass-through / disregarded entity).
Pros:
- Liability separation for many business risks (contracts, business debts, non-malpractice claims) depending on state law and how you operate the LLC
- Flexible tax options (you may later elect S-corp taxation if it becomes beneficial)
- May look more “business formal” to vendors or facilities
Cons:
- Formation and ongoing maintenance costs (state fees, annual reports, registered agent, etc.)
- More admin than sole prop (often EIN, separate bank account, better bookkeeping discipline)
- If taxed as a disregarded entity, self-employment tax generally still applies to net earnings
Important malpractice note: An LLC generally does not shield a clinician from their own professional malpractice liability. Malpractice exposure is typically addressed through malpractice insurance and state-specific legal rules, not by the LLC alone.
S-Corporation Election (via LLC or Corporation)
An S-corp isn’t a separate business type, it’s a tax classification. Typically, an LLC or corporation elects S-corp status by filing IRS Form 2553 (and meeting eligibility requirements).
Pros:
- Potential payroll tax savings: only the reasonable salary is subject to payroll taxes; remaining profit distributions are generally not subject to payroll taxes
- Still pass-through taxation (no federal “double tax” at the corporate level, assuming compliance)
- Clear framework for salary vs distributions
Cons:
- Must pay reasonable compensation to shareholder-employees before distributions
- More compliance: payroll setup, payroll tax filings, and additional accounting complexity
- Added costs: payroll processing + more advanced tax prep
Timing note (don’t oversimplify the deadline)
Many calendar-year businesses aim for a mid-March deadline to have an S-election effective for that year, but the general rule is based on the start of the entity’s tax year (commonly 2 months and 15 days after the beginning of the tax year, with exceptions/relief in some cases).
Comparing Tax Implications (High-Level)
Sole Prop / Default SMLLC taxation: Net earnings are generally subject to income tax and self-employment tax (15.3% rate made up of Social Security and Medicare components, with Social Security subject to an annual wage base).
S-Corp taxation: The shareholder-employee’s wages are subject to payroll taxes, while remaining profit distributions are generally not subject to payroll taxes. Income tax still applies to the total pass-through income.
Simplified example
If a locum physician has $120,000 of business profit:
- Sole prop/default SMLLC: self-employment tax generally applies to net earnings (subject to the Social Security wage base rules).
- S-corp: if the clinician pays themselves a reasonable salary of $60,000 (wages subject to payroll taxes) and takes $60,000 as distributions (generally not subject to payroll taxes), the payroll-tax savings comes from the distribution portion, offset by payroll/admin costs and the requirement that the salary be reasonable.
Which Structure Is Best for You?
There’s no one-size-fits-all answer. Consider:
- Earnings level: Higher profits can make S-corp taxation more compelling (after factoring payroll + admin costs).
- Liability separation needs: An LLC can help separate many business obligations from personal assets, but it typically does not protect you from your own malpractice exposure.
- Complexity tolerance: S-corps require payroll, tracking, and stronger bookkeeping discipline.
- State requirements: LLC fees, annual reports, and state taxes/franchise taxes can change the math significantly.
For many new locum tenens contractors, starting as a sole proprietor (or single-member LLC taxed as sole prop) can be reasonable. As income grows, reassess with updated numbers.
How to Decide with a CPA’s Help
Entity planning is best done with projections. A tax professional can model take-home pay under each structure, account for payroll/compliance costs, and help you file correctly and on time (including S-election timing). IRS rules around self-employment tax, S-corp wages, and election timing are technical, small mistakes can be expensive.
If you’re unsure, talking to our tax advisory services team can clarify your situation, schedule a consultation to assess your income, run “what-if” scenarios, and guide your business setup.
