The Short AnswerHigh-income physicians pay top federal and state rates on every additional dollar, and practice owners are often limited in the 20% qualified business income deduction because medicine is a specified service business. The biggest lever for practice owners is usually a cash balance plan alongside the 401(k); for every physician, it is planning how retirement savings will be taxed when they come out.
Why Do Physicians Pay So Much In Taxes?
Physicians often reach peak income later than other professionals, after training, and then earn at the top bracket for a relatively short span. In California, that means a 37% federal rate plus a state rate up to 12.3%. Medicine is also a "specified service trade or business," so the 20% qualified business income deduction phases out at higher incomes.
How Can Physician Practice Owners Lower Their Taxes?
A practice that sponsors a cash balance plan can let the physician-owners contribute far more pre-tax than a 401(k) alone, often $100,000 to $300,000+ a year for older partners. Medical practices are a large share of plan sponsors: in public California DOL Form 5500 filings for small defined benefit plans, roughly a third are medical practices.
How Can Employed Physicians Lower Their Taxes?
Employed physicians have fewer levers, which makes the remaining ones matter more: every available pre-tax and deferred compensation plan, the timing of income and deductions, and a plan for how the pre-tax pile will be taxed in retirement. Properly designed permanent life insurance can add a bucket that grows tax-deferred and can be accessed tax-free.
Common Questions
Can physicians take the QBI deduction?
Only partly, and often not at all at high incomes. Health is a specified service trade or business, so the 20% qualified business income deduction phases out once taxable income passes the annual threshold.
Is a cash balance plan worth it for a medical practice?
For profitable practices with owners in their 40s or older, often yes, because older owners can contribute the most. The plan must also cover staff, so the math depends on your headcount and ages. An actuary runs the numbers before you commit.
