In this article, we created a hypothetical case study to show tax minimization strategies for plastic surgeon practice owners. By roughly employing a handful of key optimization tactics, the plastic surgeon in this hypothetical illustration reduced their taxable income by ~$250,000, which led to ~$136,000 less in taxes paid.

While this illustration represents a simplification, it was created to showcase how a few key levers can lead to notable differences especially for practice owners. This case study is similar to Earned’s side by side comparison of tax optimizations for Primary Care Physicians.

Tax Optimization Illustration*
Plastic Surgeon in NY

Main tax optimization levers

1. Tax Deferral - 401(k) and Cash Balance Plan

Contributing to a qualified retirement plan is a common way to delay paying tax on income.  The most common choice for a plastic surgery practice is a 401(k). If the situation makes sense (e.g., the mix of age and earnings of your employees is not cost prohibitive), you can also pair the 401(k) with a cash balance plan (as shown in this hypothetical example), which is one of the biggest levers as it allows for a much larger tax deferral than a 401(k) plan alone. 

For 2024, you can contribute up to $69,000 to your 401(k) account (with a catch up provision of $7,500 if you’re 50+ years old) as a combination of salary deferral and profit-sharing contributions. One cost to consider is the need to contribute to your employee’s accounts. This will vary from practice to practice and should be analyzed carefully before implementing a 401(k) plan for your office.

Furthermore, cash balance plans are more expensive to set up and operate than a 401(k) plan and care should be taken to determine whether it’s a good fit for your current and future circumstances.  Generally, cash balance plans may make more sense for practices with predictable cash flow and steady income, and where the doctor is older and their employees are relatively younger.  

2.) Tax Entity Choice (S-Corporation)

As the owner of your practice, your choice of tax entity for your practice is a top lever for tax optimization.  In the baseline example, the plastic surgeon is being taxed as a sole proprietor, either with a single-member LLC for which they’ve made no S-election or with no legal entity at all.  In this hypothetical optimized example, however, electing to be taxed as an S-corporation leads to notable savings. These savings come from two areas:

1. Reduced payroll tax burden by shielding some of your income from being subjected to payroll taxes.

2. Becoming eligible for the passthrough entity tax which allows you to deduct your state income taxes as a business expense.

3.) Tax Deduction of Business Expenses

The third and final lever is identifying all of the deductions available to your practice. Beyond the more obvious ones like rent, office expenses, salaries, etc. here are ones that can sometimes be overlooked:

• Home Office

• Vehicle expenses using bonus depreciation or §179

• Renting your residence to your practice for corporate events

• Business use of owner cell phone

• Owner’s health insurance

• Employing your spouse and possible children

• Devices (e.g., lasers or other skin tightening devices)

  
  

A word of warning as it relates to deductions. It’s never beneficial to pay money simply to get a deduction. You’ll reduce your tax bill but make yourself worse off financially.

Conclusion

In summary, as a plastic surgeon running your own practice, you have meaningful levers to help drive tax savings that will compound over time.  At Earned, we’ve seen firsthand just how tax smart strategies have made a significant impact.  We are offering a complimentary analysis of your tax situation to see if there are potential opportunities for savings.

The information in this communication was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are for illustrative purposes only and may not be relied upon for investment decisions. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the investment recommendations contained in this communication; nor should any past recommendation be taken as personalized investment advice. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information presented may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.

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