From Hospital W-2 to Full- or Part-Time Private Practice: A Guide for La Jolla & San Diego Physicians

For physicians practicing in La Jolla and throughout San Diego, the transition from hospital employment to private practice—or the decision to layer part-time private practice income on top of a W-2 role—is one of the most consequential financial decisions of a medical career.

This transition is not simply about earning more income. It is about how income is classified, taxed, sheltered, reinvested, and ultimately converted into long-term wealth.

Physicians who approach this shift without integrated planning often default into the highest possible tax outcome. Those who plan intentionally can materially reduce taxes, stabilize cash flow, and create financial flexibility that compounds over decades.

We advise physicians and medical specialists across La Jolla and San Diego using a CPA-led framework that integrates entity structuring, QBI analysis, California PTET, reasonable compensation, retirement design, and multi-year tax projections.

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Step 1: Clarify Intent Before Structuring

The most common—and costly—planning failure occurs before an entity is formed.

Physicians often rush to “set up an S-corp” or “start a PC” without first clarifying what the practice is meant to support financially and personally.

Key questions include:

• Is private practice supplemental, transitional, or permanent?

• Is the priority incremental cash flow, long-term enterprise value, or tax deferral?

• Will the practice remain part-time indefinitely, or is it a bridge to full independence?

• How does private practice income interact with household W-2 income?

These answers directly influence:

• Entity choice (Schedule C vs Professional Corporation)

• Eligibility and usefulness of QBI (§199A)

• Whether California PTET produces meaningful benefit

• Reasonable compensation strategy

• Retirement plan selection

• Exit and succession planning

🔹 CPA CALLOUT — WHY “INTENT” MATTERS MORE THAN ENTITY TYPE

Physicians often ask, “Should I form an S-corp?” The better question is, “What do I need this practice to accomplish financially?” Entity structure is a tool, not a strategy. When intent is unclear, entity decisions are often reversed later—at significant cost.

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Step 2: Entity Selection in California

In California, most physicians operate through a Professional Corporation (PC) due to licensing rules. However, how that PC is taxed determines much of the tax outcome.

Common structures include:

• PC taxed as an S corporation

• PC taxed as a C corporation

• Transitional Schedule C / 1099-NEC income (limited early-stage cases)

Each structure interacts differently with:

• QBI (§199A)

• California PTET

• Payroll taxes

• Retirement contribution limits

• Federal vs California tax arbitrage

There is no universally “best” structure—only the best structure for a specific income profile, household context, and timeline.

🔹 CPA CALLOUT — S-CORP ≠ AUTOMATIC SAVINGS

An S-corp can reduce self-employment taxes, but:

• Reasonable salary rules apply

• QBI may be limited or eliminated

• PTET must be elected intentionally

• Poor salary design can increase audit risk

Without modeling, an S-corp can add complexity without increasing savings.

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Step 3: QBI, PTET & Strategic Tax Layering

QBI (§199A): Physician-Specific Complexity

Physicians are generally classified as a Specified Service Trade or Business (SSTB). As a result:

• QBI eligibility phases out at higher income levels

• Many physicians incorrectly assume QBI “doesn’t apply” and ignore it

• Others assume it applies when it does not

In reality:

• QBI must be modeled annually

• Wage levels, entity income, and household taxable income all matter

• Partial benefits may still exist in hybrid scenarios

California PTET: Powerful but Often Misused

The California Pass-Through Entity Tax (PTET) allows S-corp owners to:

• Pay CA tax at the entity level

• Receive a personal CA tax credit

• Partially bypass the federal SALT deduction cap (subject to limits)

However:

• PTET is elective

• Timing and cash-flow coordination are critical

• It does not benefit every physician equally

🔹 CPA CALLOUT — QBI & PTET ARE NOT “YES / NO” DECISIONS

QBI and PTET are optimization tools, not blanket elections. Assuming or ignoring either can cost tens of thousands of dollars per year

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Step 4: California Registration, EIN & Franchise Tax Compliance

Once structure and strategy are defined, execution matters.

California Secretary of State

• File Articles of Incorporation

• Appoint officers and shareholders

• Maintain required corporate formalities

Obtain an EIN

An EIN is required to:

• Open bank accounts

• Hire employees

• Run payroll

• File business tax returns

• Elect S-corp status

California $800 Minimum Franchise Tax

• Applies to most PCs regardless of profitability

• Begins once the entity is active

• PTET does not replace the $800 minimum tax

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Step 5: Reasonable Compensation & Benefit Design

For S-corporations, reasonable compensation is mandatory.

Salary should reflect:

• Specialty and clinical hours

• Revenue generated

• Geographic market (San Diego / La Jolla)

• Comparable physician compensation data

Too low → audit risk

Too high → lost payroll tax efficiency and reduced retirement leverage

🔹 CPA CALLOUT — SALARY IS A STRATEGIC VARIABLE

Reasonable compensation affects:

• Payroll taxes

• QBI calculations

• PTET optimization

• Retirement plan limits

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Step 6: Retirement Plan Selection & Integration

Retirement plans are not just benefits—they are primary tax-planning tools.

Common options:

• Solo 401(k) (part-time or early-stage practices)

• 401(k) with profit sharing

• Defined Benefit / Cash Balance Plans

Selection depends on:

• Income level

• Age

• Cash-flow stability

• Long-term practice horizon

🔹 CPA CALLOUT — RETIREMENT OFTEN OUTWEIGHS QBI

Once QBI phases out, retirement plan design often creates greater tax savings than any deduction.

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Step 7: Payroll Provider & Systems Setup

A qualified payroll provider is essential to:

• Implement reasonable compensation

• Integrate retirement plans

• Coordinate PTET timing

• Produce audit-ready records

DIY payroll is one of the most common early-stage physician mistakes.

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Step 8: Ongoing CPA Oversight & Financial Statements

A physician’s CPA should direct the financial architecture, not just file returns.

Ongoing CPA responsibilities include:

• Cash-flow analysis

• Estimated tax planning

• PTET coordination

• Retirement compliance

• Quarterly and annual strategy reviews

Core financial statements:

• Profit & Loss

• Balance Sheet

• Cash Flow Statement

Without clean financials, tax planning becomes speculative.

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Physician Case Studies: Real-World Application

Example 1: Hospital-Employed Specialist Adding Part-Time Private Practice

Profile

• W-2 income: ~$430,000

• Private practice net: ~$200,000

Without Planning: ~$90,000+ incremental tax

With CPA-Led Structuring

• S-corp PC

• Reasonable salary ~$100,000

• PTET election

• Partial QBI evaluated

• Solo 401(k)

Result

• $35,000–$45,000 annual tax savings

• $50,000+ retirement contributions

• 
  

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Example 2: Full-Time Private Practice Physician (~$600K)

Strategy

• Optimized S-corp salary

• PTET election

• Cash Balance + 401(k)

Result

• $120,000–$150,000 annual deferral

• $45,000–$60,000 combined tax reduction

🔹 CPA CALLOUT — MID-SIX-FIGURE PRACTICES

At this level, PTET and retirement design matter more than QBI.

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Example 3: High-Income Multi-Entity Physician ($1M+)

Strategy

• Multi-entity coordination

• PTET across entities

• Cash Balance + 401(k)

• Succession planning

Result

• $180,000–$220,000 annual deferral

• $750,000+ lifetime tax reduction potential

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QBI vs PTET Decision Flowchart (Physician-Specific)

• Pass-through business income?

• Physician SSTB?

• Above QBI phase-out thresholds?

• Operating through an S-corp?

• Does PTET produce net federal benefit?

• Coordinate annually with salary, retirement, cash flow, and estimates.

  
  

🔹 CPA CALLOUT — FLOWCHART TAKEAWAY

QBI and PTET are separate levers, not competing strategies. They must be evaluated together and annually.

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Closing: From Clinician to Architect of Your Financial Future

For California physicians, the decision to open a full- or part-time practice is an opportunity to build a financial system and financial future to fund quality of life goals, achieve financial independence, make work optional and retire on your terms. If you are considering setting up a full time or part time private practice or side business and have questions, feel reach to reach out for professional insight, guidance and analysis, and to get your questions answered. How can we help? Let's get our conversation started.

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About us

Natalie C. Papagni, CPA – Tax, Planning and Advisory Services

provides tax, planning and advisory services to individuals and high-income earners, physicians and healthcare professionals, business owners - entrepreneurs and new and existing businesses and private practices serious about saving taxes and minimizing multi-year tax liabilities, filing accurate and efficient tax returns, transforming financial complexity into clarity, planning for their financial future and achieving what matters most.

Natalie C. Papagni, CPA

Tax, Planning and Advisory Services

4727 Executive Drive Suite 300

San Diego, CA 92121

858.754.8277

service@lajollataxcpa.com

www.lajollataxcpa.com