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 Does California Tax A Physician's Income?
California's 2025 rate schedules reach 12.3%, starting above $742,953 of taxable income for a single filer and above $1,485,906 for a married couple filing jointly. The Behavioral Health Services Tax adds 1% on taxable income over $1,000,000, so the top combined state rate is 13.3% where income is above both lines. Both thresholds apply to taxable income, the amount left after deductions, and not to salary or practice revenue.
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, with cash value that can be accessed later subject to policy terms and tax rules.
How Does The QBI Deduction Apply To Medicine?
The qualified business income deduction is built on 20 percent of qualified business income. The statute defines a qualified trade or business as any trade or business other than a specified service trade or business or the trade or business of performing services as an employee, so an employed physician's wages fall outside it. A specified service business includes one described in section 1202(e)(3)(A), which lists services in the fields of health, law and several others. For a practice owner, part of the deduction can remain when taxable income is below the threshold amount plus $75,000 ($150,000 on a joint return), with only an applicable percentage of the qualified items counted.
What Do The 2026 Plan Limits Mean For A Physician?
The 2026 limit on employee deferrals is $24,500 for 401(k), 403(b) and governmental 457 plans, and participants 50 and older in most of those plans generally can contribute up to $32,500. The section 415(c) limit for defined contribution plans is $72,000. The section 415(b) limit on the annual benefit under a defined benefit plan is $290,000, a benefit measure and not a contribution amount; an actuary turns it into a yearly contribution for a cash balance plan.
How Do Cash Balance Plans Work For A Practice With Staff?
A cash balance plan is a defined benefit plan, so the practice funds a stated benefit and minimum-funding rules apply each year, with the minimum required contribution sometimes at zero. When the practice has eligible employees, participation and coverage rules can require benefits beyond the physician-owners, which is why headcount and ages shape the math. A useful proposal shows the contribution for the owners, the cost for staff and the assumptions behind both.
How Does California Treat Practice Income And Retirement Distributions?
California's elective pass-through entity tax is 9.3% of the qualified entity's qualified net income. An entity taxed as a partnership or S corporation may elect it each year for taxable years beginning on or after January 1, 2021, and before January 1, 2031, and whether the election helps a particular practice is a question for its CPA. For retirement income, the Franchise Tax Board says the California treatment of pension and annuity income is generally the same as the federal treatment.
How Is Retirement Plan Money Taxed Later?
The IRS says all or some portion of qualified-plan pension or annuity payments may be taxable unless the payment is a qualified distribution from a designated Roth account. That later bill is the Second Bill. The planning question is the mix: how much of a retirement balance is pre-tax, how much is Roth and how much sits in a taxable account.
Who Does Physician Tax Planning Fit?
It fits profitable practice owners whose partners are in their 40s or older and who want to look at a cash balance plan, and employed physicians who want to line up every available plan, the timing of income and a plan for how retirement savings will be taxed. It can fit less when a practice has many eligible staff relative to its owners, since coverage rules can raise the cost, or when a physician is early in training with little taxable income. Tyler is a licensed insurance agent, not a CPA or attorney, so tax and legal advice stay with your own advisors while the plan is built alongside them.
What Should A Physician Bring To The First Call?
The first call is 30 minutes on Zoom. Helpful items are the last two years of tax returns, a recent pay statement or practice financial statement, a list of retirement plans with balances, the practice's ownership structure and the name of your CPA.
What Does This Look Like For Ventura County Physicians?
In the 2024 Department of Labor filings, 38 of the 115 Ventura County employers with a small defined benefit or cash balance plan, or 33.0%, carry a healthcare or medical practice label, and 17 of the 42 in Thousand Oaks (including Newbury Park) do. All 38 county practices are in ambulatory health care services (NAICS subsector 621), a group that includes dentists and other practitioners as well as physician offices. Their plans have a median of 5 participants, so the staff-coverage question above applies locally. The counts are minimums because Westlake Village is excluded, and the data covers only practices that file for this type of plan.
Meetings with practice owners run in person around Ventura County or on Zoom, with the practice's CPA in the loop. The Ventura County page lists the other strategies local practice owners ask about.
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.
Is a physician's salary subject to the 3.8% net investment income tax?
The IRS lists wages among the common types of income that are not net investment income. Interest, dividends and capital gains from a taxable account can be, once modified adjusted gross income passes $200,000 for a single filer or $250,000 for a married couple filing jointly.
Does a cash balance plan have to cover staff?
When a practice has eligible employees, participation and coverage rules can require benefits beyond the owners. The actuary and plan administrator test this each year, and headcount is one of the inputs that shape the cost.
