Medical practice accounting: the physician owner's guide, and the firm that runs it

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The Overview

Medical practice accounting is the bookkeeping, payroll, owner compensation and tax structure of a physician-owned practice, kept in a shape that lets the owner see margin monthly and pay the least legal tax annually.

This page explains how it should run, and how Doc Wealth runs it for physician owners.

What This Page Covers

Accounting for medical practices: what makes it different

Bookkeeping for medical practices: the monthly routine

Payroll and what to pay yourself

Entity structure and the PTET election

Tax planning for practice owners

Medical practice CPA, bookkeeping and payroll from one physician only firm

Medical practice accounting questions owners ask

What Makes It Different

Accounting for medical practices: what makes it different

Accounting for medical practices has five features that a generalist bookkeeper treats as noise and a physician owner has to treat as signal.

Revenue arrives months after the work

You see the patient in March. The payer adjudicates in April, pays part in May, denies a line in June, and the patient portion trickles in through August. Cash basis books show a quiet March and a loud May; neither tells you what March earned.

The fix is not switching to accrual; most practices can stay on the cash method for tax, depending on entity type and gross receipts. The fix is reading two numbers side by side every month: collections from the bank, and charges and adjustments from your practice management system. The gap is your receivables, and its trend is your revenue cycle management and your cash flow in one number.

Receivables get the same treatment. Your books show one balance; your practice management system knows how much of it is over 120 days from a payer that will never pay. Books that do not tie to the aging report overstate the practice and hide the write offs that are coming.

Provider compensation is a formula, not a salary

Associate physicians are paid on base plus productivity, wRVU thresholds, collections percentages, or a partnership draw with a year end true up. Each has to be tracked monthly or your margin swings at reconciliation. A practice that books a quarterly bonus in the month it is paid shows two good months and one terrible one, four times a year.

1099 associates carry a classification question

If the practice sets the schedule, bills under its tax ID, supplies the staff and space, and carries the malpractice, these factors generally point toward employee status, regardless of how the contract labels the arrangement. State tests can be stricter. Misclassification exposure, including the unpaid employment taxes and penalties, generally falls on the practice. The books have to record these payments so the year end 1099 filing and the classification review are straightforward.

Equipment is a depreciation decision every year

Each equipment purchase is a choice among Section 179 expensing, bonus depreciation, or depreciation over the recovery period. The right answer depends on your taxable income this year and next, so the decision belongs in the tax planning conversation before you sign the purchase order. Our physician tax deductions guide covers practice owner deductions in detail.

Most practices are more than one entity

A common shape: the practice in one entity, the building in a second, a management company in a third. Each has its own books, bank account and tax return, and transactions between them must match on both sides. When a generalist setup leaves them sharing one QuickBooks file and one credit card, the returns are built on guesswork.

The Monthly Routine

Bookkeeping for medical practices: the monthly routine

Good medical practice bookkeeping is boring: the same steps, the same week of every month. Whether you search for bookkeeping for doctors or medical accounting services, this is the routine.

The monthly close, in order

Reconcile every bank and credit card account to the statement, every month.

Post deposit detail from your practice management system so collections are split by payer class, not one line called Deposits.

Record merchant processing fees and clearinghouse fees as expenses rather than netting them against revenue.

Import payroll from Gusto (or your payroll platform) with wages, employer taxes and benefits in separate accounts.

Accrue provider compensation owed but not yet paid, including productivity bonuses and partner true ups.

Record intercompany rent, management fees and loans between your entities on both sets of books.

Post fixed asset purchases to the balance sheet, not to supplies, and update the depreciation schedule.

Review the profit and loss (P&L) against last month and the same month last year. Investigate any line you cannot explain in one sentence.

Tie accounts receivable to the practice management aging report and record write offs.

Update the tax projection. Every month you know more about the year than the month before.

Steps 1, 3, 4, 6, 7, 9 and 10 are the bookkeeping itself, and they are what Doc Wealth runs. Steps 2, 5 and 8 depend on reports outside the ledger (practice management aging, compensation contracts, payer remittances) that come from you or your office manager each month.

A sample chart of accounts for a physician owned practice

Equity

Owner distributions

Cash taken out that is not W-2 salary

Fixed asset

Equipment and leasehold improvements

Anything with a useful life over one year and a cost above your capitalization threshold

Expense

Rent or intercompany rent

Paid to a third party or to your own real estate entity

Expense

Billing and merchant fees

Clearinghouse, RCM vendor, card processing

Expense

Medical supplies and drugs

Injectables and high cost inventory as their own sub-account

Expense

Malpractice insurance

Tail coverage and claims-made premiums tracked separately

Expense

Payroll taxes and benefits

Employer FICA, unemployment, health insurance, retirement match

Expense

Staff wages

Front desk, clinical support, billing staff

Expense

Provider compensation

Associate and partner pay, kept separate from staff wages

Patient collections

Income

Copays, deductibles, self pay, cosmetic or cash services

Insurance collections

Income

Commercial, Medicare and Medicaid payments, by payer class using sub-accounts

What it captures

Type

Account

Income

Other practice income

Account

Your specialty adds lines: cosmetic revenue for dermatology, imaging and DME for orthopedics.

How should a medical practice set up QuickBooks Online?

QuickBooks Online is the general ledger, not the billing system. Patient level charges, claims and adjustments live in your practice management or EHR platform; QuickBooks receives the summary.

Connect the bank and card feeds, set up the chart of accounts above, turn on class or location tracking for multiple sites or margin by provider, and build a bank rule for every recurring vendor. One entity per QuickBooks file.

The reports to review every month

What to look at

Question it answers

Report

Profit and loss (P&L)

What did the practice earn and spend this period?

Revenue by payer class, provider compensation, overhead, month over month movement

Balance sheet

What does the practice own and owe?

Cash, loans, payroll liabilities, equipment, owner equity

Why did the bank balance change?

Cash bridge

Operations, loan principal, equipment purchases, distributions

What is still unpaid, and by whom?

Receivables aging

Balances over 90 days, payer patterns, write off candidates

What has been earned and what has been paid?

Provider compensation schedule

Contract formulas, accrued bonuses, true up timing

Revenue by payer class, provider compensation, overhead, month over month movement

What to look at

What did the practice earn and spend this period?

Question it answers

Profit and loss (P&L)

Report

Cash, loans, payroll liabilities, equipment, owner equity

What to look at

What does the practice own and owe?

Question it answers

Balance sheet

Report

Operations, loan principal, equipment purchases, distributions

What to look at

Why did the bank balance change?

Question it answers

Cash bridge

Report

Balances over 90 days, payer patterns, write off candidates

What to look at

What is still unpaid, and by whom?

Question it answers

Receivables aging

Report

Contract formulas, accrued bonuses, true up timing

What to look at

What has been earned and what has been paid?

Question it answers

Provider compensation schedule

Report

Profit and available cash are not the same number.

Profit

$60,000

Loan principal paid

−$10,000

Owner distribution

−$30,000

Out of the bank

$40,000

An illustrative month: $60,000 of profit, $10,000 of loan principal paid and a $30,000 owner distribution. That is $40,000 out of the bank and neither payment reduces reported profit. Before you take money out, look at the next payroll, the next estimated tax payment and the reserve you want to hold.

Profit is not cash

If you would rather hand all of this to a team that only does it for physicians, our bookkeeping for medical practices service runs this close every month.

Payroll & Owner Pay

Payroll and what to pay yourself

S-Corp reasonable compensation by specialty

If your practice is taxed as an S-Corp, you must pay yourself a W-2 salary that is reasonable for the work you perform before you take distributions. Salary carries Social Security and Medicare tax; distributions do not. The incentive to set salary low is obvious, and the IRS knows it.

Reasonable means what a practice would pay someone else to do your clinical job, adjusted for hours, administrative role and region. The reference points are compensation surveys for your specialty. We published the ranges and our method in reasonable salary by specialty for physician S-Corps.

Set the number once a year with your tax team, run it through payroll every pay period, and document it. A salary that moves with cash flow is the pattern the IRS looks for. The election mechanics are in our physician S-Corp guide.

Distributions versus salary

Everything you take above your W-2 salary is a distribution. S-Corp profit passes through to you and is taxed whether or not the cash comes out, so the distribution itself is generally not taxed again as long as it stays within your stock basis. Distributions avoid payroll tax, and with partners they must be proportional to ownership.

Uneven distributions, or distributions beyond basis, create problems the accounting has to catch before filing, which is why the books track wages, distributions, shareholder contributions and loans separately.

If your practice is a partnership, you do not take a salary at all. You take guaranteed payments and draws, and your share of profit is generally subject to self employment tax. That difference is often the deciding factor in the entity choice below.

Associates as W-2 or 1099

An associate who works your schedule, sees your patients and uses your staff generally shows indicators of employee status. A physician who covers occasional shifts, controls their own schedule, carries their own malpractice and bills through their own entity may qualify as an independent contractor, but classification depends on the full working relationship. Some states apply a stricter test than the federal one; the associate's side is on our 1099 physician tax page.

Classify by facts, put the facts in the contract, and review the arrangement when the role changes.

Our physician payroll services run owner salary, staff and associate payroll in Gusto, coordinated with the same tax team that sets your compensation and files your returns.

Entity & PTET

Entity structure and the PTET election

The entity your practice sits in determines how you pay yourself, whether you can elect PTET, and how partners share income. It is the most consequential decision in medical practice accounting, and the one a formation service most often makes for you without a tax review.

PLLC, PC, S-Corp and partnership

Start with what your state allows. Some states let physicians practice through a professional limited liability company (PLLC). Others, California among them, require a professional corporation (PC). The state statute decides this, not the tax code.

Then decide how the entity is taxed, a separate question:

A single owner PLLC is taxed as a sole proprietorship by default, a PC as a C corporation. Both can file Form 2553 and be taxed as an S-Corp, which is where the salary and distribution split comes from. If the form went in late, late S-Corp election relief explains the fix.

A multi owner PLLC is taxed as a partnership by default. Partnerships allow uneven profit allocations when the partnership agreement gives them substantial economic effect, which groups value when partners produce at different levels, but every partner generally pays self employment tax on their share.

An S-Corp with multiple owners must allocate profit strictly by ownership percentage, and every owner takes a reasonable salary. Productivity based pay runs through the salary, not the distribution.

We compared the legal forms in PLLC versus PC for physicians and the tax treatment for groups in S-Corp versus partnership for physician groups.

When the structure needs to change, we walk you through the PLLC, PC or partnership formation and the EIN with our formation partners, who handle the state filings. You are not passed off. The tax team that recommended the structure carries it through the S Corp election, payroll set up, and assistance with determining reasonable compensation. Our physician entity formation page explains how that works.

The PTET election, and the condition that makes it worth it

Owners searching for a PTET tax strategy for physicians are asking one thing: can state income tax that the federal cap on state and local tax deductions blocks be deducted anyway. Often, yes.

A pass-through entity tax (PTET) election lets your practice pay state income tax at the entity level. The entity deducts the payment on the federal return with no cap, and you receive a credit or exclusion on your personal state return so the income is not taxed twice. State income tax on practice income becomes federally deductible again.

Three conditions, all of which have to be true:

Your state offers the election. Many states with an income tax now do, including New York, New Jersey, California, Illinois, Georgia and Massachusetts, each with its own form, deadline and estimated payment rules. California also taxes the S-Corp itself at 1.5 percent of net income, which changes the math; see S-Corp state taxes in California, New York and New Jersey.

Your practice is taxed as a partnership or an S-Corp. A sole proprietorship or a disregarded single member LLC cannot elect, which is one more reason a solo owner in a high tax state often benefits from the S-Corp election.

Your state income tax on practice income exceeds the federal deduction you would otherwise get on your personal return. The cap and its income phase down change with legislation, so the break even is checked for the current year, not assumed from last year.

Deadlines are the trap. New York closes its election on March 15 of the tax year, California requires a June 15 prepayment to keep the full credit, and most other states elect on the return itself. A missed deadline could mean losing the election for that year or receiving a reduced tax benefit, depending on your state and situation. Our guide to PTET for physicians walks through the state by state rules and the estimated payment mechanics.

Tax Planning

Tax planning for practice owners

Once the books close on time and the entity is right, tax planning has something to work with. Four moves we evaluate for nearly every owner, each with its qualifying condition.

Retirement plans built for a practice with staff

A practice with employees cannot use a solo 401(k). It uses a 401(k) with profit sharing, a cash balance plan, or both, and nondiscrimination rules require that eligible staff participate. It is worth it when the design lets you contribute a large pre tax amount while the required staff contribution stays within what you would spend on retention anyway. A cash balance plan generally allows the largest deductible contributions for owners in their late forties and beyond.

A new plan can generally be adopted as late as the return due date for the prior year, but 401(k) deferrals only work if the plan exists before year end, so the decision belongs in the fall. We coordinate plan design with your plan administrator and actuary. The contribution math is in our physician retirement tax guide.

Cost segregation on a building you own

If your practice occupies a building you own, usually through a separate real estate entity that rents to the practice, a cost segregation study reclassifies building components into shorter depreciation lives and accelerates the deduction.

It is worth it when the building basis is large enough to justify the engineering study, and when the resulting loss can actually be used against practice income, which depends on how the rental and the practice are grouped for passive activity purposes. Get the grouping election wrong and the deduction is stranded. See cost segregation for physicians for how a study works.

Hiring family

Paying your children for real work in the practice shifts income from your bracket to theirs, where the standard deduction may shelter it. The payroll tax exemption for a child under 18 applies only when the employer is a sole proprietorship or a partnership owned solely by the parents; a PC or S-Corp does not get it. The work must be real, age appropriate and documented, and the wage what you would pay a stranger.

A spouse on payroll can bring the practice's health and retirement benefits into the household under the plan's eligibility rules. Our post on hiring your children in a physician practice covers the documentation.

The Augusta rule for board meetings

Your practice can rent your home for up to 14 days a year for legitimate business use, deduct the rent, and you receive the income without reporting it. It applies when the practice is a separate entity from you (an S-Corp, PC or partnership, not a sole proprietorship), the rent matches documented local rates for comparable space, and each meeting has an agenda, minutes and a valid and reasonable business purpose (e.g., offsite staff meeting).

Quarterly board and planning meetings for a practice with partners are the natural fit. We walk through the rate substantiation in the Augusta rule for physicians.

All four are planned in the fall, not discovered in April. Our tax planning for doctors service runs these evaluations through the year, with the books and payroll feeding the projection monthly.

The Service

Medical practice CPA, bookkeeping and payroll from one physician only firm

If you searched for a medical practice CPA or an accountant for medical practice owners, here is what that role looks like at Doc Wealth (our physician CPA page covers the individual side). We are a physician founded tax planning and preparation firm with Tax Attorneys, CPAs, or Enrolled Agents on the tax team, working only with physicians.

What is included every month

Monthly transaction categorization in QuickBooks Online, up to 100 transactions, using physician specific tax categories

Bank and credit card reconciliation every month across all business accounts

Monthly profit and loss (P&L) by category, plus quarterly snapshots that feed the estimated payment projections

Year end close, delivered to the same tax team that prepares the return

Payroll management for owner salary, staff and associates

A tax projection updated through the year, so S-Corp salary, PTET estimates and retirement contributions rest on real numbers

Entity and structure review, including the S-Corp election and reasonable compensation. For a new PLLC, PC or EIN, we walk you through the process alongside our formation partners, who handle the filings

Preparation of the practice return and your personal return by the same tax team that kept the books

We do not submit claims, work denials or chase patient balances; billing stays with your billing team or revenue cycle vendor. Retirement plan design, cost segregation studies and entity filings are performed by our partners, with your tax team guiding the process and doing the tax work on either side. Thousands of physicians trust the tax team behind this work.

Who you talk to

Your bookkeeper and your tax team are one team on one platform, not two firms passing spreadsheets. When a large equipment purchase is categorized, the tax team sees it and weighs Section 179 against depreciation while there is time to act. Prompt, dependable communication is part of the agreement, with direct access to your tax team year round.

Handoff from your current bookkeeper

We review your accounts, transaction history and categorization to find the gaps, clean up the existing books if they need it, and set you up on a system integrated with your tax team from the first month.

You can keep a separate bookkeeper and use us for tax planning alone, but there is a cost to the separation: categories drift, reports need reformatting, and the tax team loses the real time view that makes mid year planning work. The full owner picture is on our practice owner tax page.

Pricing

What is included

Price

Service

Concierge Plus

$11,400 per year, plus a $950 one time setup fee

Two entities or properties, monthly bookkeeping in QuickBooks Online up to 100 transactions, monthly statements, payroll management, tax planning and preparation

Bookkeeping add-on

From $300 per month

Monthly close and statements for one entity, added to a Concierge package

$125 per month

Payroll management

Owner, staff and associate payroll run in Gusto

The Gusto subscription and state payroll tax registration fees are paid by the client. Additional entities or properties are $600 per year each, and bookkeeping above 100 monthly transactions is $100 per additional 50 transactions. Practices with multiple locations are quoted after the intro call. All packages are on our pricing page.

Service

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Proof

What the returns show

When we reviewed 500 physician tax returns prepared elsewhere, three of the recurring findings bear directly on practice owners: no S-Corp election where the income supported one, no PTET election in states that offered it, and multi state filing gaps where income crossed state lines. Each is a structural miss, visible from the return alone. The full findings are in what we saw when we opened 500 physician tax returns.

Answers

Medical practice accounting questions owners ask

How do you use QuickBooks for a medical practice?

Use QuickBooks Online as the general ledger and leave patient level billing in your practice management system. Post deposits by payer class, record processing fees as expenses, import payroll with wages and employer taxes separated, and turn on class tracking for multiple sites. Reconcile every account monthly, one file per legal entity.

What is medical bookkeeping?

Medical bookkeeping is the monthly recording and reconciliation of a practice's collections, expenses, payroll, assets and intercompany activity, structured so the owner sees margin by month and the tax team can prepare accurate returns. It differs from general bookkeeping in how it handles insurance receivables, provider compensation and multiple entities.

Is there such a thing as medical accounting?

Yes, in the sense that a medical practice has accounting problems most small businesses do not: revenue that arrives months after the service, receivables that age by payer, compensation tied to productivity, and entity forms set by state law. The principles are the same. The application is specific enough that generalist bookkeeping regularly gets it wrong.

Should my practice be an S-Corp, a PLLC or a partnership?

The PLLC or PC question is decided by your state. The tax question depends on how many owners you have and how you share profit. A solo owner usually benefits from S-Corp taxation. A group that wants uneven profit allocation often chooses partnership taxation; one that can run productivity through salary chooses S-Corp. We model both first.

What should I pay myself from my practice?

If your practice is an S-Corp, a W-2 salary that is reasonable for your specialty, hours and role, supported by compensation survey data, with the rest as distributions. If it is a partnership, guaranteed payments and draws, with self employment tax on your share of profit. Set the number annually, document it, and run it through payroll consistently.

What does medical practice accounting cost?

Concierge Plus is $11,400 per year plus a $950 one time setup fee and covers two entities, monthly bookkeeping up to 100 transactions, monthly statements, payroll management, tax planning and return preparation. Bookkeeping as an add-on starts at $300 per month and payroll management is $125 per month. Gusto and state registration fees are paid by the client.

Which states let my practice elect PTET?

The majority of states that levy an income tax now offer a pass-through entity tax election, including New York, New Jersey, California, Illinois, Georgia and Massachusetts. States without an income tax have no need for one. Each sets its own eligibility, deadline and payment rules, and the list changes, so we confirm your state's rules every year.

Do you replace my bookkeeper or work with them?

We replace them, in most cases. Our bookkeeping sits on the same platform as your tax team, and that integration is where the value is. You can keep a separate bookkeeper and engage us for tax planning only, but categories drift and the tax team loses real time visibility. We assess your existing books first and clean them up if needed.

Last updated September 2026