What Physicians Should do with a Partnership K-1 Held in Their S-Corp
- Kenneth Eremita
- Jun 4
- 2 min read
If you’re a physician working with a group like Vituity (ie CEP America), there’s a good chance you’re receiving income via a Partnership K-1. And if that K-1 is issued to your wholly owned S corporation, you’ve got a unique setup with some very specific compliance responsibilities.
This structure can be effective for tax planning, but only if executed properly. Here's what you need to know to avoid common (and costly) mistakes.
Step 1: Operate the S-Corp Like a Real Business
Even if the S-corp exists only to hold the K-1 interest, the IRS expects you to treat it like a real entity. That means:
Bookkeeping: Use QuickBooks Online or another tool to track income and expenses. Check out our DIY accounting guide for physicians and CRNAs to get started.
Payroll: Run payroll for yourself and issue a W-2 with reasonable compensation.
Annual maintenance: File an 1120-S return, issue K-1s (yes, even to yourself), and keep clean records
Step 2: Health Insurance Must Be Run Through Payroll
If your K-1 partnership provides health insurance, or reimburses you for premiums, your S-corp must gross up that value as taxable wages to stay compliant.
Report premiums in Box 1 of your W-2🚫 Do not include them in Boxes 3 or 5 (FICA wages)
Take the self-employed health insurance deduction on your 1040 (as eligible)
Consider if the benefits are included in the Partnership K-1's Ordinary Income
Step 3: Retirement Contributions Must Follow S-Corp Rules
If the partnership offers a 401(k), or if you have your own solo plan at the S-corp level, be extremely careful:
Employee deferrals can only come from W-2 wages paid by the S-corp.
Employer contributions (profit sharing) are also capped based on wages and subject to the 415(c) annual limit.
K-1 income cannot be used to calculate 401(k) contributions from your S-corp.
This is one of the most misunderstood areas—and it's painful to fix incorrect tax filings that run afoul of this compliance consideration.
Step 4: Avoid Pitfalls with Duplicate Benefits
Thinking of adding your own health plan or solo 401(k) at the S-corp level? Make sure you’re not violating controlled group or affiliated service group rules under IRC §414.
Even if the partnership and your S-corp are legally separate, the IRS may treat them as related based on common control or service arrangements. That could disqualify your benefits plan if not structured carefully.
Why Most CPAs Don’t Catch These Mistakes
This type of hybrid structure—S-corp owning a partnership interest—is rare. Many CPAs don’t recognize:
That benefits paid by the partnership must be grossed up in S-corp payroll.
That 401(k) contributions have to tie back to W-2 wages, not K-1s.
That improperly set up plans can create disqualification risk.
These are exactly the types of complexities I handle regularly for my physician clients.