Setting Up Payroll for a Direct Primary Care Practice

Payroll is one of those operational tasks that feels simple until you get it wrong. For physicians launching or growing a DPC, concierge, or direct specialty care practice, setting up payroll correctly from the beginning saves you from penalties, compliance headaches, and the kind of IRS notices that ruin an otherwise productive Tuesday.

This guide walks through the key decisions: when you actually need payroll, which provider to choose, how to structure your own compensation as an owner, and the mistakes that trip up small medical practices most often. Where tax decisions are involved, we will point you toward your CPA — because those calls depend on your specific situation.

When to start running payroll

The answer depends on your entity structure and whether you have employees. If you are operating as an S-corp or C-corp — which most established DPC practices are — you need payroll from day one. That is because the IRS requires corporate officers who perform services for the business to receive a W-2 salary. You cannot simply take draws from a corporation and skip payroll taxes. It does not matter that you are the only person in the practice. If you are incorporated, you need a payroll system running to pay yourself.

If you are operating as a sole proprietor or single-member LLC (taxed as a sole proprietorship), you take owner's draws instead of a salary. In that structure, you do not need payroll for yourself. But the moment you hire your first employee — even a part-time medical assistant, a front desk coordinator working 15 hours a week, or a nurse — you need a payroll system in place.

The right entity structure for your practice is a decision to make with your CPA and possibly an attorney. It has significant implications for how you pay yourself, how you are taxed, and your personal liability. If you have not had that conversation yet, have it before you set up payroll — the entity structure dictates how payroll works for you as an owner.

Choosing a payroll provider

For a small medical practice with fewer than 20 employees, you have three main options worth considering. Each has trade-offs around cost, complexity, and features. Here is how they compare:

Gusto

Gusto is the most popular payroll platform for small practices, and for good reason. The interface is clean and intuitive — most physicians can run payroll themselves in under 10 minutes once it is set up. Gusto handles employee onboarding, tax filings, direct deposit, W-2 and 1099 generation, benefits administration, and workers' compensation. It integrates seamlessly with QuickBooks and Xero, which means your payroll data flows directly into your accounting system without manual entry.

Pricing starts at around $40 per month plus $6 per employee per month for the basic plan. For a solo practice with one or two employees, you are looking at roughly $50 to $55 per month. Gusto is the strongest choice for practices with 1 to 15 employees who want a straightforward, modern platform without unnecessary complexity. Osprey CFO is a Gusto partner — learn more about our Gusto partnership here.

ADP Run

ADP is the largest payroll provider in the country and has been around for decades. ADP Run is their small business product, and it is more feature-rich than Gusto but also more complex. If you are planning to scale your practice past 20 employees, or if you need robust compliance tools, HR features, and dedicated support, ADP is worth considering. The trade-off is a steeper learning curve, higher cost, and a less modern user experience. Custom pricing means you will need to talk to a sales representative to get a quote.

Paychex

Paychex occupies a similar tier to ADP — enterprise-grade payroll with strong compliance tools and support. It is a solid option for larger practices with complex needs, multiple locations, or provider compensation structures that require more customization. Like ADP, pricing is custom and typically higher than Gusto. Most single-location DPC or concierge practices will find Paychex to be more platform than they need.

For most DPC and concierge medicine practices with fewer than 15 employees, Gusto is the straightforward choice. It does what you need, it is affordable, and it does not require a payroll specialist to operate. Save the enterprise platforms for when your practice has genuinely outgrown the simpler tools.

Owner compensation: salary vs. distributions

This is one of the most important financial decisions for a physician-owner, and it is also one of the most misunderstood. How you pay yourself affects how much you owe in payroll taxes, your exposure to IRS scrutiny, and your overall tax liability. The rules depend entirely on your entity structure.

For S-corps — which are the most common structure for DPC practices — the IRS requires you to pay yourself a "reasonable salary" through payroll before taking any additional distributions. Your salary is subject to Social Security and Medicare taxes (collectively, FICA). Distributions are not subject to FICA, which is where the tax savings come from. The temptation is to set your salary artificially low to minimize payroll taxes and take the rest as distributions. The IRS knows this, and they audit for it.

What counts as a "reasonable salary" is not a specific number — it is based on what you would have to pay someone else to do your job, taking into account your experience, hours worked, the geographic market, and the nature of the services you provide. For a DPC physician who is also managing the business, the reasonable salary is typically in the range of what a comparable employed physician would earn, adjusted for the size and scope of the practice.

For sole proprietors, the compensation question is simpler: you take owner's draws from the business, and you pay self-employment tax on your net business income. There is no salary-versus-distribution decision to optimize. If your practice is growing and you are paying significant self-employment tax, that is often the point where it makes sense to talk to your CPA about whether converting to an S-corp would be beneficial.

Setting up your first payroll run

Once you have chosen a provider and sorted out your entity structure, the actual setup process is straightforward. Here is what it looks like step by step:

1. Get your EIN. If you have not already, apply for an Employer Identification Number from the IRS. You can do this online at irs.gov and receive your EIN immediately. You need this before you can run payroll, open a business bank account, or file employer tax returns.
2. Register with your state. In North Carolina, you need to register with the NC Department of Revenue (NCDOR) for state income tax withholding and with NCWorks (the Division of Employment Security) for unemployment insurance. Your state will assign you employer account numbers that your payroll provider needs to file taxes on your behalf. If you are in a different state, the process is similar but the specific agencies vary.
3. Set up your payroll provider. Create your account with Gusto (or whichever platform you chose), enter your business information, connect your business bank account, and input your state registration numbers. Most providers walk you through this with a guided setup flow.
4. Enter employee information. For each employee, you will need their legal name, Social Security number, address, date of birth, and a completed W-4 form (which determines their federal tax withholding). Your payroll provider will typically handle the onboarding paperwork digitally — you send the employee an invite, and they fill in their own information.
5. Choose a pay schedule. Biweekly (every two weeks) is the most common pay schedule for small medical practices. It results in 26 pay periods per year and is easy for both you and your employees to track. Some practices use semi-monthly (1st and 15th) or monthly. Whichever you choose, be consistent — and check your state's pay frequency requirements, as some states mandate minimum pay frequencies.
6. Run your first payroll. Enter hours (for hourly employees) or confirm salary amounts (for salaried employees), review the payroll summary, and approve. Your provider handles the direct deposits, tax withholding calculations, and tax filings. The first run takes a bit longer as you double-check everything; subsequent runs take minutes.
7. Set calendar reminders. Mark your calendar for quarterly payroll tax filing deadlines (Form 941 is due by the end of the month following each quarter), annual W-2 distribution (January 31), and any state-specific filing deadlines. Your payroll provider handles most filings automatically, but you should verify that they are being submitted on time.

The entire setup process — from creating your payroll provider account to running your first payroll — typically takes one to two weeks, depending on how quickly you get your state registrations processed. Do not wait until the day before payday to start.

Common payroll mistakes to avoid

Payroll errors are expensive. They come with penalties, interest, and sometimes legal consequences. Here are the mistakes that trip up small medical practices most often:

• Misclassifying employees as independent contractors. This is the most common and most costly mistake. The IRS applies a behavioral control, financial control, and relationship test to determine worker classification. If you control when, where, and how someone works — their schedule, their tasks, their methods — they are almost certainly an employee, not a contractor. Misclassification can result in back taxes, penalties of 1.5% to 40% of unpaid wages, and potential lawsuits. When in doubt, classify the person as an employee.
• Missing quarterly payroll tax filings and payments. Federal payroll taxes (Form 941) are due quarterly, and the deposits themselves may be due monthly or semi-weekly depending on your total payroll tax liability. State filings have their own deadlines. Missing a deadline triggers automatic penalties and interest. Your payroll provider should handle these filings, but verify that they are actually being submitted.
• Not carrying workers' compensation insurance. In North Carolina, businesses with three or more employees are legally required to carry workers' compensation insurance. Even if you have fewer than three employees, workers' comp protects both you and your staff in the event of a workplace injury. Failure to carry required coverage can result in fines, lawsuits, and personal liability for medical expenses.
• Paying yourself as an owner's draw when your entity requires W-2 salary. If your practice is structured as an S-corp or C-corp, you must pay yourself through payroll with proper tax withholding. Taking informal draws or distributions without running payroll creates a compliance problem that gets more expensive the longer it goes unaddressed. The IRS can reclassify your distributions as wages and assess back payroll taxes plus penalties.
• Not retaining payroll records. The IRS requires you to keep payroll records for at least four years. This includes W-4s, time records, pay stubs, tax filings, and any correspondence related to payroll. Your payroll provider stores most of this digitally, but make sure you have access to your records and that they are backed up.
• Running payroll manually or via spreadsheet. Some physicians try to manage payroll with a spreadsheet, manual checks, and self-filed tax forms. This approach is error-prone, time-consuming, and creates significant compliance risk. For $50 to $90 a month, a payroll provider handles tax calculations, filings, direct deposits, and compliance. The cost of a single payroll tax penalty almost always exceeds a full year of payroll provider fees.

When to hand payroll off to a professional

Running payroll yourself is manageable when your practice is small and straightforward — a solo physician with one or two employees, a simple pay structure, and no complicated benefits. But there is a point where managing payroll yourself becomes a poor use of your time and a source of unnecessary risk.

Here are the signs it is time to get help:

• Payroll is taking more than an hour per pay period. If you are spending significant time each cycle reviewing timesheets, resolving discrepancies, double-checking tax calculations, or troubleshooting provider issues, you are spending clinical or administrative time on something that a professional can handle more efficiently.
• You have received a notice from the IRS or your state. Notices about late filings, incorrect withholding, or missed payments are a clear signal that something in your payroll process is broken. A professional can resolve the issue, respond to the notice, and fix the underlying problem so it does not recur.
• Your team is growing. Adding employees means more W-4s, more tax jurisdictions (if employees live in different states), more complexity around benefits, PTO tracking, and compliance. The administrative burden scales faster than most practice owners expect.
• You are making compensation structure decisions. When questions about salary-versus-distribution splits, retirement plan contributions through payroll, or multi-provider compensation models come up, you need someone who can coordinate with your CPA and ensure payroll is set up to reflect those decisions correctly.

An outsourced accounting team can manage payroll as part of your overall financial operations — ensuring taxes are filed on time, employees are properly classified, and owner compensation is structured appropriately. This is not just about running payroll; it is about integrating payroll into your broader financial picture so that your cash flow, tax planning, and compensation strategy all work together.

Frequently asked questions

Q: How much does payroll cost for a small medical practice?

A: Most cloud-based payroll providers charge $40 to $80 per month as a base fee plus $6 to $12 per employee per month. A solo practice with one employee might pay $50 to $90 per month total. The cost scales with headcount and any add-on services like benefits administration or workers' compensation management. Compared to the cost of a payroll tax penalty or the time you spend managing payroll manually, it is a straightforward investment.

Q: Should I use Gusto or ADP for my DPC practice?

A: For most practices with fewer than 15 employees, Gusto is the better fit. It is simpler, more affordable, and integrates well with common accounting software like QuickBooks and Xero. ADP makes more sense for larger practices with complex compliance needs or plans to scale past 20 or more employees. If you are just getting started or running a single-location practice, Gusto will handle everything you need without the overhead of an enterprise platform.

Q: How do I pay myself as a physician-owner?

A: It depends on your entity structure. S-corp owners must take a reasonable W-2 salary before taking additional distributions. Sole proprietors take owner's draws from business profits. The right approach — and the right amounts — depend on your revenue, profitability, and what the IRS considers reasonable compensation for your role. This is a decision to make with your CPA, not one to figure out on your own. Getting the salary-versus-distribution split wrong can trigger an audit.

Q: Do I need workers' compensation insurance?

A: In North Carolina, businesses with three or more employees are required to carry workers' compensation insurance. Even if your practice has fewer than three employees and is not legally required to carry it, workers' comp is generally advisable. It protects your employees if they are injured on the job and protects you from personal liability for their medical expenses and lost wages. The cost is typically modest for a medical office environment.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. Osprey CFO is not a tax firm and does not provide tax preparation or tax advisory services. Consult with qualified professionals for guidance specific to your practice and situation.