Medical practice accounting services cover the bookkeeping, payroll, payer deposit reconciliation, provider compensation calculations and tax work that keep a physician group's books accurate and its owners paid correctly. A practice also needs an accountant who can tie insurance remittances to the ledger and who will sign a HIPAA business associate agreement before touching patient-level data.
This guide covers what medical practice accounting services should include in 2026, the cash vs accrual choice under section 448, HIPAA and fraud and abuse points, PC and PLLC issues, and the KPIs for a monthly report, with a worked example for a three-physician group.
Most engagements are built from five service lines.
| Service line | What the accountant does | Typical output |
|---|---|---|
| Bookkeeping and close | Codes transactions to a healthcare chart of accounts, reconciles bank and card accounts, records accruals | Monthly financial statements, closed by a fixed day |
| Payroll | Runs payroll for clinical and front office staff, handles physician salary draws, files payroll tax returns | Payroll registers, quarterly 941s, year-end W-2s |
| Revenue reconciliation | Matches practice management system collections to bank deposits and payer remittance files | Deposit reconciliation, unapplied cash list, A/R rollforward |
| Provider compensation | Calculates each physician's pay under the group's written formula | Provider compensation statements, bonus true-ups |
| Tax and planning | Prepares entity and owner returns, estimates, entity elections, equipment planning | Federal and state returns, quarterly projections |
A medical practice's chart of accounts should separate revenue by payer class (Medicare, Medicaid, commercial, self-pay) and by service type where the practice has ancillaries such as in-office lab or imaging. Expenses usually split into provider costs, clinical support staff, front office staff, occupancy, medical supplies and technology. A guide to building a chart of accounts that supports reporting covers the structure in more detail. Practices that outsource this layer can see how a dedicated team handles the billing system handoff in this piece on outsourced bookkeeping for healthcare practices.
Practice payroll mixes hourly staff with overtime, salaried mid-level providers, and physician owners whose pay may be a base draw plus a periodic true-up. If the practice is an S corporation, each physician owner needs a salary that meets the IRS reasonable compensation standard, which this guide on reasonable compensation for S corp owners explains. A payroll compliance checklist helps keep filing deadlines straight.
Billing staff or an outside billing company run claims, denials and appeals. The accountant's job sits downstream: confirming that every deposit in the bank matches a posted payment in the practice management system, that electronic remittance totals agree to deposits, and that the A/R rollforward (beginning A/R plus net charges minus collections minus adjustments) lands on the ending balance. Claims workflow, denial management and coding belong to the billing function, and our separate guide to healthcare revenue cycle management covers that side.
Physician groups pay owners through formulas based on collections, work RVUs, equal shares or a blend, usually with overhead allocated first. The accountant pulls production data, applies the formula exactly as the shareholder or operating agreement writes it, and documents every adjustment. Whether overhead is split equally or by production can move large sums between partners, so the formula should be applied the same way every month.
Tax work covers the entity return (Form 1120, 1120-S or 1065 depending on structure), owner returns, quarterly estimates and equipment purchase timing. For 2026, the section 179 expensing limit is $2,560,000, reduced dollar for dollar once section 179 property placed in service exceeds $4,090,000, according to IRS Rev. Proc. 2025-32. Practices in states with an elective pass-through entity tax should also review whether the PTET election turns state tax into a federal deduction for their owners.
The cash method reports income when payments arrive and deducts expenses when paid. Accrual reporting records revenue when the service is performed (net of expected contractual adjustments) and expenses when incurred. IRS Publication 538 describes both methods and the limits on who can use cash.
Section 448 of the Internal Revenue Code bars three types of taxpayer from the cash method: C corporations, partnerships that have a C corporation as a partner, and tax shelters. Two exceptions matter for medical groups:
S corporations are outside the C corporation bar entirely. The trap to watch is the tax shelter category, which can catch an LLC or partnership that allocates losses to passive investors. Practices that bring in outside investors or a management company partner should have the method reviewed before the first return under the new structure.
The cash method usually suits the tax return because it defers tax on receivables until they are collected. Accrual reporting gives a better management picture, because a month with weak collections but strong charges still shows the work performed. A common practitioner approach (guidance) is to close monthly on an accrual basis for management reporting and convert to cash basis for the return.
A health care provider that transmits health information electronically in connection with a HIPAA standard transaction is a covered entity under 45 CFR 160.103. That same section defines a business associate to include a person who provides "legal, actuarial, accounting, consulting" or financial services to a covered entity where the service involves disclosure of protected health information (PHI). An accounting firm that sees patient names on remittances, A/R aging by patient or collection files is a business associate.
The contract terms are set by 45 CFR 164.504(e). A business associate agreement must establish the permitted uses and disclosures of PHI and require the accountant to:
The rule also requires that the covered entity be able to terminate the contract if the business associate violates a material term. The agreement should be signed before system access is granted. Practices outsourcing offshore should confirm the provider's subcontractor chain is covered, a point the guide to outsourced accounting for dental and medical practices addresses in its implementation steps.
The HHS Office of Inspector General lists five federal fraud and abuse laws that apply to physicians, including the Anti-Kickback Statute and the Physician Self-Referral Law (Stark law), in its Roadmap for New Physicians. In brief, the Anti-Kickback Statute prohibits knowingly and willfully paying remuneration to induce or reward referrals of business payable by federal health care programs, and the Stark law prohibits physicians from referring patients for "designated health services" payable by Medicare or Medicaid to entities with which they have a financial relationship unless an exception applies. Designated health services include clinical laboratory, imaging, and physical therapy services.
For accountants, the practical point is narrow. When a compensation formula credits a physician for revenue from in-office lab, imaging or other ancillaries that physician orders, the arrangement needs to fit a Stark exception, and the accountant should not redesign that formula without the practice's health care attorney. The accounting team applies the approved formula and keeps the production data behind each payment. This article gives general awareness only and is not legal advice.
Physicians commonly practice through a professional corporation (PC) or professional limited liability company (PLLC). State law decides which forms are available and, in many states, limits ownership to licensed professionals. Corporate practice of medicine rules also differ by state, so entity documents need review by local counsel.
The tax treatment follows the federal classification, which is where the accounting decisions sit:
Medicine is a specified service trade or business for the section 199A qualified business income deduction. The IRS section 199A FAQs list "health" among the SSTB fields and confirm that reasonable compensation from an S corporation and guaranteed payments are not QBI. Under Rev. Proc. 2025-32, the 2026 threshold amount is $403,500 for joint filers and $201,750 for most other returns, with the phase-in range ending at $553,500 and $276,750. Above the top of the range, a physician's SSTB income gets no deduction. Our section 199A deduction guide works through the calculation.
The formulas below are common practice management definitions (guidance). Targets depend on specialty and payer mix, so compare against your own trend first.
| KPI | Formula | What it tells you |
|---|---|---|
| Net collection rate | Payments ÷ (charges minus contractual adjustments) | How much of the collectible amount was actually collected |
| Gross collection rate | Payments ÷ gross charges | Mostly reflects fee schedule levels; weak as a performance measure |
| Days in A/R | Ending A/R ÷ average daily net revenue | Speed of conversion from service to cash |
| Overhead ratio | Operating expenses before provider pay ÷ net revenue | Share of revenue consumed before physicians are paid |
| Provider net production | Provider collections minus allocated overhead | Basis for most collections-based pay formulas |
| Payer mix | Collections by payer class ÷ total collections | Exposure to rate changes from a single payer |
Dental groups track a similar list with a few specialty adjustments, as shown in this article on dental practice financial metrics and KPIs. For practices whose days in A/R keep climbing, our piece on accounts receivable services covers follow-up routines that sit alongside the billing team.
The figures below are illustrative. Lakeview Family Medicine is a PC owned equally by three physicians. It pays out income as compensation using a formula that allocates half of overhead equally and half by each physician's share of collections. Employer payroll taxes and retirement contributions are ignored to keep the math readable.
Revenue and A/R for the year
Expenses
Compensation formula (cash basis)
| Physician | Collections | Share | Equal overhead | Production overhead | Total overhead | Compensation |
|---|---|---|---|---|---|---|
| A | $1,200,000 | 40% | $250,000 | $300,000 | $550,000 | $650,000 |
| B | $1,050,000 | 35% | $250,000 | $262,500 | $512,500 | $537,500 |
| C | $750,000 | 25% | $250,000 | $187,500 | $437,500 | $312,500 |
| Total | $3,000,000 | 100% | $750,000 | $750,000 | $1,500,000 | $1,500,000 |
Cash vs accrual result
On the cash method, income before physician pay is $3,000,000 minus $1,500,000 = $1,500,000, and paying $1,500,000 of compensation leaves zero taxable income in the corporation. On the accrual method, income before physician pay is $3,060,000 minus $1,530,000 = $1,530,000, leaving $30,000 of entity-level income after the same compensation. Because Lakeview meets the qualified PSC tests (and its receipts are well under the $32,000,000 gross receipts limit), it can stay on the cash method for tax while using the accrual figures for management reporting.
KPIs
The 44.1% gross collection rate looks alarming on its own, yet the practice collected almost everything it was owed. This is why the monthly report should lead with net collection rate. A fractional CFO for a medical practice can take numbers like these into budgeting and partner buy-in pricing.
What do medical practice accounting services include? They usually include bookkeeping and the monthly close, payroll for staff and physicians, reconciliation of payer deposits to the practice management system, provider compensation calculations, and entity and owner tax returns.
Can a medical practice use the cash method of accounting? Usually yes. A practice organized as a C corporation can use cash if it qualifies as a personal service corporation under section 448, and any corporation or partnership that is not a tax shelter can use cash if its three-year average gross receipts are $32,000,000 or less for 2026. S corporations are outside the C corporation restriction.
Does a practice's accountant need to sign a business associate agreement? Yes, whenever the accounting work involves access to protected health information. HIPAA's definition of business associate specifically lists accounting services, and 45 CFR 164.504(e) sets the terms the agreement must contain.
Can physician bonuses be based on lab or imaging revenue? Bonuses tied to designated health services that a physician refers can raise Stark law issues unless the arrangement fits an exception. Any formula that touches ancillary revenue should be reviewed by a health care attorney before the accountant applies it.
Do physicians qualify for the 199A deduction? Medicine is a specified service trade or business, so the deduction phases out for 2026 once taxable income passes $201,750 for single filers (or $403,500 for joint filers) and is gone above $276,750 (or $553,500 joint).
Madras Accountancy supports medical practices and the CPA firms that serve them with bookkeeping, payroll, tax preparation, monthly reporting and CFO-level advisory work. To discuss what your practice needs, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
