Short answer: if your practice is taxed as an S-corp, the IRS requires you to pay yourself a “reasonable” W-2 salary for the work you do before taking the rest as distributions. There’s no magic formula, but setting your salary too low to dodge payroll tax is a well-known audit trigger. The goal is a defensible number, not the lowest possible one.
Why does S-corp salary matter?
The S-corp’s appeal is payroll-tax savings: your W-2 salary is subject to Social Security and Medicare taxes, but distributions of remaining profit generally are not. That creates an incentive to pay yourself a small salary and take a large distribution — which is exactly why the IRS requires the salary to be “reasonable” for the services you actually perform.
What counts as “reasonable compensation”?
It’s the pay a similar dentist would earn for the same clinical and management work in your market. The IRS looks at your role, experience, hours, and what comparable dentists are paid — not at whatever number minimizes your tax. In practice, a producing dentist-owner’s reasonable salary is typically a meaningful figure, because the clinical work itself commands a real wage.
How do you set the number?
- Document your actual role — clinical production, management, and hours.
- Pull comparable dentist compensation data for your market and specialty.
- Set a salary that reflects the clinical work you perform, then take profit above it as distributions.
- Revisit annually with your CPA as production and roles change.
- Keep the reasoning on file in case you ever need to support it.
Does the salary affect retirement contributions?
Yes — an important wrinkle. Retirement-plan contributions (like a 401(k) or profit-sharing / cash balance plan) are generally based on W-2 wages, so a salary set too low can cap how much you can shelter for retirement. Sometimes a higher salary that unlocks larger retirement contributions beats a lower one that saves a bit of payroll tax. This interplay is exactly where your CPA and advisor should coordinate.
Is an S-corp even right for your practice?
The salary question only matters if you’ve elected S-corp treatment in the first place. Whether that election makes sense depends on your profit level and situation — we compare the options in S-corp vs. sole proprietor for dentists. Entity choice and reasonable comp should be decided together with your CPA.
Frequently asked questions
It’s the wage a comparable dentist would earn for the same clinical and management work in your market — not the lowest number that minimizes payroll tax. For a producing dentist-owner it’s typically a substantial figure. Set it with your CPA using comparable compensation data and document your reasoning.
Only within reason. S-corp owners can take profit above a reasonable salary as distributions, but setting the salary unreasonably low is a common IRS audit trigger. If challenged, distributions can be reclassified as wages with back-taxes and penalties.
It can. Many retirement-plan contributions are based on W-2 wages, so too low a salary may cap what you can shelter. Sometimes a higher salary that unlocks larger retirement contributions is more valuable than the payroll-tax savings of a lower one — coordinate the two with your advisor and CPA.
Sources
Founder & Financial Planner · Investment Adviser Representative · Series 63 & 65
Ian McGinnis is a financial planner and founder of Dental Wealth Partners, a non-commission, fee-only financial planning firm for dentists. He is the author of The Wealthy Dentist: Smarter Money. Less Stress. More Life. and hosts the Smiles & Cents podcast.
Keep reading
- S-corp vs. sole proprietor for dentists: which is better?How choosing an S-corporation affects a dentist’s taxes, payroll, and paperwork — and when the added complexity is worth it.
- Tax planning strategies for dental practice ownersProactive, year-round tax strategies for dental practice owners — entity choice, retirement plans, income timing, and coordinating with your CPA.
- Retirement plans for dental practices, comparedA comparison of 401(k), safe harbor, profit sharing, SEP-IRA, and cash balance plans for dental practice owners — and how to choose.