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 the founder of Dental Wealth Partners and a fee-only financial planner dedicated to dentists. As an investment adviser representative (Series 63 and 65), he built the firm to give dentists coordinated, fiduciary advice across their practice, taxes, investments, retirement plans, and long-term goals — the whole picture in one strategy. A graduate of Belhaven University, Ian previously worked at Davis Private Wealth, MML Investors Services, and Northwestern Mutual, and is based in the Jackson, Mississippi area. He is the author of The Wealthy Dentist 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.