Business
S Corporation Salary for Doctors and Dentists: Setting Reasonable Compensation
How medical and dental S corporation owners set a defensible salary, how it affects payroll tax and the Section 199A deduction, and where a cash balance plan fits.
Doctors and dentists who run their practice as an S corporation must pay themselves a reasonable salary before taking distributions. The IRS gives no formula, only a list of factors, so the salary has to be supported with evidence about what the owner actually does. That decision also ripples into payroll tax, the Section 199A deduction and how much you can put into a retirement plan. This guide explains how to set a defensible figure and how the pieces fit together.
An illustration
Picture a hypothetical dental practice with three dentists and $2.4 million in collections. The owner takes a $95,000 W-2 salary and about $600,000 in distributions. A big gap like that is exactly what attracts IRS attention, yet it does not prove the salary is wrong. The answer depends on facts the numbers do not show:
- How many hours the owner spends chairside, and on which procedures
- How much time goes to running the practice: hiring, scheduling, vendors, compliance
- Whether the owner supervises the associates
- What it would cost to hire a dentist and a practice manager to do the same work
- How much of the $2.4 million comes from the owner’s own production versus the associates, hygiene and equipment
- Whether there is any written reasoning behind the $95,000
The rule in one sentence
A shareholder who works in the business must receive wages that reflect the value of their services before taking non-wage distributions. Wages pay for personal work; distributions reflect ownership, capital and the work of other employees. If the IRS decides wages were set too low, it can reclassify distributions as wages and assess payroll tax, penalties and interest. Distributions are not automatically tax-free either; amounts above stock basis can create taxable gain.
The IRS factors, translated for a practice
| IRS factor | Question for a medical or dental practice |
|---|---|
| Training and experience | Credentials, specialty, board certification and years in practice |
| Duties | Clinical, managerial, executive, or a mix |
| Time devoted | Clinical and administrative hours per week |
| Comparable pay | What similar professionals earn for similar work in the same market |
| Compensation agreements | Is there a written arrangement? |
| Pay of non-owner employees | What associates and other clinicians earn |
| Distribution history | Wages versus distributions over several years |
| Bonus practices | Formula-based or irregular? |
| Source of gross receipts | Owner’s services versus associates, staff and capital |
Separate three kinds of value
Clinical work such as procedures, diagnosis and treatment planning is the most direct evidence. Track the owner’s own production separately from total collections.
Management such as hiring, scheduling oversight, compliance and financial decisions has real market value even though it never appears on a production report. An owner spending 15 hours a week on administration is doing a practice manager’s job.
Ownership is not a service. The return on the equipment, facility, brand and referral base belongs in distributions. Drawing the line between pay for work and return on ownership is the heart of the analysis.
Solo practice versus group practice
In a solo practice most collections trace to the owner’s chair time, so the analysis is fairly direct. With associates, revenue comes from several sources. That does not mean salary should be a fixed percentage of production, which no rule supports, but it does mean documenting the owner’s clinical output, the owner’s management role and the profit generated by others.
Building a benchmarking file
- Written job description covering clinical, administrative and supervisory duties.
- Time allocation from a calendar or log, not a guess.
- Production by provider: owner, associates and hygiene, plus total collections.
- Market data from traceable, dated sources such as the Bureau of Labor Statistics and published specialty compensation surveys.
- Adjustments for geography, specialty, experience and full-time or part-time status.
- Internal comparisons with associates and the practice administrator.
- History of wages, bonuses and distributions.
- A written rationale explaining why the chosen figure fits the facts.
Do not default to a particular survey percentile. The right point in a range depends on the practice’s facts. Review the file every year, not only when an audit seems likely.
Same total pay, two different splits
| Scenario | W-2 salary | Distributions | Still to analyze |
|---|---|---|---|
| A | $100,000 | $500,000 | Does $100,000 reflect the owner’s clinical and management work? |
| B | $250,000 | $350,000 | Is $250,000 supported by the evidence, or too high or too low? |
Wages carry Social Security and Medicare tax; properly classified distributions generally do not. That gap is the reason the IRS watches S corporation pay, and neither split above can be judged without the analysis.
Where Section 199A comes in
The qualified business income deduction can allow up to 20% of qualified business income from a pass-through business. The One Big Beautiful Bill Act made it permanent for tax years after 2025 and widened the phase-in ranges for specified service businesses. Health care performed by physicians and dentists is a specified service, but that does not automatically remove the deduction:
- Below the threshold, a qualifying owner can generally take the full deduction.
- Within the phase-in range, only part of the income, wages and property counts.
- Above the range, the deduction from that business can disappear.
For 2026, the IRS threshold is $201,750 for single filers and $403,500 for joint filers, with the phase-in ending at $276,750 and $553,500. The figures adjust each year, so confirm the current revenue procedure.
Owner wages are not qualified business income, and higher wages reduce the business’s net income. Above the threshold, though, W-2 wages also feed the wage limitation, so a higher salary can help in some cases. Neither “higher salary always hurts” nor “lower salary always helps” holds up.
Adding a cash balance plan
A cash balance plan is a defined benefit plan that shows each benefit as a hypothetical account. Employer contributions to a properly designed plan are generally deductible and can be much larger than 401(k) limits. It tends to suit practices with high, steady profit, older owners with less time to save and cash flow that can support required annual funding.
Contributions are set by an enrolled actuary based on age, compensation and the plan formula, not chosen freely each year, and the plan needs legal design and nondiscrimination testing. Higher defensible wages support larger contributions, and the deduction lowers taxable income, which can change where you fall in the Section 199A range. Whether it brings you below the phase-out depends on your complete numbers, so model it before committing.
| Variable | Before review | After a documented review | Effect to model |
|---|---|---|---|
| Owner W-2 | $95,000 | A benchmarked figure | More payroll tax |
| Distributions | $600,000 | Lower relative to salary | Different employment tax treatment |
| Retirement contributions | 401(k) and profit sharing | Possibly a cash balance plan | Lower taxable income |
| Section 199A | Depends on income | Possibly a different position | Requires full modeling |
What to keep in case of an exam
- Employment agreement and job description
- Payroll records, W-2s and Forms 941
- Benchmarking sources and the written methodology
- Time records or the estimation method
- Production reports by provider and practice financials
- Pay data for other clinicians
- Distribution and bonus history
- Board or shareholder approval records
Common mistakes
- Setting salary as a flat percentage of revenue
- Using the lowest number found online or outdated surveys
- Ignoring management duties or the owner’s own production
- Comparing the owner to a role that is not similar
- Raising salary only when an audit looks likely
- Focusing only on payroll tax and missing retirement plan options
- Assuming a cash balance plan guarantees a set deduction
How CPA Torrance helps practice owners
Our healthcare accounting team builds documented compensation analyses and models them alongside Section 199A and retirement planning through tax planning, with production data kept accurate through monthly bookkeeping. We do not promise IRS acceptance or a specific saving, but we can give you a clear, supported figure. Book a 15-minute call.
Frequently asked questions
What is a reasonable salary for a dentist who owns an S corporation?
There is no set figure. It is the wage that matches the clinical, management and administrative work actually performed, benchmarked against similar roles, specialty, hours and location.
Which factors does the IRS use?
Training, duties, time devoted, comparable pay, distribution history, pay of other employees, bonus practices and the source of the practice’s receipts.
Can I take distributions as an S corporation owner?
Yes, after paying yourself reasonable wages. Otherwise the IRS can reclassify distributions as wages.
Is there a minimum salary?
No minimum exists in the tax code. The figure depends on your actual services.
Do medical and dental practices lose the Section 199A deduction?
Not automatically. Owners below the income threshold can still qualify fully, and those in the phase-in range partly.
This article is general information, not tax advice for your situation. Deadlines and rules can change; confirm with a tax professional before acting.
