Reasonable Salary for an S Corp Doctor, Dentist or Therapist

What salary is reasonable for an S corp owner who is a doctor, dentist or therapist?

An S corporation must pay a shareholder who works in the practice reasonable compensation for those services before it makes non-wage distributions to that shareholder. The Code and regulations give no specific guidelines, such as a dollar amount or percentage for a profession, and courts decide each case on its facts (IRS fact sheet; IRS: S corporation compensation).

The rule applies to a professional practice like any other business. A corporate officer who works in the practice is an employee of the corporation (Publication 15), so your pay for that work is wages. Money taken beyond reasonable wages can be a distribution.

The test starts with where the practice's receipts come from: the owner's own services, the services of employees who are not shareholders, or capital and equipment (IRS: S corporation compensation). The more of the receipts come from your own work, the more of what you take out is wage work. For a solo practitioner with no staff or equipment producing receipts, the receipts come largely from your own services, and the factors below bear on the amount. The IRS also says reasonable compensation never exceeds the amount the shareholder receives, directly or indirectly (IRS: S corporation compensation).

A case is not simple when:

• other clinicians, such as associates, hygienists or employed therapists, produce part of the receipts;
• you work part time in the practice or hold another job;
• your books do not show collections by provider, or your pay and distributions are recorded together;
• you have taken mostly distributions for a year or more;
• a notice, or your preparer, has questioned the number.

The last two can mean past years need correcting, not just a new number. See "Different for you?" at the end.

Gather before you set it: your hours and duties in a typical week, receipts by provider for the year, pay records for staff and associates, your practice agreements, and your last W-2, Form 1120-S and payroll filings.

Which of my practice's receipts count as my own work?

Receipts you produce yourself, and the administrative work that keeps the rest running, are wage work. Receipts produced by other people or by equipment are not. The IRS draws the line this way (IRS: S corporation compensation):

The IRS text speaks of non-shareholder employees. If your associates are paid as contractors on Form 1099, see contractors who may be employees.

To sort your own practice, pull collections by rendering provider for the year from the billing or scheduling records and mark the lines that are yours. The IRS gives no percentage cut-off, so keep the report and the method you used. The practice still pays its associates and staff wages of their own.

What do people in my field earn as employees, and how do I use that number?

Employee pay for the same work is the usual first comparison. The IRS lists what comparable businesses pay for similar services as a factor (IRS fact sheet), and the regulation on deducting pay says it is in general just to assume that reasonable pay is what would ordinarily be paid for like services by like enterprises under like circumstances (26 CFR 1.162-7(b)(3)). The IRS's job aid for its own valuation staff asks what a non-owner would be paid for the same job at a similar company (IRS job aid). The job aid says it is not official IRS position and cannot be cited as authority, so read it as a view of how the IRS may approach the question.

The Bureau of Labor Statistics (BLS) publishes median pay for these jobs. These are national medians for wage and salary workers, May 2025:

Use a median as one input, in this order:

1. Match the job and the place. BLS defines the median as the wage at which half the workers in an occupation earned more and half earned less (BLS: Dentists). It mixes fields of practice and experience levels. BLS publishes estimates for the nation, individual states and metropolitan areas (BLS wage statistics), so look up your own state or area. If your profession is not in the table, such as a chiropractor or optometrist, find its occupation in the same BLS statistics and use it the same way.
2. Match the hours. BLS says its annual wage estimates assume a full-time, year-round schedule of 2,080 hours (BLS FAQ). Scale to the hours you work for the practice.
3. Know who is left out. BLS says the survey does not cover the self-employed or owners and partners in unincorporated firms, and its figures are wages only, without employer benefit costs (BLS FAQ). The medians mostly describe people employed by others.
4. Adjust, then write down why. Training, experience and local demand move the number. A median is not a safe harbor.

The closest local comparison is often your own payroll. The IRS lists payments to non-shareholder employees as a factor, so what the practice pays an employed associate or therapist for similar work carries weight (IRS fact sheet).

How do my hours, duties and management work change the number?

More hours and wider duties raise the comparison, and fewer hours lower it. The IRS lists training and experience, duties and responsibilities, and time and effort devoted to the business as factors, and says management work counts as wage work even when the manager produces no receipts directly (IRS: S corporation compensation).

Split your week by duty. The IRS job aid describes breaking an owner's hours into duties, pricing each at what the market pays for that job, and adding the parts. It warns against adding full-time salaries for several jobs, because that overstates the hours one person works. It also ranks this the least used approach and notes that hours are hard to allocate and part-time market pay is hard to find (IRS job aid). Use the split to check the market comparison, not to replace it. For a practice owner, clinical hours compare with clinician pay, and hours spent running the practice compare with pay for that management job. The BLS median for medical and health services managers is $123,860.

The split is a method, not a rule. A title, or a list of duties with no hours behind it, proves little.

What if I work part time in my practice or also work somewhere else?

Time and effort devoted to the business is one of the factors, so a part-time owner is compared with part-time pay for the same work (IRS fact sheet). The IRS job aid takes the same view: an employee is entitled to part-time pay for part-time work (IRS job aid).

The return asks for your hours too. When total receipts, as the Form 1120-S instructions define them, are $500,000 or more, Form 1125-E lists each officer's percent of time devoted to the business (Form 1125-E; Form 1120-S instructions). Report the same hours you document.

Hours that do not match the receipts need an explanation, because the test starts with who produced the receipts. If you work three days a week yet your own patients produce most of the receipts, the file should explain why pay for three days fits. If other clinicians produce most of them, collections by provider show that. Keep:

• your clinic or session schedule;
• the other employer's schedule, and its pay records, kept apart from the practice's;
• the dated pay decision, stating the hours it assumes.

How do I document the number so it holds up?

Write down how you chose the number, when, and from what, before the pay is set. The regulation on deducting pay looks at the circumstances when the pay arrangement was made, not when it is questioned, so date the decision (26 CFR 1.162-7(b)(3)). An owner's intent to limit wages does not control: in an 8th Circuit case the IRS cites, the shareholder received $24,000 a year in wages beside large distributions, the corporation said it intended to pay only that, and the court held that the test is whether the payments were truly pay for services (IRS: corporate officers). The same IRS page describes Tax Court cases against a veterinary clinic and an accountant's corporation, where the court treated payments the owner called distributions or dividends as wages. The file is the evidence.

The factors come from the IRS fact sheet. The source-of-receipts test comes from IRS: S corporation compensation.

The number then appears in three places: your W-2 through payroll, Form 1120-S line 7 for officers' compensation, and Form 1125-E when total receipts reach the threshold above (Form 1120-S instructions). The Form 1120-S instructions say payments to an officer must be treated as wages to the extent they are reasonable compensation. For the first paycheck, see setting up payroll. For recording pay and distributions, see S corporation bookkeeping.

Should my salary change when the practice's profit changes?

The IRS factors center on the work, but the company's financial condition is also weighed, so profit is not ignored (IRS job aid). Salary changes mainly when your hours, duties or the staff and equipment that produce receipts change. A good or bad year alone does not decide it. For a practice that nets less than the comparison, or a first year, see S corporation owner salary.

The IRS lists dividend history and the use of a formula among the factors (IRS fact sheet). It publishes no formula, and a wage worked backward from the year's profit does not answer the work-based factors above. Review the number at least once a year and whenever your duties change.

What does the IRS do if it decides my salary is too low?

The IRS can reclassify distributions as wages to the extent they are reasonable pay for your services, and it has done so in court cases (IRS: S corporation compensation). The practice can then owe employment tax on the added wages, and the employee's share of that tax applies too.

Social Security tax is 6.2% for each of employer and employee on wages up to $184,500. Medicare tax is 1.45% for each, with no wage base (Publication 15). Each employer generally counts only the wages it pays toward the Social Security wage base, so pay from another job does not use up the practice's base (section 3121(a)(1)). An employee with excess Social Security tax withheld by several employers can claim a credit on the individual return (IRS Topic 608). Added wages above the base the practice itself pays carry Medicare tax only, so the cost differs between a therapist and a physician. Employees also owe 0.9% Additional Medicare Tax on combined wages from all employers above a threshold set by filing status (Form 8959 instructions). An employer starts withholding it on wages it pays above $200,000, whatever other employers pay, and it has no employer share (Form 8959 instructions; Publication 15). A part-time physician with two jobs can therefore owe it when she files though neither employer withholds it.

Penalties and interest on unpaid employment tax can follow (behind on payroll taxes). A person responsible for collecting and paying over employee taxes who willfully fails to may also be personally liable for the trust fund recovery penalty (section 6672; IRS). The IRS manual says it does not apply to tax assessed at the reduced rates of section 3509, which cover some workers wrongly treated as non-employees (IRM 4.23.8). See the trust fund recovery penalty for who counts as responsible and the time limit.

A year with only distributions, or with no payroll at all, needs more than a new number. See S corporation owner salary for correcting past years, and if you never ran payroll for the current year.

Example

These examples are illustrative, in US dollars. They are not salary benchmarks.

A solo therapist who takes mostly distributions

A licensed marriage and family therapist works full time, alone. Her practice has $140,000 after other operating costs, before her wages and the employer payroll tax on them. She pays herself $30,000 in gross wages. Employer Social Security and Medicare tax adds $2,295 (7.65 percent), leaving $107,705 before unemployment tax and other payroll costs, and she takes $105,000 as distributions. Her own sessions produce nearly all the receipts. The BLS median for marriage and family therapists is $66,940, more than twice her wage (a counselor or social worker would use that occupation's row in the table above). With no associates or equipment behind the profit, a wage this far below the pay for the same work may draw questions. She starts from her file, not a percentage: what an employer would pay a full-time therapist in her state, adjusted for her experience and any management work. The $140,000 covers a median wage plus employer tax with room to spare, so profit does not limit that comparison.

An owner dentist with two hygienists and an associate

An owner dentist works 40 hours a week: about 35 treating patients and 5 running the practice. A provider report shows his own treatment produced about 60 percent of collections. The associate dentist and the hygienists produced the rest. The practice nets $400,000 before owner pay.

Only the owner's clinical and management work needs wage treatment. The associate's and hygienists' production, and the equipment, do not, and the practice pays them wages of their own. The 60 percent shows whose work produced the receipts; it is not a salary percentage, and his comparison is priced from his hours. One way to check against market pay is 35 of 40 hours at the BLS dentist median of $176,110, plus 5 of 40 hours at the manager median of $123,860. That comes to about $170,000, before adjusting for his field, state and experience. He keeps the provider report, the hours log and the staff pay records with it.

A physician at part time in her own corporation

A physician works about 60 percent of full time in her S corporation and the rest as an employee elsewhere. Time and effort devoted to the corporation is a stated factor, so she compares her wage with part-time pay for the same work. Sixty percent of the BLS physician median of $275,930 is about $165,600, before adjusting for her field, state and experience. She keeps her clinic schedule, the other employer's schedule and a dated pay decision. Wages from the other employer pay for other work and stay separate in her records.

Different for you?

• A notice or your preparer has questioned a low salary, you have taken mostly distributions for a year or more, or your practice has several providers and you cannot tell which receipts are yours: the number depends on your actual hours, receipts and records, and past years may need correcting. Start with S corporation owner salary and see corporate tax help to work through the number with your actual hours, receipts and records.
• Your books cannot show collections by provider, or owner pay and distributions sit in one account: the file this page asks for starts in the books. See S corporation bookkeeping and bookkeeping help.
• You want the general rule, the 60/40 idea, or how to fix past years paid only in distributions: see S corporation owner salary.
• You have not run payroll for yourself this year: see S corporation payroll never run.
• You are still deciding whether the S election pays off: see Should you elect S corporation status? and How S corporations are taxed.
• You want to know how salary affects the qualified business income deduction: see QBI deduction for S corporation owners.
• You want health insurance or retirement contributions for the owner: see Health insurance for owners.
• You took more out than your stock basis: see S corporation distributions in excess of basis.
• A spouse or family member works in the practice: the IRS may adjust items when a family member of a shareholder renders services without reasonable compensation (Form 1120-S instructions); see paying family on payroll in an S corporation.
• Your practice is an LLC that has not elected S corporation tax status: see Paying yourself from an LLC.