If your practice is an S corp, you have to pay yourself a salary through payroll that matches what you'd pay someone else to do your job. Your CPA sets the number. Your part is giving them the facts and keeping payroll running on schedule.
Why the IRS cares about your salary
In an S corp, your salary carries payroll taxes and your distributions don't. That gives every owner a reason to keep the salary low. The IRS knows it, and it can treat distributions as wages when the salary is too low for the work, then charge the payroll taxes you skipped, plus penalties and interest.
What goes into the number
There's no formula. The IRS looks at the facts, including:
- Your training and experience.
- Your duties and the hours you work.
- What practices like yours pay someone for the same work.
- The size of the practice and how much it earns.
- What you pay the people who work for you.
- How your salary compares with your distributions over time.
As a DPC owner you do two jobs. You see patients, and you run the business. Both count. Many CPAs use a compensation study, a report that prices each task you do at market rates, to back up the number.
Mistakes I see
- No salary at all while taking distributions all year.
- A salary set the year the election started and never looked at again.
- Nothing on payroll until December, then one large paycheck.
- Distributions taken before payroll is caught up.
If the practice can't support a full salary yet, tell your CPA. What the business can afford is part of the picture, and they can help you document it.
How it shows up in your books
Your salary and the employer payroll taxes are expenses on the P&L. Distributions aren't expenses. They come out of your equity on the Balance Sheet. That's one reason your profit and your bank balance can look so different. This post explains that gap.
What I'd do this week
- Confirm payroll has run for you every month this year.
- Add up your salary so far this year and your distributions so far this year.
- Send both totals to your CPA before December, so any change can go through your last payrolls of the year.
Common questions
Is there a 60/40 rule?
No. A 60/40 split between salary and distributions is a shortcut people repeat. It isn't an IRS rule. The number has to fit your work and your practice.
Can I change my salary partway through the year?
Yes, through payroll. Talk with your CPA first so the change fits the full-year picture.
Do I need a compensation study?
It isn't required. It's documentation that shows how the number was set, which helps if the IRS ever asks.
Want payroll and distributions recorded right?
We keep your salary, payroll taxes and distributions separate in your books every month, so your CPA can see them at a glance. If that's what you need, apply to work with us.