Free Tool — Healthcare S-Corps
Are you paying yourself too much — or too little?
Most physician S-corp owners set their salary once and never revisit it. A number that's too low invites an IRS audit. Too high and you're overpaying FICA by thousands per year. Find your optimal range in 90 seconds — free, from a licensed CPA.
Reasonable compensation, answered
The questions practice owners ask before they trust a salary number — including the rule of thumb that is not a rule.
What is reasonable compensation for a physician S-corp owner?
There is no percentage in the tax code. Reasonable compensation is a facts-and-circumstances standard: what the practice would have to pay someone else to do the work the owner actually does. The factors that matter are the owner's role and clinical duties, hours worked, specialty and regional pay data, and how much of practice revenue comes from the owner's personal services rather than from staff, equipment, or capital. A practice generating most of its revenue from the owner's own clinical work generally supports a higher salary than one where associates produce most of the collections.
Is the 60/40 salary-to-distribution rule real?
No. The 60/40 split is a rule of thumb that circulates widely and appears nowhere in the Internal Revenue Code, the regulations, or IRS guidance. It can happen to land near a defensible number, but it is not a safe harbor and it will not defend an examination on its own. What defends a salary is documentation of comparable pay for the role actually performed — not a ratio.
What happens if an S-corp owner pays themselves too little?
The IRS can recharacterize distributions as wages. The consequence is back employment taxes on the reclassified amount, plus penalties and interest, and the adjustment can reach open prior years rather than only the year examined. Officer compensation of zero alongside meaningful distributions is the pattern most likely to draw the adjustment, because the return states on its face that an owner performed services without pay.
Can a physician take all practice income as distributions instead of salary?
Not if the physician performs services for the practice. An owner who works in the business must be paid reasonable compensation as W-2 wages before profit is distributed. The distribution treatment applies to the return on capital and the value created by the business beyond the owner's own labor — not to the labor itself.
How does owner salary affect retirement contributions?
Employer retirement contributions are generally calculated off W-2 compensation, so a salary set too low to minimize payroll taxes also caps how much can go into a SEP-IRA or 401(k). This is the trade-off most salary analyses miss: the payroll tax saved by a lower salary can be smaller than the deductible retirement contribution it forfeits, particularly for an owner trying to fund a plan aggressively.
When should an owner revisit their salary?
Before the year closes, because compensation runs through payroll and payroll for a finished year cannot be redone. A salary reviewed in September or October can still be corrected across the remaining pay runs; the same review in late December has no runway. Practices whose collections have moved materially during the year are the ones most likely to have a salary that no longer matches the facts.