What Is A Reasonable Salary for Owner Compensation?Submitted by Mission Financial Planning on February 28th, 2020
Is your dental practice an S-Corp? If so, each year you face the challenge of determining how much you should pay yourself in W2 income verses how much should flow through to your tax return as passthrough income.
As a business owner, you cannot skirt the issue of paying federal taxes by characterizing your compensation as distributions of the dental practice’s net income instead of wages. Before you can pay yourself profits, a “reasonable salary” must be paid.
What is a reasonable salary?
The IRS says you must pay yourself “reasonable compensation for services rendered to the corporation." (Learn more at https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues )
Some CPAs calculate reasonable salary as a ratio based on the owner’s contribution to the collections vs. other staff members’ efforts. You might also think about: What is a reasonable salary for the person who would replace you in your role(s) at the office? How much would you pay an associate dentist to do what you do? And, what would you pay for the administrative duties you take on?
A reasonable salary is required, it needs to look realistic, and be justifiable for the numbers in your business.
The IRS leaves room for interpretation, and CPAs we work with have different ways of determining what their clients take as salary. If you have questions about reasonable salary, contact Jared Wood or Sharon Weaver today.