S-Corp Salary Strategy for Dental Practice Owners

Introduction

Dental practice owners operating as S corporations often grapple with the challenge of balancing compensation structures to minimize tax liabilities while complying with IRS mandates on reasonable salary. Inexperienced tax preparers may set salaries too low, risking IRS reclassification and penalties, or too high, unnecessarily increasing payroll taxes.

Are you optimizing your S-Corp salary to leverage self-employment tax savings without triggering audits? At Kewal Krishan & Co, our expert tax advisors help dental practice owners save an average of $50,000 annually, which could accumulate to $1 million over a decade through precise salary strategies. This blog details the S-Corp salary strategy for dental practices in 2025, backed by Internal Revenue Code (IRC) provisions, with actionable examples and compliance steps.

With the One Big Beautiful Bill Act making the Qualified Business Income (QBI) deduction permanent under IRC § 199A, and expanded phase-in thresholds, strategic salary setting is more critical than ever for Specified Service Trades or Businesses (SSTBs) like dentistry. Discover how to structure your compensation effectively, linked to Our Tax Planning Services.

Understanding S-Corp Salary Requirements for Dental Practices

S corporations under IRC § 1361 pass income to shareholders, avoiding corporate tax but requiring reasonable compensation for services rendered by shareholder-employees per IRS guidelines. For dental practices, an SSTB under IRC § 199A(d)(2), this salary affects self-employment (SE) tax savings, QBI deductions, and audit risk.

Reasonable salary is determined by the IRS 9-factor test, including training, duties, time devoted, and comparable salaries (from Revenue Ruling 59-221 and case law like Watson v. Commissioner). In 2025, the Social Security wage base is $174,900, capping FICA at that amount under IRC § 3121.

Salaries are subject to payroll taxes (15.3%, split between employer/employee), while distributions avoid SE tax under IRC § 1402. However, unreasonably low salaries may be reclassified, incurring penalties under IRC § 6662.

QBI deduction (20% of qualified income under IRC § 199A) is limited for SSTBs above phase-in thresholds ($75,000 single/$150,000 joint, full phase-out at $275,000/$550,000). Salary impacts the wage limitation (50% of W-2 wages).

For details, see IRS Fact Sheet on S Corporation Compensation.

Key Forms for Reporting

• Form 1120-S: Reports S-Corp income and deductions.
• Form 941: Quarterly payroll tax returns.
• Form W-2: Issued to shareholder-employees for salaries.
• Form 8995-A: For QBI deduction calculations.

Detailed Example: Optimizing Salary for Dental Practices

Consider Dr. Lee, owner of a dental S-Corp with $600,000 net income in 2025, filing jointly with $650,000 total taxable income. Industry data suggests reasonable salary at 30-35% of collections (e.g., $180,000-$210,000 for $600,000 practice).

Low Salary Scenario (Risky)

• Salary: $100,000 (payroll tax $15,300).
• Distribution: $500,000 (no SE tax).
• QBI: 20% of $600,000 = $120,000, limited to 50% wages ($50,000). SSTB phase-out (over $150,000, full at $550,000): ~25% deduction retained ($12,500).
• Tax: Salary at 32% ($32,000) + distributions NIIT if applicable. IRS may reclassify $100,000 distribution as salary, adding $15,300 payroll tax + penalties.

Optimized Salary Scenario

• Salary: $200,000 (30% of income, reasonable per BLS data; payroll tax $30,600, but half deductible).
• Distribution: $400,000.
• QBI: 20% = $120,000, wage limit $100,000. Phase-out reduces to $25,000.
• Tax Savings: Avoids SE on $400,000 (~$61,200 saved vs. sole prop), QBI $25,000 deduction saves $8,000 at 32%. Net vs. low: Higher QBI/wage limit offsets increased payroll.

Total savings vs. no S-Corp: ~$45,900 in SE tax, plus QBI.

Alternative Scenario

For $300,000 income (below $150,000 threshold): Salary $90,000 (30%), distribution $210,000. Full QBI $60,000, saving $19,200 at 32%, with SE avoidance on distributions.

Step-by-Step Guide for Taxpayer Compliance

To set and document reasonable salary for your dental S-Corp in 2025, follow these steps:

1. Determine Reasonable Amount: Use IRS 9-factor test; reference BLS data (dentist median $160,000-$220,000) or comparables like RCReports tool.
2. Document Justification: Prepare memo detailing factors, duties, and market data per IRS guidelines.
3. Set Salary: Approve via corporate minutes; pay via payroll system, withholding FICA/Medicare.
4. Calculate QBI: Aggregate qualified income, apply wage limit and SSTB phase-out under IRC § 199A.
5. File Payroll Returns: Submit Form 941 quarterly, W-2/3 by January 31, 2026.
6. Report on Returns: File Form 1120-S by March 15, 2026, issuing K-1s; claim QBI on personal Form 1040 with Form 8995-A.
7. Pay Taxes: Remit payroll taxes timely to avoid penalties under IRC § 6651.
8. Retain Records: Keep memos, payroll stubs, and comparables for three years (IRC § 6001).

For multi-owner practices, explore Our Business Tax Services.

Common Pitfalls to Avoid

• Underpaying Salary: Risks reclassification and penalties (IRC § 6662); use 30-35% of collections benchmark for dentists.
• QBI Misapplication: Forget SSTB phase-out for dentistry; calculate accurately.
• Documentation Lapses: Lack of justification invites audits; maintain detailed records.
• State Non-Conformity: Some states (e.g., CA) may not recognize federal QBI; verify local rules.

Why Work with a Tax Expert?

Crafting an S-Corp salary strategy for dental practices requires balancing IRS reasonable compensation mandates with QBI optimization under IRC § 199A, where errors can trigger reclassifications or lost deductions. Generic preparers may undervalue industry benchmarks or OBBBA expansions, costing thousands. Kewal Krishan & Co specializes in tailored compensation analyses, ensuring audit-proof documentation and maximum savings. Our expertise safeguards against pitfalls, as demonstrated in Our Tax Litigation Services.

Conclusion

The S-Corp salary strategy for dental practice owners in 2025 hinges on setting reasonable compensation to minimize SE taxes while preserving QBI deductions, enhanced by OBBBA’s permanent provisions. With industry benchmarks guiding 30-35% salaries, careful documentation and compliance are essential to avoid IRS scrutiny. Strategic planning can yield significant savings—review your compensation structure now to enhance your practice’s financial health.

Call to Action

Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to refine your S-Corp salary strategy.

About Our CPA

Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.

Disclaimer

This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.

FAQs

1. What is reasonable salary for dental S-Corps?

Typically 30-35% of collections, based on IRS 9-factor test and BLS.

2. How does salary affect QBI?

Provides wage base for limitation, but dentistry as SSTB phases out above thresholds (IRC § 199A).

3. What’s the 2025 Social Security base?

$174,900, capping FICA (IRC § 3121).

4. Can low salary trigger audits?

Yes, if unreasonable; document justification to defend (Revenue Ruling 59-221).

5. Is QBI permanent for 2025?

Yes, via OBBBA, with expanded thresholds.