Blog Archive
February 2015

How to Determine “Reasonable Salary” in an S-corporation

If you own a dental or medical practice taxed as an S-corporation, then the IRS has sent you a notice CP261 with language that reads something like this:

“You must determine a reasonable salary when a shareholder-employee of an S corporation provides services to the corporation. Payments to a shareholder-employee for services provided to an S corporation are wages and are subject to employment taxes. We may re-characterize distributions paid to a shareholder as salary if the distribution was paid in lieu of reasonable compensation.”1

In every practice where the dentist is both an owner and seeing patients, there are two types of compensation. First, as an employee working on patients you should be paid a salary or wage for your hours worked. Second, as a business owner you should be entitled to distributions to pay the taxes that flow to your personal income tax return, pay for debt services, receive a return on capital invested in the business, and for time spent growing the business as an entrepreneur...