Setting a reasonable S corporation salary when you are the clinician

The general rule for S corporation owner wages is set out in our post on reasonable compensation: there is no safe harbor percentage, and the salary has to be reasonable for the services you actually perform. This post applies that standard to one very common owner, a licensed clinician who owns the practice and also sees clients in it.

That describes most of the therapists, counselors, psychologists, and allied health practitioners who own an S corporation. Their situation has a shape that makes the analysis more manageable than it first looks, provided it is done in the right order.

You are doing two jobs

A clinician-owner performs clinical services, and in all but the smallest practices also performs management services: scheduling, oversight of billing, hiring, supervising associates, compliance, and the business decisions. Those are different roles with different market rates. The cleanest way to reach a defensible number is to price them separately and add them up, weighted by the time each one actually takes.

Owning the practice is not a third job. Profit that comes from capital, from the practice’s reputation, or from other people’s work is a return on ownership, and that is the part distributions are meant to carry. The factors the IRS and the courts weigh do not ask what share of profit you took as salary. They ask what your services were worth.

Pricing the clinical half

For a solo practitioner, the natural comparable is what an employed clinician with the same license, credentials, and caseload earns in your market. Public wage data exists for this. The Bureau of Labor Statistics publishes Occupational Employment and Wage Statistics by occupation and by metropolitan area, with categories covering mental health counselors, marriage and family therapists, clinical and counseling psychologists, and many allied health roles. Surveys from professional associations can supplement it. Whatever source you use, record which one, which occupation, which geography, and the date you pulled it.

Then adjust for the facts that make you different from the median. A full caseload is not a part-time one. A doctoral license, a specialty certification, or a supervisory credential moves the figure up, and seeing clients twenty hours a week moves it down relative to a full-time employee. The aim is not the highest or the lowest figure that could be argued. It is a figure you can explain.

A group practice has a better comparable than any survey, which is its own payroll. If the practice pays W-2 associates for clinical hours, what it pays them per session or per hour for comparable work is exactly the evidence the factor test asks about, because it measures what the business pays non-owners for similar services. An owner whose clinical salary sits well below what the practice pays its own associates for the same work is the pattern that is hardest to explain.

Pricing the management half

Management time is priced against what it would cost to hire someone to do it: a practice manager, an office manager, or a clinical director, depending on what the work actually is. In a solo practice this is often modest and partly absorbed into the clinical rate. In a group practice with associates to supervise and a payroll to run, it can be a real and separate amount. Estimate the hours honestly. The point is a record of how the number was built, not a figure worked backward from the result you wanted.

Where the rest of the profit comes from

In a solo practice most of the profit usually is the clinician’s own work, so the room between a reasonable salary and total profit is narrower. That is not a reason to avoid the election, but it is a reason to run the numbers before making it, which is one of the questions on our page for therapy practices.

In a group practice, a meaningful share of profit is generated by associates’ sessions. That margin is not payment for your clinical services, and it is the strongest support for distributions that exceed salary. It is worth being able to show: sessions and collections by provider, and what each associate costs the practice.

What the salary also drives

The salary feeds several other calculations, which is a reason not to treat it as a payroll tax number alone. Employer retirement contributions for an S corporation owner are based on W-2 wages, not on distributions, so a lower salary also lowers what a 401(k) or similar plan can take in on your behalf. The qualified business income deduction under section 199A excludes the reasonable compensation paid to the owner from qualified business income, and because a health practice is a specified service trade or business, the deduction phases out as taxable income rises. Health insurance premiums the corporation pays for a more-than-2-percent shareholder are included in that shareholder’s W-2 wages under IRS Notice 2008-1, which changes what the W-2 shows without adding Social Security and Medicare tax when the arrangement is set up correctly.

None of these is a reason to choose a particular number. They are reasons to understand what the number does before setting it.

Running it through payroll

A reasonable salary has to be paid as wages: through payroll, with withholding, reported on quarterly Forms 941 and an annual W-2. A figure written into a memo but paid out as owner draws is not salary. A regular payroll schedule is usually easier to live with than a single year-end catch-up, and it makes the owner’s own estimated tax planning simpler, because tax withheld from wages counts toward the year’s required payments.

Revisit it when the practice changes

A salary set for a solo practice in its second year is rarely right for the same owner running a group practice with eight associates. Adding clinicians, reducing your own caseload to manage, moving to a new market, or adding a credential each change the inputs. Re-derive the figure when the facts move, and keep the earlier analysis alongside the new one, since the record of how the number changed is part of what makes it credible.

If you are weighing the S election in the first place, or already have one and have never written down how the salary was set, that is a short conversation, and it is where our S corporation work usually starts.

• S corporation
• Reasonable compensation
• Private practice