How should a healthcare practice owner pay themselves — salary, distribution, or both?

If your practice is set up as an S-Corp or professional corporation (and most private practices are), you need to pay yourself both a W-2 salary and take distributions. This isn’t optional. The IRS requires S-Corp owners who actively work in the business to receive a reasonable salary before taking any profit distributions. Skipping the salary or setting it artificially low to save on payroll taxes is one of the most common and most audited mistakes healthcare practice owners make.

The key question is what counts as “reasonable.” For a physician-owner, the IRS generally expects your salary to reflect what a non-owner provider in the same specialty and geographic area would earn. Depending on your specialty, that typically falls in the $200,000 to $400,000 range or higher. A family medicine practice owner paying themselves $60,000 on W-2 while taking $350,000 in distributions is going to attract attention. The IRS looks at industry salary surveys, regional compensation data, and what similarly qualified professionals earn in comparable roles. If your salary doesn’t pass that test, you’re exposed.

The reason owners are tempted to lean heavily toward distributions is taxes. Salary is subject to Social Security and Medicare taxes (FICA), which means roughly 15.3% on the first $168,600 in 2024 and 2.9% Medicare tax above that. Distributions are not subject to FICA. So every dollar shifted from salary to distributions saves payroll tax. The savings are real, but so is the risk. If the IRS reclassifies distributions as wages, you’ll owe the back payroll taxes plus penalties and interest.

The right approach is to set a defensible salary based on actual compensation benchmarks for your specialty, then take remaining profits as distributions. Document how you arrived at the salary figure. Save the comp data you used. This documentation is your defense if the IRS ever questions the split.

Your bookkeeping has to clearly support this structure. Salary should run through payroll with proper withholding and quarterly tax deposits. Distributions should be recorded separately as owner draws from retained earnings, not mixed in with payroll or coded as contractor payments. When these get tangled together in the books, it creates confusion at tax time and makes it harder to demonstrate compliance if you’re audited.

It’s also worth reviewing your salary annually. As your practice grows and revenue changes, what was reasonable two years ago may no longer be. A practice generating $1.5 million with one physician-owner paying themselves $180,000 on W-2 looks very different from one generating $600,000. The salary should move with the business.

Working with Northern Virginia small business bookkeeping services that understand healthcare practice finances makes this easier to manage. The payroll, distributions, tax deposits, and quarterly filings all need to work together cleanly. Getting the compensation structure right from the start protects you from penalties and gives you a clear picture of what the practice is actually earning after fair owner compensation.