Running a dental practice requires balancing clinical work with business decisions that are not always obvious. One of the most common areas of confusion we see isknowing the reasonable compensation for dentists. It often comes up when a dentist becomes an owner, restructures their entity, or starts taking distributions. Many dentists assume there is a standard number or a simple formula. In reality, reasonable compensation depends on context and documentation more than a single dollar amount.
Understanding how reasonable compensation works helps you stay compliant with tax rules and avoid IRS scrutiny. It also plays a role in long-term planning, from retirement contributions to practice valuation.
Why Reasonable Compensation Matters for Dentists
If your practice is structured as an S corporation, the IRS requires that you pay yourself a reasonable salary before taking distributions. That salary is subject to payroll taxes, while owner distributions are not. The temptation is to keep wages low and distributions high. This is exactly where dentists run into trouble.
The IRS does not define reasonable compensation with a fixed number. Instead, they look at whether your pay reflects the work you actually perform for the practice. If compensation is too low relative to your role, the IRS can reclassify distributions as wages and assess back taxes, penalties, and interest.
Even dentists operating as sole proprietors or partnerships should care about reasonable compensation. It influences how profits are interpreted, how future buyers evaluate the practice, and how lenders assess risk.
How the IRS Thinks About Reasonable Compensation
The IRS evaluates reasonable compensation based on facts and circumstances. They look at factors such as your training, experience, duties, time spent in the practice, and what similarly situated dentists earn in comparable practices.
What this means is that your compensation should align with the value of your clinical and managerial work. A dentist who produces the majority of collections, oversees staff, manages operations, and makes strategic decisions should be compensated accordingly. A dentist who works fewer hours or focuses primarily on ownership and oversight may justify a different structure.
The key point is that reasonable compensation is defensible when it is documented and benchmarked.
Credible guidance on this framework comes from the Internal Revenue Service, which consistently emphasizes comparability and documentation rather than formulas.
Common Compensation Benchmarks Dentists Use
While there is no universal rule, benchmarks provide a useful starting point. Many dental CPAs and valuation professionals look at compensation as 30- 35% of collections attributable to the dentist’s production.
In many general dentistry practices, reasonable compensation for a full-time producing owner often falls in a range that reflects market associate pay, adjusted upward for ownership responsibilities. Industry data frequently shows associate compensation around a percentage of collections, which can help frame what a non-owner dentist would earn for similar clinical work.
National salary data from sources like the American Dental Association and the Bureau of Labor Statistics can also support your analysis, especially when combined with local market data.
Benchmarks should never be used in isolation. A high-producing dentist in a busy metro area with advanced procedures will not match a part-time owner in a rural practice. The numbers must reflect reality.
How Practice Structure Affects Compensation
Entity structure plays a major role in how reasonable compensation is applied. In an S corporation, wages and distributions are treated differently for tax purposes, which is why reasonable compensation is so important.
Dentists operating as sole proprietors or partnerships do not split income the same way, but compensation still matters for planning, valuation, and future restructuring. If you plan to convert to an S corporation, understanding reasonable compensation early helps avoid abrupt changes later.
Your compensation also affects retirement planning, as W2 wages determine how much you can contribute to certain retirement plans. Underpaying yourself can limit long-term savings even if it reduces payroll taxes in the short term.
Common Mistakes Dentists Make
One of the most common mistakes is setting a salary once and never revisiting it. As production grows, hours change, or responsibilities expand, compensation should be reviewed.
Another mistake is relying on overly aggressive advice or online calculators that promise tax savings without context. If compensation is not defensible, the savings can disappear quickly under audit.
Finally, many dentists fail to document their rationale. Even a reasonable salary can become a problem if there is no explanation behind it.
Plan Your Next Step With Virjee Consulting
Reasonable compensation is not just about avoiding IRS issues. It affects cash flow, retirement planning, and how your practice looks to buyers and lenders. A well-structured compensation plan supports both tax efficiency and long-term value.
When compensation aligns with reality, dentists tend to feel more confident in their financial decisions. There are fewer surprises and fewer last-minute fixes during tax season.
At Virjee Consulting, we work with dentists across the country on tax planning, accounting, and practice valuation. Reasonable compensation is a core part of that work because it touches so many aspects of a dental practice.
If you are unsure whether your current compensation structure makes sense, or if you are planning a change in ownership or entity structure, a review can provide clarity and direction.
Schedule a conversation with our team, and we will help you evaluate your compensation in the context of your practice, your goals, and the realities of dentistry today.
