Getting Money Out of Your Practice: The Tax-Smart Way to Pay Yourself

By Spiro Leunes, CPA | CEO, MRL Advisory Group — New Jersey & New York Dental CPAs

Most practice owners focus on how much money their practice makes. Far fewer pay attention to how that money gets into their pocket — and that second question often matters more to your after-tax income than the first.

Here’s the reality that surprises owners: the exact same profit can be taxed very differently depending on your entity structure and the method you use to take it out. Two dentists earning identical net income can end up with meaningfully different take-home pay simply because one structured the way they pay themselves and the other didn’t. This is one of the most reliable, lowest-risk ways to keep more of what you already earn — and it’s squarely in a CPA’s wheelhouse.

Here’s how getting money out of your practice actually works, and where the opportunities and the traps are.

Your Entity Type Sets the Rules

How you can pay yourself — and how it’s taxed — starts with how your practice is organized.

Sole proprietorship or single-member LLC. Simple, but tax-inefficient at higher incomes. All of your net profit is subject to self-employment tax on top of income tax. There’s no mechanism to separate “wages” from “profit,” so the full amount is exposed.

Partnership or multi-member LLC. Active owners generally pay self-employment tax on their share of the profits, often taking guaranteed payments for their work. Like a sole proprietorship, there’s limited ability to shelter earnings from those payroll-type taxes.

S-corporation. This is where real planning opens up. An S-corp lets you split what you take out into two buckets — a reasonable salary (subject to payroll taxes) and distributions (not subject to those payroll taxes). For most established practices, this split is the single biggest lever for reducing payroll tax. More on it below.

C-corporation. Generally avoided for practices because of “double taxation” — the corporation pays tax on its profits, and then you’re taxed again when that money is distributed to you. There are narrow situations where a C-corp makes sense, but for most owners it creates more tax, not less.

The takeaway: your entity isn’t just a legal formality. It determines which of the strategies below are even available to you, which is why an entity review is often the first thing we look at with a new practice owner.

The S-Corp Salary and Distribution Split

For most profitable practices, electing S-corporation treatment is the central move. Here’s the mechanic in plain terms.

As an S-corp owner, you must pay yourself a reasonable salary through payroll. That salary is subject to payroll taxes, just like any employee’s wages. But any profit you take beyond that salary can be paid out as a distribution, which is not subject to those same payroll taxes.

That difference is the opportunity. By taking a legitimate, defensible salary and receiving the remaining profit as distributions, owners can reduce the payroll taxes they’d otherwise owe on the entire amount.

But — and this is the part that gets owners in trouble — that salary has to be reasonable.

“Reasonable Compensation”: The Line You Don’t Want to Cross

The IRS knows exactly why owners like the salary/distribution split, and it watches for abuse. If you pay yourself an artificially low salary to dodge payroll taxes, the IRS can reclassify your distributions as wages, then assess back payroll taxes, penalties, and interest.

So what’s “reasonable”? There’s no single formula, but it generally reflects what you would have to pay someone else to do the work you do — your clinical production, your management role, your hours, your experience and credentials. For a dentist or physician, the clinical work alone has a clear market wage, and that’s the floor the number has to respect.

This is genuinely fact-specific, and it’s the one area of this topic where the right answer depends entirely on your practice. Setting it too high gives away the benefit; setting it too low invites a problem. Getting it right — and documenting the basis for it — is exactly the kind of judgment call a practice CPA is there to make with you.

A Simplified Illustration

Numbers are illustrative and rounded to show the concept, not your actual result:

Imagine a practice nets $400,000 in profit for the owner.

• As a sole proprietor, the full $400,000 is exposed to self-employment tax on top of income tax.

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• As an S-corp, the owner takes a reasonable salary — say $200,000 — which is payroll-taxed, and receives the remaining $200,000 as a distribution that avoids those payroll taxes.

  
  

The savings come from the portion that’s no longer running through payroll taxes. How large that savings is depends on your income level (see the next section) and a current analysis of the rates and wage bases, which adjust every year. The point isn’t the exact figure — it’s that the structure creates the savings, and the structure is something you control.

Setting Expectations: The Win Is Bigger at Some Income Levels Than Others

It’s worth being honest about this, because the S-corp benefit is sometimes oversold.

The Social Security portion of payroll tax only applies up to an annual wage base. Once your salary passes that threshold, additional earnings aren’t hit by that portion regardless of how you take them. For very high earners whose reasonable salary already exceeds the wage base, the savings on distributions comes mainly from the Medicare portion — which has no cap.

That’s still real money on a large distribution, year after year. But the largest percentage benefit tends to show up at more moderate income levels. The right way to know what it means for you is to run your actual numbers — not to assume the headline benefit applies in full.

The PTET Election: One of the Biggest State Tax Wins for NJ and NY Owners

If your practice is taxed as an S-corporation or a partnership, there’s a state-level strategy that often saves high-earning owners more than almost anything else on this list — and it’s especially valuable in high-tax states like New Jersey and New York.

Some background. The 2017 federal tax law capped the federal deduction for state and local taxes — the “SALT cap.” For owners in high-tax states, that meant a large share of the state income tax they paid was no longer federally deductible. In response, more than 30 states — including New Jersey and New York — created an elective pass-through entity tax (PTET).

Here’s how it works: instead of the state income tax on your practice’s profits being paid by you personally, where it runs into the SALT cap, your practice elects to pay that tax at the entity level. Because it’s paid by the business, it’s deductible as a business expense on the federal return — bypassing the individual SALT cap entirely. You then receive a corresponding credit on your state return, so the income isn’t taxed twice. In New Jersey this is the Business Alternative Income Tax (BAIT); in New York it’s the New York PTET, with a separate New York City PTET as well. The IRS has explicitly sanctioned this approach.

Does it still matter after the 2025 federal tax law? Yes — and this is worth being precise about, because the rules changed. The 2025 legislation raised the SALT cap significantly for several years. But two things keep PTET valuable for practice owners:

• The higher cap phases back down for high earners. Many dental and medical practice owners earn enough that their deduction is reduced toward the original floor — so the higher cap offers them little relief, while PTET still does.

  
  

• An earlier version of the law would have stripped PTET from “specified service” businesses, a category that includes dental and medical practices. The final law removed that restriction, so practice owners kept the benefit.

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The catch is that PTET is elective and time-sensitive. It generally requires an affirmative annual election and properly timed payments — miss the deadline and the benefit is gone for that year. The amounts, thresholds, and mechanics also shift year to year and differ between New Jersey and New York. This is exactly the kind of election we manage for practice clients, because the savings are substantial and the rules are unforgiving on timing.

Other Tax-Smart Ways to Take Money Out

The salary/distribution split is the headline, but it’s not the only tool. Several other methods let you move money out of the practice efficiently:

Employer retirement plan contributions. Funding a 401(k)/profit-sharing plan — or a cash balance plan for higher earners — lets the practice make deductible contributions that build your personal wealth outside the business. It’s one of the most powerful ways to take money out while cutting current taxes.

An accountable plan. A properly documented accountable plan lets the practice reimburse you tax-free for legitimate business expenses you incur personally — home office, mileage, phone, and similar costs — rather than absorbing them yourself with after-tax dollars.

Renting property to your practice. If you own the building your practice operates in, the practice can pay you rent. That rent is deductible to the practice and isn’t subject to payroll taxes, though specific self-rental rules apply and need to be handled correctly.

Fringe benefits. Health insurance, HSAs, and certain other benefits can be structured efficiently — though S-corp owners face special rules (for example, how shareholder health insurance is reported), which is why these need to be set up properly rather than assumed.

Employing family members. Putting a spouse or children on payroll for legitimate work can shift income to lower brackets and open additional planning — when done correctly and for real work performed.

Each of these has rules that have to be respected. Done properly, they compound; done sloppily, they create audit exposure. The difference is almost always in the documentation and the setup.

Common Mistakes We See

• Staying a sole proprietor out of inertia. Many owners never revisit their structure as profits grow, leaving the S-corp benefit on the table for years.

  
  

• Setting an unreasonably low salary. Chasing maximum payroll-tax savings without a defensible basis is one of the fastest ways to invite a reclassification problem.

  
  

• Assuming the headline S-corp savings applies in full. At high incomes, the benefit is real but narrower than the marketing suggests — your actual numbers tell the story.

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• Skipping the documentation. Accountable plans, self-rentals, and family payroll all work — but only if they’re properly set up and supported. Verbal arrangements don’t hold up.

  
  

• Missing the PTET election. For NJ and NY pass-throughs, forgetting to make a timely BAIT or PTET election — or mistiming the payments — forfeits one of the largest available state tax savings for that entire year.

  
  

• Never coordinating the pieces. Salary, distributions, retirement contributions, the PTET election, and benefits all interact. Optimized one at a time, they leave money on the table; planned together, they don’t.

  
  

The Bottom Line

You work hard for every dollar your practice earns. How you take those dollars out — your entity structure, your salary-to-distribution mix, your retirement contributions, and the other tools available to you — determines how much of it you actually keep. Unlike chasing more production, this is a lever you fully control, and it pays off every single year.

It’s also fact-specific, especially when it comes to reasonable compensation, which is precisely why it’s worth doing with a CPA who knows dental and medical practices rather than relying on a rule of thumb.

At MRL Advisory Group, we help dental and medical practice owners across New Jersey and New York structure how they pay themselves — choosing the right entity, setting defensible compensation, and coordinating the full set of strategies so you keep more of what you earn and stay on the right side of the rules.

This article is for general educational purposes only and does not constitute legal or tax advice. Tax rules, rates, and thresholds change and apply differently to each practice; reasonable compensation in particular is highly fact-specific. Review your situation with a qualified advisor before acting. MRL Advisory Group provides accounting, tax, and advisory services to dental and medical practices in New Jersey and New York.