September 9, 2025

A question we often hear from S-Corp dental practice owners is, “But if I pay myself more, won’t I pay more taxes?”

The answer is no, not on your income taxes. An S-Corp is taxed on net profit regardless of how you classify your compensation. Paying yourself more in wages reduces S-Corp profit by the same amount, leaving your taxable income unchanged.

Where wages do matter is in two areas: payroll taxes and retirement plan contributions. W2 wages trigger Social Security and Medicare taxes, but they are also the only type of income that counts when calculating retirement plan contributions. Finding the right balance is critical: too low a wage limits retirement funding, while too high a wage creates unnecessary payroll taxes without extra benefit.

S-Corp dentists must pay themselves a “reasonable salary.” Often, this salary is conflated with taxes. After all, in prior W2 jobs, we all know that the more we are paid, the more we owe in taxes. In reality, for S-Corp dentists, the only increased taxes tied to an increased wage are the payroll taxes.

This is why we advise using payroll as a tool to achieve the following objectives:

• To stay compliant (e.g., the “reasonable wage”).
  
  
• Pay income taxes via withholding to avoid a large tax bill and underpayment penalty.
  
  
• To use W2 wages to max the retirement plan.
  
  

Once and only after all the above objectives are met it is time to switch from wages to distributions to minimize payroll taxes.

Payroll Taxes

Payroll taxes (Social Security & Medicare) are separate from income taxes. As an employer and employee, S-Corp dentist owners must pay both the employer and the employee portion of the payroll taxes.

Here are the 2025 payroll tax rates:

• Social Security (OASDI): 12.4% combined (6.2%-employee & 6.2%-employer), applies up to $176,100. No further Social Security tax is due after this point.
  
  
• Medicare: 2.9% combined (1.45%-employee & 1.45%-employer) applies to all wages with no limit.
  
  
• Additional Medicare Tax: 0.9% (employee only) on employee wages above $200,000 (single) or $250,000 (married).
  
  

Payroll taxes total about $26,900 at $176,100 of wages. Above that, only Medicare continues, meaning that wages beyond the Social Security base carry a marginal payroll tax cost of about 3% (or 3.8% if subject to the Additional Medicare Tax).

Retirement Contributions Depend on Wages

For S-Corp owners, only W-2 wages count toward retirement contributions. Distributions do not, so a high wage is a strategic planning tool.

Here are the 2025 limits:

Why You May Need Higher Wages to Max the 401(k)

On paper, a dentist could max out the 401(k) at around $200,000 of wages. In reality, the discretionary profit-sharing contribution is tied to the employee census (e.g., age, time employed). The plan must pass nondiscrimination testing, ensuring contributions are fair between the owner and staff.

That’s where demographics matter:

• If your team is younger and you are older, you can use age-weighted or new comparability formulas to allocate more profit-sharing dollars to yourself.
  
  
• If your staff is older or highly compensated, your ability to maximize contributions may be restricted. To pass testing, you may need to increase the profit-sharing pool for employees, and since contributions are based on a percentage of W-2 wages, this may require you to set your own salary higher.
  
  
• In practices with long-tenured staff, it is not uncommon for the dentist-owner to need wages of $350,000 to fully fund the maximum contribution for themselves while meeting required employee allocations.
  
  

Best Practices for Dentists

• Start with the goal in mind. Work backwards: how much do you want to put into retirement this year? With the right retirement plan, you could save up to $70,000 in 2025. How much will you owe in income taxes? Set your gross pay to fully pay in your projected tax liability to avoid underpayment penalties and a large income tax bill.
  
  
• Consider staff demographics. Younger staff often give you more flexibility in profit-sharing formulas. Older or highly compensated staff typically mean you must raise your own salary to “balance” allocations.
  
  
• Don’t stop too early. While $200,000 of wages may cover the math, many dentists find they must pay themselves closer to the max wage of $350,000 (for 2025) to actually capture the full benefit after compliance testing (e.g., to get the vast bulk of the practice’s retirement funding allocated to themselves rather than the team).
  
  
• Use distributions after wages are optimized. Once your wages are high enough to fund the maximum retirement contribution and fully pay in your income taxes for the year, take additional profit as distributions to avoid payroll taxes entirely.
  
  
• Meet reasonable compensation rules. The IRS requires S-Corp owners to pay themselves a reasonable wage for their services. For dentists, this nearly always means six figures, and for profitable practices, often closer to national associate dentist compensation levels or higher.
  
  

Salary vs. Distribution Strategy in 2025

Key Takeaways:

• Wages beyond ~$200K don’t increase the retirement contribution limits but are often required in real-world plans to pass testing and allow the dentist to get a better percentage of the overall practice retirement plan funding (e.g., the discretionary component of the plan, and the difference between $23,500 and $70,000).
  
  
• Payroll taxes taper after $176,100 because Social Security stops; beyond that point, wages incur only Medicare at ~3%–3.8%.
  
  
• The absolute wage ceiling is $350K. No matter how high wages go, retirement contributions cannot exceed $70k (or $77.5k with catch-up).
  
  

Example

Consider an S-Corp dental practice with $600,000 in profit before owner wages.

• With a $200,000 salary, payroll taxes are about $29,000. On paper, this should allow a $70,000 401(k) contribution. However, after applying nondiscrimination testing with a staff of mostly older hygienists and assistants, the maximum allowable owner allocation might fall short.
• By raising wages to $350,000, the dentist maintains compliance and unlocks the full discretionary profit-sharing allocation. Payroll taxes rise to around $40,000, but the trade-off is capturing the entire $70,000 retirement contribution plus long-term tax deferral.

This demonstrates why the “optimal” wage is not just about hitting the IRS limits; it’s also about passing plan testing based on your employee census.

The Bottom Line

For S-Corp dentist-owners, wages are not about changing your income tax. They are about balancing two levers: fully paying in your income taxes via withholding and maxing retirement contributions.

• Due to employee demographics and profit-sharing formulas, you must pay yourself a high salary, generally closer to $350,000.
  
  
• Avoid wages above that point, since they only add payroll tax without further benefit.
  
  
• Use distributions for additional income once wages have done their job.
  
  

By carefully setting your salary, you can fully pay in your income taxes via withholding to avoid underpayment penalties and a large tax bill, maximizing your retirement funding and minimizing payroll taxes, ensuring your S-Corp works as hard for your future as you do for your patients.

References

• Internal Revenue Service. “Retirement Topics—401(k) and Profit-Sharing Plan Contribution Limits.” Updated 2025.
  
  
• Internal Revenue Service. “Retirement Topics—SEP and SIMPLE IRA Contribution Limits.” Updated 2025.
  
  
• Social Security Administration. “2025 Social Security Wage Base Announced.”
  
  
• Internal Revenue Service. “Questions and Answers for the Additional Medicare Tax.”
  
  
• The Tax Adviser. “Advising S Corporation Clients on Reasonable Compensation.” October 2024.