Set a Salary That Actually Holds Up
A step-by-step process for setting S-corp salary and distributions that survives scrutiny, not just spreadsheet math.
Reasonable compensation isn’t a formula. It’s a number you can defend if someone asks why you chose it. This walks through five steps: locking in your baseline numbers, defining what reasonable looks like for your specialty, setting your actual compensation structure, pressure-testing the 2026 tax impact, and checking for exposure before you run payroll.
1 Lock In Your Baseline Numbers
2 Define What “Reasonable” Looks Like for You
3 Set Your Actual Compensation Structure
4 Pressure-Test the Tax Impact (2026 Rules)
5 Check for Exposure Before You Move Forward
6 Final Check Before Running Payroll
Built for physicians with S-corp entities, practice owners earning $150,000 or more, and doctors actively involved in both clinical and business operations.
Questions we get a lot
A salary that reflects what someone would actually pay a physician doing your specific role — clinical work, ownership duties, or both — based on compensation data for your specialty and region, not a generic average or an arbitrarily low number designed mainly to minimize payroll tax.
There’s no fixed percentage. The salary needs to be reasonable for your role and specialty first; whatever profit remains after that can be taken as distributions. Distributions doing most of the work while salary sits artificially low is the pattern that draws scrutiny.
$184,500. Social Security tax applies to salary up to that amount; Medicare tax applies to the full salary with no cap, plus an additional 0.9% on wages above $200,000 (single) or $250,000 (married filing jointly).
The IRS can reclassify distributions as wages, which triggers back payroll taxes, penalties, and interest on the reclassified amount. A salary that only makes sense as a tax-minimization strategy, rather than as pay for the work actually performed, is the pattern that gets flagged.
A defensible salary starts with real numbers, not a guess.
If you want a second opinion on your compensation split, we can work through the numbers with you.
Disclaimer: This checklist is for informational purposes only and does not constitute legal, tax, or financial advice. While we make every effort to keep the content accurate and up to date, federal and state laws and regulations can change without notice. Decisions based on this information should be made in consultation with a licensed CPA or attorney familiar with your specific situation. Leichter Accounting Services is not liable for any errors or omissions, or for any actions taken based on the contents of this checklist.