How should a medical practice owner pay themselves: salary, distributions, or both?

It depends on how your practice is taxed. The name on your state paperwork, whether PC, PLLC, or LLC, matters less than the tax classification behind it. That classification decides whether you can pay yourself a salary at all.

If you’re a sole proprietor or a single-member LLC with no election, you don’t get a salary. You take draws, which are simply transfers from the business account to your personal account. You pay income tax on the full profit whether you take it out or leave it in the practice. You also pay self-employment tax on that profit, which covers both halves of Social Security and Medicare. Partnerships and multi-member LLCs work much the same way. Partners take draws or guaranteed payments, and each partner pays self-employment tax on their share of the profit.

If the practice is taxed as an S-corp, you do both. Owners who work in the practice must take a reasonable salary through payroll, with withholding and payroll taxes, just like any employee. Whatever profit is left can come out as distributions, and distributions aren’t subject to Social Security or Medicare tax. That difference is the whole reason physicians elect S-corp status.

The IRS knows this, and it pays attention to physician S-corps that pay a small salary and take large distributions. A surgeon with $600,000 in profit and a $60,000 salary is the kind of return that gets questioned. If the IRS decides the salary was unreasonable, it can treat distributions as wages and assess back payroll taxes, penalties, and interest. There is no fixed formula for what counts as reasonable. The usual support is compensation data for your specialty and region, such as MGMA surveys, along with your hours, your duties, and what the practice would have to pay another physician to do your job. Writing down how you arrived at the number each year is part of good tax planning for any practice owner.

This is where expectations often need adjusting. The 2026 Social Security wage base is $184,500. For most full-time physicians, a salary you can actually defend is above that number. That means you’re already paying the maximum Social Security tax through payroll, and the savings on distributions come down mostly to the 2.9% Medicare tax plus the 0.9% additional Medicare tax for high earners. On $225,000 of distributions, that works out to roughly $8,000 a year. You then subtract payroll processing costs, state unemployment tax, and the cost of a separate corporate tax return. The election is still worth it for many practices, but it isn’t the large windfall some people describe.

A few other things affect the decision. Employer retirement contributions are based on your W-2 salary, so cutting salary too far can shrink what you’re able to put away, which may cost more than the payroll tax you saved. In practices with more than one owner, S-corp distributions must follow ownership percentages. Any differences in pay between owners belong in salary under your existing agreements, not in uneven distributions.

Once you’ve settled on an approach, keep it clean. Run your salary through payroll on a regular schedule instead of one lump payment in December. Record distributions as distributions, not as expenses. Since distributions have no tax withheld, set money aside for quarterly estimates. Working with a firm that offers medical practice bookkeeping and tax services helps keep payroll, distributions, and estimates lined up throughout the year.

Final decisions on structure and owner pay should be made with your tax advisor, and the numbers are worth revisiting every year as your income and practice change.