The IRS legally requires employees to be paid a reasonable salary. As an employee of your own company, Heard will help you to determine said salary.
Heard will help you to determine a salary by:
- Determine your net income before any salary amounts are paid.
- Determine a salary that makes up 45-55% of net income.
*This is based on the IRS' Valuation Analysis Field guide by industry. The average percentage of salary to net income in the healthcare industry is 59%. This is fairly high for a small business, and we are comfortable applying the set range above (45-55%).
We assess your business performance (ie. we look at your projected annualized net profit) to see what the business can afford to pay you and to ensure you aren't over or underpaying in payroll taxes. We also take into account your state and the average salary range of a therapist in your region with a similar education level and years of experience. It's to your advantage to take Owner's Distributions on top of your salary because, as an S-Corp, it is no longer subject to self-employment taxes, nor is it subject to payroll taxes. You can take distributions as frequently or infrequently as you'd like by transferring funds from your business account to your personal account. You can use your Allocation Guide to help you determine the amounts. This is our recommendation to increase your income rather than significantly raising your salary. With this route, please keep in mind that you don't want your distributions to exceed your salary by year-end, or it will appear as though you are trying to avoid payroll taxes. While we don't recommend setting your salary too much higher or lower, it is ultimately up to you, and come the annual tax return time, we can reassess and advise you on whether we think you should make any adjustments.
Depending on when you become an S corporation during the year, you may need to run a catch-up payroll. Heard can help you initiate an off-cycle payroll in order to catch you up for the quarter you are setting up.
For more FAQs about therapists' reasonable salaries.
For more about setting a reasonable salary, visit our resources on Becoming an S corporation as a sole proprietor and as an LLC or PLLC.