6 Reasons Dentists Should Run an S-Corp Analysis Before Year-End

6 Reasons Dentists Should Run an S-Corp Analysis Before Year-End

A solo dental practice generating $500K in collections and $250K in profit, taxed as a sole proprietor or single-member LLC, is paying somewhere north of $30,000 a year in self-employment tax it doesn't have to pay.

The fix is not exotic. An S-corp election — properly structured, with defensible reasonable compensation — can capture a significant slice of that. The catch is timing. Year-end is the deadline that determines whether the structure applies to next year or the year after.

Here are six reasons to run the analysis before December 31.

1. The SE tax savings on practice profit run into five figures fast

By default, a dentist operating as a sole proprietor or single-member LLC pays self-employment tax under IRC §1401 on every dollar of net practice income: 12.4% Social Security tax up to the wage base ($168,600 for 2024) plus 2.9% Medicare tax (with no cap), plus an additional 0.9% Medicare surcharge on income above $200,000 single / $250,000 married under §1411.

An S-corp splits practice profit into a reasonable W-2 wage (subject to payroll tax) and distributions (not subject to SE tax).

Rough math on $250,000 of practice profit: paying the dentist a $140,000 reasonable salary leaves $110,000 of distribution. The SE tax savings on that $110K of distribution is roughly $14,200 a year, net of the cost of running payroll (a few thousand) and the additional compliance burden.

Above $400K of profit, the savings can easily clear $20,000 a year. Below $150K of profit, the case is much weaker because the cost of running an S-corp eats more of the savings.

2. Reasonable compensation has to be defensible — not aspirational

The S-corp savings live in the gap between a reasonable wage and the practice's full profit. The IRS knows this and pays close attention.

Reasonable compensation under the line of cases starting with Watson v. Commissioner and Sean McAlary Ltd. v. Commissioner means what you'd have to pay someone with comparable skills, in your geography, doing the same job. For dentists, the defensible number is informed by:

• The American Dental Association's annual income survey by region and practice type.
• Bureau of Labor Statistics data for general and specialty dentists by metro area.
• Industry comp surveys from dental practice management consultants.

Set the wage too low (e.g., $60K when the regional median for a general dentist is $190K) and the IRS can recharacterize distributions as wages, with back payroll tax, penalties, and interest. The recharacterization risk is real and growing.

The defensible posture is a documented compensation study at the time of the election and reviewed every few years as the practice grows. Iota Finance builds the reasonable compensation file for dental clients alongside the election — so the position holds up if the IRS asks.

3. The election generally has to be in place before the tax year it applies to

Form 2553 — the S-election form — has to be filed within two months and 15 days of the start of the tax year for the election to apply to that year.

For a calendar-year practice, that means an election filed by March 15 of the tax year applies to the current year. An election filed in April would apply to the following year.

Late-election relief under Rev. Proc. 2013-30 is available in some circumstances, but it requires the practice to have intended to be an S-corp from the start — which is hard to argue retroactively.

The decision to elect for a given year should be made before December 31 of the prior year. A dentist running the analysis in November can have the election filed clean by year-end and the practice operating as an S-corp from January 1.

A dentist running the analysis in February has either lost the year or is hoping for late-election relief that may or may not come.

4. Payroll has to actually run for the owner

An S-corp without payroll for the owner isn't really an S-corp from the IRS's perspective. The "all distributions, no wages" structure is one of the most aggressively reclassified positions in small-business tax.

Running payroll for one person — the owner — is mechanically simple but not free. Most full-service payroll providers charge $50–$120 a month for a single-employee S-corp. Annual cost: $600–$1,500.

The benefit of payroll isn't just compliance. It's also that it establishes the wage figure on a Form W-2, which informs Social Security benefits earned, mortgage qualification, and the documentation trail for the reasonable compensation position.

A small fixed cost. A meaningful structural benefit.

5. The S-corp pairs powerfully with a retirement plan

Once the practice is on payroll, the retirement plan options expand significantly. A solo dentist on S-corp payroll can contribute to:

• A Solo 401(k) — $23,000 employee deferral for 2024 plus an employer contribution of up to 25% of W-2 wages, subject to the §415(c) limit ($69,000 total for 2024, adjusted annually for inflation).
• A SEP IRA — 25% of W-2 wages, same overall §415 cap.
• A defined benefit plan or cash balance plan, which can shelter materially more — sometimes $100,000+ a year — for higher-earning dentists nearing retirement.

Pairing the S-corp election with a Solo 401(k) on a $140,000 reasonable salary, the dentist can defer up to $58,000 in combined employee and employer contributions for the year. Combined with the SE tax savings, the cumulative annual benefit can clear $40,000–$60,000.

These plans have to be in place by year-end (Solo 401(k)) or by the filing deadline (SEP). The conversation has to happen during the S-corp analysis, not after.

6. The analysis itself is cheap; the wrong answer is expensive

Running an S-corp breakeven analysis costs a few hundred dollars in CPA time. Skipping the analysis and continuing as a sole proprietor at $250K of profit costs $14,000+ a year in unnecessary SE tax.

The math favors running the analysis. The math also favors running it before year-end, because the election deadline closes the window for the upcoming tax year.

Year-end is the deadline. Not because something dramatic happens on December 31, but because everything that determines whether the structure can apply to next year has to be in place before the clock turns.

Find a CPA who runs the analysis as a matter of course

A dental-literate CPA runs the S-corp analysis at engagement and reviews it annually as the practice grows. The election is filed when the math supports it. The reasonable compensation file is documented. The retirement plan is layered on. The payroll runs.

A generalist tax preparer often doesn't bring up the question at all.

Iota Finance works with dental practice owners on entity election, reasonable compensation positioning, retirement plan design, and the year-end planning calendar that puts the structure to work for next year. Read their Sam's List reviews and book an intro call before this year's December 31 deadline lands.