How to pay yourself in private practice comes down to your business structure. If you operate as a sole proprietor or a single-member LLC that hasn’t elected corporate tax treatment, you take an owner’s draw from profits. If you run an S-corporation or C-corporation, you must put yourself on payroll and pay a W-2 salary before taking any distributions. Each path carries different tax obligations, and choosing the wrong one, or executing the right one poorly, can cost thousands in avoidable taxes or IRS penalties.
The Owner’s Draw Method
As a sole proprietor or single-member LLC owner, you and the business are the same taxable entity. Every dollar of net profit is yours whether you move it to a personal account or not, and the IRS taxes all of it on your individual return regardless of how much you actually withdraw. Taking money out, called an owner’s draw, is not a deductible business expense and doesn’t reduce your taxable income.
All net earnings from the practice are subject to self-employment tax, which covers both Social Security and Medicare. The combined rate is 15.3%, split between 12.4% for Social Security and 2.9% for Medicare.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only to net earnings up to $184,500 in 2026.2Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security Earnings above that threshold still owe the 2.9% Medicare tax, and if your total earnings exceed $200,000 for single filers, an additional 0.9% Medicare surtax applies to the excess.3Internal Revenue Service. 2026 Publication 926
One partial offset: you can deduct half of your self-employment tax as an adjustment to income on your personal return. That doesn’t reduce the self-employment tax itself, but it lowers your adjusted gross income and can help with other calculations tied to AGI.
Mechanically, a draw is just a transfer from the business account to your personal account. Label every transfer clearly as “Owner Draw” or “Distribution” in the memo field and in your accounting software. Distributions of profits and reimbursements for expenses you paid personally have different tax treatment, and mixing them up in your records creates problems at tax time.
The W-2 Salary Method
Practitioners operating as an S-corp or C-corp must run formal payroll and pay themselves a W-2 salary for the work they perform in the practice. This isn’t optional. Federal tax law allows businesses to deduct reasonable compensation for services actually performed, and the IRS treats corporate officer-shareholders who perform services as employees.4Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses The implementing regulations make clear that if payments labeled as something other than salary track stock ownership rather than work performed, the IRS can treat them as disguised compensation.5eCFR. 26 CFR 1.162-7 – Compensation for Personal Services
A W-2 salary involves withholding federal income tax from each paycheck, plus the employer and employee each paying their share of Social Security and Medicare taxes at 7.65%.6Internal Revenue Service. About Form W-2, Wage and Tax Statement The key advantage for S-corp owners sits on the other side of that salary: profits distributed to you as a shareholder, after you’ve paid yourself reasonable compensation, are not subject to the 15.3% in employment taxes. That gap is the main reason practitioners elect S-corp status.
The IRS watches for owners who pay themselves too little and take outsized distributions. If distributions get reclassified as wages, you owe back employment taxes on the full amount (both the employer and employee shares, totaling 15.3%), plus interest, a failure-to-deposit penalty of 2% to 15%, and potentially a 20% accuracy-related penalty for negligence.7Internal Revenue Service. Failure to Deposit Penalty
Most practitioners on payroll use a third-party service that calculates withholding, generates pay stubs, handles direct deposit, and files quarterly payroll tax returns. Cost typically runs $30 to $80 a month for a single-employee payroll, which is usually cheaper than the penalties one computational error can trigger.
When It’s Worth Electing S-Corp Status
If you’re a sole proprietor or single-member LLC and your net income is high enough that employment tax savings outweigh the added payroll and filing costs, electing S-corp treatment can pay off. Many tax professionals put the breakeven point somewhere around $50,000 to $60,000 in annual net profit, though the exact number depends on your reasonable salary and state taxes.
To make the election for the current tax year, file Form 2553 with the IRS no later than two months and 15 days after the start of the tax year. For a calendar-year business wanting S-corp status in 2026, that deadline is March 15, 2026.8Internal Revenue Service. Instructions for Form 2553 If you miss it, the IRS offers late-election relief if you file within three years and 75 days of the intended effective date and show reasonable cause for the delay.9Taxpayer Advocate Service. Extend the Time for Small Businesses to Make Subchapter S Elections
Weigh the ongoing costs before you file. S-corp status means running payroll, filing quarterly payroll tax returns, issuing yourself a W-2 at year-end, and filing a separate S-corp return on Form 1120-S. If your net income is modest, those costs can eat the tax savings the election was supposed to produce.
Setting a Reasonable Salary
The IRS doesn’t publish a dollar figure for reasonable compensation. It looks at what someone with your training, experience, and responsibilities would earn doing comparable work in your geographic area. The Bureau of Labor Statistics publishes Occupational Employment and Wage Statistics that break down median wages by occupation and metro area, and that’s a solid starting point for documenting your salary decision.10U.S. Bureau of Labor Statistics. Occupational Employment and Wage Statistics Home
Beyond wage data, the IRS and courts have looked at hours worked, complexity of services provided, the practice’s gross and net revenue, and what similar practices pay non-owner employees for the same role. If your practice grosses $400,000 and you’re the sole clinician working 40-plus hours a week, a $40,000 salary will draw scrutiny. The salary needs to reflect reality, even when that means a larger share of revenue runs through payroll before you take any distributions.
The salary figure has one more consequence worth noting. Employer retirement plan contributions for S-corp owners are calculated on your W-2 wages, not on total distributions, so a higher salary raises the ceiling on what the practice can contribute to your retirement plan. Defaulting to the lowest defensible salary can quietly cost you retirement space.
How Much You Can Safely Pay Yourself
Before deciding on any pay amount, you need a clear picture of what the practice generates after expenses. Subtract all operating costs from gross revenue: rent, insurance premiums, software subscriptions, professional dues, supplies, and staff wages. The result is net profit, and that’s the pool your compensation comes from. Look at three to six months of history rather than a single month, since revenue swings are common in the early years and one strong month is not a trend.
From net profit, set aside money for three things before paying yourself:
- Taxes. Reserve 25% to 30% of net earnings for federal and state income taxes plus self-employment tax where applicable. The exact percentage depends on your bracket and your state.
- Operating cushion. Keep two to three months of overhead in the business account so slow stretches don’t force you to inject personal funds back in.
- Growth and maintenance. Equipment replacements, continuing education, and marketing that keep the practice competitive.
What remains is your safe payable amount. Paying yourself more than that invites cash flow problems that compound quickly once you fall behind on tax deposits or vendor payments.
Quarterly Estimated Taxes
Whether you take a draw or a salary, you’ll likely owe quarterly estimated taxes. Sole proprietors and LLC owners owe estimates on virtually all their income because nothing is withheld at the source. S-corp owners still owe estimates on the distribution portion, though salary withholding covers part of the obligation.
For 2026, the four deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. You can skip the January payment if you file your 2026 return and pay the full balance by February 1, 2027.11Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals
The IRS imposes an underpayment penalty if you owe more than $1,000 at filing time and didn’t pay enough during the year. To avoid it, pay at least 90% of your current-year tax liability or 100% of last year’s, whichever is smaller. If your adjusted gross income exceeded $150,000 in the prior year, the safe harbor rises to 110% of last year’s tax.12Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty Missing these payments is one of the most common and most avoidable mistakes in private practice finance.
Retirement Contributions as Compensation
Retirement contributions reduce your taxable income while building long-term wealth, and they belong in the pay-yourself conversation. Two plans dominate private practice use.
A SEP IRA lets you contribute the lesser of 25% of compensation or $72,000 for 2026.13Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) Setup is minimal and there’s no annual filing requirement until assets exceed a threshold. The tradeoff is that contributions come entirely from the employer side, so you can’t make employee elective deferrals.
A solo 401(k) offers more flexibility. As the employee, you can defer up to $24,500 in 2026, plus an $8,000 catch-up if you’re 50 or older. A higher catch-up of $11,250 applies for ages 60 through 63 under SECURE 2.0.14Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 On top of the deferral, the practice can make employer contributions of up to 25% of W-2 wages for S-corps, or 25% of net self-employment earnings for sole proprietors, with total combined contributions capped at $72,000 before catch-up amounts.
The Self-Employed Health Insurance Deduction
Self-employed practitioners can generally deduct 100% of health insurance premiums paid for themselves, their spouse, and dependents. The plan must be established under your business, or for S-corp owners who are more-than-2% shareholders, treated as established under the S-corp. The deduction is taken as an adjustment to income on Schedule 1, not as an itemized deduction, so it reduces your adjusted gross income directly.15Internal Revenue Service. Instructions for Form 7206
There’s a catch that trips people up: you lose the deduction for any month in which you were eligible to participate in a subsidized health plan through a spouse’s employer or any other employer. Eligibility alone disqualifies you, even if you didn’t enroll. Check it month by month rather than assuming you qualify or don’t for the entire year.
Reimbursing Yourself Through an Accountable Plan
If your practice is an S-corp or C-corp, you can reimburse yourself tax-free for legitimate business expenses you paid out of pocket, but only if you set up what the IRS calls an accountable plan. Reimbursements under such a plan are excluded from gross income, don’t appear on your W-2, and aren’t subject to employment taxes.16eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
An accountable plan must meet three requirements:
- Business connection. The expense must relate directly to your work for the practice.
- Substantiation. You document each expense with enough detail to verify amount, date, and business purpose within a reasonable time.
- Return of excess. If you receive an advance that exceeds actual expenses, you return the difference within a reasonable period.
Common reimbursable items include mileage driven for business, continuing education, professional conference fees, and office supplies purchased with personal funds. The plan itself can be as simple as a written policy in your corporate records.
Records to Keep
The IRS requires you to keep records supporting items on your return until the statute of limitations expires. For most situations that’s three years from filing. Employment tax records carry a longer requirement of at least four years after the tax becomes due or is paid, whichever is later.17Internal Revenue Service. How Long Should I Keep Records If you underreport income by more than 25% of gross income, the audit window stretches to six years, so keep records that long anywhere there’s ambiguity.
Some documents should be kept indefinitely: corporate formation papers, your S-corp election on Form 2553, accountable plan policies, and records tied to property or equipment the practice owns. These establish the legal structure and tax treatment of the practice itself, and reconstructing them years later is difficult or impossible.