Key Takeaways

• S corp owners who work in their practice must pay themselves reasonable compensation, meaning roughly what comparable businesses pay for similar services
• If your salary is too low, the IRS can reclassify some or all of your distributions as wages and charge employment (payroll) tax on them, and it may add interest and penalties
• The IRS has no safe-harbor percentage for splitting salary and distributions, so rules of thumb like 60/40 are starting points, not protection
• To find the most accurate number, compare market data, consult other therapists, and have an accountant who works with therapists review your salary

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If you’ve elected S corporation status for your therapy practice, then you already know you need to pay yourself reasonable compensation in the form of a salary.

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Great! Now you just need to figure out what a reasonable salary is, and how you go about setting it.

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We’ll take an up-close look at this often-misunderstood term, and get hands-on with the process of setting your reasonable salary. But first, a quick review.

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What is reasonable compensation?

When your therapy practice was a sole proprietorship, all your practice’s income and expenses were identical—for tax purposes—with your personal income and expenses.

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So, if a client paid your practice $100 for a session, you personally received that $100 as gross income. If you paid $900 office rent, it was an expense you personally incurred—even though you can deduct office rent as a business expense.

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Now that your therapy practice is an S corp, things are different. Any money you earn from your therapy practice has to come either in the form of a salary or as distributions.

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Salary is money paid to an employee. A distribution is money paid out to shareholders. Since you’re both an employee and a shareholder, you can earn money both ways.

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But here’s the catch: your salary is subject to employment tax, also called payroll or FICA tax. The combined rate is 15.3%: 12.4% for Social Security (which applies only to wages up to the annual wage base, $184,500 in 2026) and 2.9% for Medicare (which applies to all wages). Half of that is withheld from your paycheck (7.65%) and your S corp pays the other half (7.65%) as the employer. Since you own the S corp, both halves effectively come out of your pocket. If you’ve ever looked at a payroll stub as a W2 employee, you’ve seen the employee half listed.

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Distributions you receive, however, are not charged payroll tax. (They still count as income for federal income tax purposes.) And that’s why the IRS wants you to pay yourself a reasonable salary.

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If your S corporation is brand new and you’re still not sure of the difference between salary and distributions, check out our complete guide to S corporations for therapists. And if you’re still deciding whether an S corp makes sense for you, see when your therapy practice should become an S corp and how to switch from a sole proprietor to an S corporation.

Why the IRS requires you to pay yourself a reasonable salary

Here’s a hypothetical: suppose your therapy practice, an S corp, earned $100,000 in profit in a year. In order to receive that money as personal income and use it to pay personal expenses, you need to earn it either as a salary or as a distribution.

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If you paid yourself the $100,000 as a salary, it would be subject to 15.3% in employment taxes, which comes to $15,300 (7.65% withheld from your pay and 7.65% paid by your S corp). But if you take it all as a distribution, you don’t pay any employment tax on it. You could save that $15,300.

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Some owners did exactly that: they worked day-to-day as employees of their S corps but paid themselves as shareholders instead, receiving distributions and skipping employment tax.

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The IRS’s position is that payments an S corp makes to an officer who performs services for the corporation are wages, and it has the authority to reclassify distributions as wages when the salary is too low. So if you work in your own S corp, you should be on its payroll as a W2 employee and receive a salary. What’s more, that salary needs to be “reasonable.” You can’t pay yourself a $1,000 salary and take $99,000 in distributions.

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What’s reasonable, you ask? It depends on your role, how much your practice earns, and how much other self-employed therapists in your area earn. To set a reasonable salary, you need to do market research. 

How the IRS decides reasonable compensation

The IRS doesn’t publish a formula for reasonable compensation. Its guidance on S corporation compensation lists some of the factors that go into the determination:

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• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business, such as how many hours you actually work
• Dividend history, meaning how much you have taken as distributions compared with wages
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

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There is no safe-harbor percentage. The IRS doesn’t set a salary-to-distribution ratio that automatically counts as reasonable, and the Code and regulations contain no specific guidelines for reasonable compensation. The IRS looks at the facts and circumstances of each practice.

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This isn’t just theoretical. In David E. Watson, P.C. v. United States (8th Cir. 2012), an accountant who ran his practice as an S corp paid himself a low salary while taking much larger profit distributions, and the courts treated part of those distributions as wages subject to employment tax. The IRS lists the case among its references on S corporation compensation. Every practice is different, so have a CPA review how these factors apply to yours.

What happens if you don’t set reasonable compensation?

If the IRS suspects you’re underpaying your salary in order to avoid paying taxes, they may audit you. And if they determine you should have paid yourself a higher salary relative to distributions you took, they can retroactively charge you employment tax.

The dangers of underpaying yourself 

Suppose your profit in a given year was $100,000. You paid yourself a $20,000 salary, took another $60,000 as distributions, and left $20,000 in the bank. That means the total you paid in employment taxes was $3,060 ($20,000 x 15.3%).

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The IRS audits you and, based on their own information, determines that $45,000 is a more reasonable salary, and that you should be paying 15.3% employment tax on $45,000 rather than $20,000. So they treat $25,000 of your $60,000 distribution as salary, and charge you employment tax on it.

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Now, in addition to the $3,060 you already paid, you owe another $3,825 ($25,000 x 15.3%), for a total of $6,885, before any interest or penalties. What’s more, the IRS generally has three years from the date you file to assess additional tax, and longer if you substantially underreport (more than 25% of the gross income on your return) or file a fraudulent return. Employment tax returns have their own timing rules, so ask your CPA how they apply to you. If you underpaid yourself for several years, the IRS may charge added employment taxes for each of them, resulting in a hefty (and unexpected) tax bill.

Market research for reasonable compensation

Chances are, when you were setting your rates as a therapist, you did some research to figure out how much you should charge. 

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You may have checked out other therapists’ websites or directory listings to see what they charged. If you did, you would have taken into account their educational backgrounds, experience, and location, and compared them to your own.

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Setting a reasonable salary is very similar to setting a reasonable hourly rate as a therapist. The most important part is finding out what other therapists are earning. Therapists’ salaries are affected by:

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• The number of years they’ve been in practice
• The geographical area where they practice
• What types of treatment they offer
• Their level of education

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There are a few resources you can turn to when researching therapist salaries:

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• Free salary comparison tools like Glassdoor, PayScale, and Salary.com
• Commercial salary comparison tools like RCReports (which specializes in reasonable compensation), or an accounting firm like SEK that offers reasonable compensation reports
• Person-to-person outreach, contacting therapists in your professional network who are comfortable sharing information about their past and present salaries
• An accountant with a large number of clients who are self-employed therapists (ask other therapists in your network for referrals)

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Any online calculator or salary tool can give you only a rough estimate, since it can’t account for your specific credentials, experience, and duties.

What is a typical therapist income?

According to Heard’s 2026 Financial State of Private Practice Report, median revenue among respondents in 2025 was $80,412, and median profit was $55,000. Solo practitioners reported median revenue of $75,000, while group practice owners reported median revenue of $169,121.

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The same survey found a gap by business structure: S corp respondents reported a median profit of $75,000, compared with $52,528 for sole proprietors. That doesn’t mean electing S corp status raises your profit. S corp respondents also tend to be more experienced, so treat the gap as a correlation, not a cause.

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Heard’s own income data offers another reference point. In Heard’s 2025 income report, which is based on financial data from Heard customers, S corp therapy practices averaged $179,003 in revenue and $115,250 in net income in 2025 (medians were $143,646 and $94,307), and the average therapist across all business structures took home $86,961 in net income. Those are customer-data figures, so they aren’t directly comparable to the survey medians above.

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Keep in mind that these numbers have to do with revenue and profit, not salary. For instance, an S corp owner with $55,000 in profit might pay themselves a $45,000 salary and keep the remaining $10,000 in their practice’s emergency savings account.

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To specifically consider salary, the US Bureau of Labor Statistics publishes median wages by occupation. These figures describe employed therapists, not private-practice owners, so use them as a reference point rather than a target.

Median annual wages for therapist occupations (BLS, May 2025)

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Source: US Bureau of Labor Statistics, Occupational Employment and Wage Statistics (OEWS), May 2025, as published in the Occupational Outlook Handbook. Median means half of workers in the occupation earned more and half earned less. These wages are for employed therapists, not private-practice owners, and they vary widely by state, setting, and experience.

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Myth busting: the 60/40 rule for reasonable compensation

Some business owners recommend the 60/40 rule, or the 50/50 rule, for setting reasonable compensation.

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Following this rule, each year you pay yourself 60% of your net profit as salary, and the other 40% you take as distributions from the S corp. The split is 50% and 50%, respectively, if you follow the 50/50 version of this rule.

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A split like this can be a handy starting point, but it’s a rule of thumb, not a legal standard. The IRS doesn’t recommend any split in particular for paying yourself a reasonable salary, it has no safe-harbor percentage, and there’s no proof the 60/40 approach is fail safe.

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In fact, since businesses can vary in so many different ways from one another, there’s no one-size-fits-all solution. The best approach is always to set reasonable compensation based on what comparable professionals are paid for similar work, and to document how you arrived at the number.

How to pay yourself: a worked example

Here is a simple, hypothetical example of how an S corp owner might split pay between salary and distributions. These numbers are for illustration only. They aren’t a recommendation, and the right salary for your practice depends on the factors above.

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Suppose your practice has $75,000 left after business expenses, before you pay yourself. After researching what comparable therapists are paid, you decide $50,000 is a reasonable salary. Payroll tax at 15.3% applies to that salary only: $3,825 (7.65%) is withheld from your paycheck and $3,825 (7.65%) is paid by your S corp as the employer, for $7,650 in total. The $75,000 less the $50,000 salary and the $3,825 employer share leaves $21,175, which you can take as a distribution with no payroll tax. Income tax still applies to both.

Illustrative example: $75,000 in profit before owner pay

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Want a rough idea of what an S corp election could mean at your income? Try Heard’s free S corp calculator. It estimates payroll tax savings, but it can’t tell you what your reasonable salary is. For that, you need market data and, ideally, a CPA who knows your practice.

Therapist reasonable compensation FAQ

How do I set a reasonable salary if I work part time?

Reasonable salary calculations often use the standard full-time convention of 2,080 hours per year (40 hours a week for 52 weeks). The IRS doesn’t require that number, but it’s a handy benchmark. If you work less, calculate the number of hours you spend working each year as a percentage of 2,080, and multiply that by the reasonable salary for a full-time therapist. (For instance, if you work 1,040 hours per year, your salary should be 50% of what a full-time therapist earns.) Time and effort devoted to the business is one of the factors the IRS considers.

How do I pay myself a salary if I don’t know how much I’ll earn during the year?

For convenience’s sake, it’s best to set a regular salary, meaning one that doesn’t change from one payment period to the next. But you don’t have to pay yourself on a bi-weekly basis. You could cut yourself a paycheck every week, every month, or even every quarter. Also, if you find you’ve earned more than you expected, you can pay yourself a bonus (taxed as salary) at the end of the year.  

Do I pay myself a salary if I’m a sole proprietor?

No. Sole proprietors, and single-member LLCs taxed as sole proprietorships, take an owner’s draw rather than a salary. A draw isn’t wages, so there’s no payroll to run. Instead, you pay self-employment tax and income tax on your net profit, usually through quarterly estimated payments. You only put yourself on payroll once your practice is taxed as an S corp. See our guide to switching from a sole proprietor to an S corporation for how that change works.

I run a group practice and spend more time doing admin than I do seeing clients. How do I calculate a reasonable salary?

If you find yourself doing the duties of multiple roles for your practice, then you can calculate your salary based on the salaries of multiple roles. For instance, if you see clients part of the time, but also spend your working hours doing admin and social media marketing, the breakdown might look like this.

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While researching salaries for a calculation like this, keep in mind your level of experience and certification in each role. For instance, you may have a Master’s degree and seven years of experience in clinical practice as a therapist. But you may have zero experience as an administrative assistant (consider running your own therapy practice on-the-job training). The salaries for each role should reflect that.

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This is just an introduction to setting a reasonable salary for yourself as a self-employed therapist. As always, you’ll be guaranteed the best results by consulting with an accountant.

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For a broader view of setting up and running an S corp, check out our complete guide to S corps for therapists.

Summary

• The IRS requires S corp owners who work in their practice to pay themselves reasonable compensation as W2 wages, because low salaries could otherwise be used to avoid employment (payroll) tax
• A reasonable salary should be about equal to what comparable businesses pay for similar services, taking into account your license, education, experience, duties, and the time you put in
• Location matters too, since therapists earn more (on average) in some parts of the country than in others
• There is no safe-harbor percentage, and rules of thumb like 60/40 are starting points rather than protection
• If your salary is too low, the IRS can reclassify distributions as wages and charge employment tax on them, plus potentially interest and penalties
• Online calculators can give only a rough idea of how much to pay yourself, so reach out to your professional network or consult an accountant who has many therapists as clients

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.‍

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Bryce Warnes is a West Coast writer specializing in small business finances.

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