Why an S Corp may no longer be the default choice
Key Takeaways
- Choose a business structure that maximizes tax efficiency and helps you retain more income, while ensuring compliance with IRS regulations.
- For dental practice owners with taxable income below $500,000, the QBI deduction may make a Single-Member LLC a smart choice.
- For multi-owner practices, a hybrid structure can deliver flexibility and savings.
Choosing the proper tax structure is one of the most important financial decisions a dentist can make. Beyond selecting your business entity type — whether that’s a PC, PLLC, LLC or partnership — you must decide how your dental practice will be taxed.
“Your tax classification affects how you pay yourself, how profits are distributed, and how much you ultimately owe in taxes each year,” says Zane Harris, CPA and financial planner at CWA. “The good news is, we can layer the most efficient tax treatments over almost any legal entity type.”
While the options can seem complicated, the goal is simple: choose the most tax-efficient business structure that allows you to keep more of your hard-earned income while staying compliant with IRS rules.
Single Owner Practices
Most dental practice owners begin as a Single-Member LLC (SMLLC) and elect S Corp taxation once profits and stability reach a certain level. This approach offers a smooth transition protecting owners from liability while optimizing their tax position as the business grows.
However, with favorable changes to the Qualified Business Income deduction that increase tax benefits to business owners, as well as making the benefits permanent, Zane says growing businesses may benefit from waiting another year or two before choosing S Corp status.
“The tax advantages of an S Corp are still there, but with the QBI extending and expanding, a single-member LLC could be more advantageous than an S Corp for some smaller dental practices.”
It breaks down like this: both SMLLCs and S Corps can qualify for the QBI deduction, which allows business owners to deduct up to 20% of their business income before calculating taxes. However, what qualifies as the income eligible for that deduction varies.
An S Corp requires the owner to pay themselves a “reasonable salary,” which is subject to payroll taxes. Only the remaining profit — called a distribution — counts toward QBI.
An SMLLC (taxed as a sole proprietorship) passes all profits directly to the owner. Everything is considered business income for QBI purposes, and the deduction is applied to the full profit.
The result? A potentially lower tax bill with fewer administrative headaches.
“For some dental practice owners, especially those with taxable income under $500,000, the improved QBI deduction can potentially make the SMLLC setup the smarter, cleaner, and more flexible choice,” says Zane.
Another aspect to consider before moving to an S Corp is your retirement planning strategy.
“If your priority is building wealth through your 401(k) or similar benefit plan, you may be better off staying an SMLLC so you can contribute based on total income rather than just wages,” says Zane.
That’s because when your dental practice is taxed as an S Corp, the IRS requires you to pay yourself a “reasonable salary” as a W-2 employee. Only that salary — not your S Corp distributions — counts toward the calculation of how much you can contribute to your 401(k).
“If you keep your salary low to save on payroll taxes, which is a common reason dentists elect S Corp status, you’re also lowering the amount you can put into your retirement plan,” says Zane.
At the same time, if you raise your salary to contribute more, you increase your payroll tax burden.
In other words, the more you try to maximize your 401(k) within an S Corp, the more likely you are to either:
- Trigger higher payroll costs, or
- Reduce the amount of income eligible for the QBI deduction.
“Operating as an SMLLC can offer more flexibility because all net income counts as earned income for retirement contribution purposes, as well as being eligible for the QBI deduction. In an S Corp, you must choose which one to maximize,” says Zane.
Multi-Owner Practices
For practices with more than one owner, Zane typically recommends a hybrid tax structure that blends the flexibility of an LLC with the tax advantages of an S corporation.
Often referred to as “A Partnership of S Corps”, the business operates as a multi-member LLC receiving limited liability protection. The difference here is that the members are not individuals. Each member is a separate, single-owner S corporation.
This arrangement gives each dentist’s S Corp its portion of profits from the partnership, offering liability protection and potential payroll tax savings. Each owner can also customize their salary, benefits, and retirement contributions within their own S Corp, giving them personal flexibility while keeping the main practice unified.
The tradeoff is administrative complexity. Each S Corp requires separate tax filings, payroll, and accounting.
“This structure demands close collaboration with a CPA and legal advisor who understands dental group dynamics,” adds Zane.
Bottom line is, before finalizing any decision on tax structure, it’s wise to consult both a dental attorney and a tax professional who understands your state’s laws and the unique nature of dental practices.
With the right structure in place, dental practice owners can focus on what truly matters — delivering exceptional care and growing a thriving, healthy business.
For more on choosing the most tax-efficient business structure for your dental practice, or any other professional or personal financial question, CWA advisors are here to help. Set up your free consultation today.
