Jovan Johnson, MBA, CFP®, CPA/PFS
If you own a private practice, you have probably asked yourself a seemingly simple question:
How much should I actually pay myself?
The quick answer is that there isn’t one percentage or salary that’s appropriate for every private practice owner.
How much you should pay yourself depends on your practice’s profitability, business structure, cash reserves, taxes, upcoming expenses, retirement strategy, and your personal financial goals.
I like to break the question into three parts:
- How should you legally pay yourself?
Salary, distributions, owner’s draws, or some combination depending on how your practice is structured and taxed. - How much can your practice afford to pay you?
This means looking beyond the balance in your business checking account and accounting for operating expenses, payroll, taxes, reserves, debt, and upcoming investments in the practice. - How much should you personally take?
That’s where your household spending, emergency savings, retirement, investments, giving, debt, and other personal goals come into the picture.
You probably didn’t start your practice just to create another job for yourself. For many practice owners, part of the goal is more flexibility, more control over your time, and the opportunity to build personal wealth.
So the bigger question becomes: How do you turn practice income into personal wealth?
Let’s say your practice collected $500,000 this year.
How much of that $500,000 actually becomes income you can use personally?
That’s one of the most important financial questions a private practice owner has to answer. And revenue alone doesn’t give you the answer.
Practice Revenue Is Not the Same as Owner Income
This is probably the first distinction I would make if I were talking to a room full of private practice owners.
Revenue is not the same thing as profit. And profit is not necessarily the same thing as the amount you should take home.
There are several stops between the money coming into your practice and that money eventually building wealth for you personally.
Practice Revenue
↓
Operating Expenses
↓
Practice Profit
↓
Taxes & Reserves
↓
Owner Compensation
↓
Retirement & Investments
↓
Personal Wealth
That is why I don’t love using a simple percentage of revenue to determine what an owner should pay themselves. Two practices can generate the same revenue and have completely different expenses, staffing needs, tax situations, cash reserves, and personal financial goals.
How Does Your Business Structure Affect How You Pay Yourself?
Before deciding how much to pay yourself, you first need to understand how you should pay yourself.
That depends in part on how your practice is structured and taxed.
Sole Proprietor or Single-Member LLC
Generally, you don’t put yourself on payroll. Instead, you take owner’s draws from the business.
One thing that sometimes surprises new practice owners is that the amount you transfer to your personal bank account doesn’t determine your taxable business income. You’re generally taxed on the practice’s net profit, whether you leave some of that money in the business or transfer it to yourself.
Partnership or Multi-Member LLC Taxed as a Partnership
Partners generally aren’t treated as employees of the partnership. Instead, they may receive distributions and, in some cases, guaranteed payments for services.
Partners are generally taxed on their share of partnership income, even if all of that income isn’t actually distributed to them.
S Corporation
If you work in your S Corporation, you generally need to pay yourself reasonable compensation through payroll. Additional profits may then be paid to you as shareholder distributions.
This is why deciding on an S Corporation salary shouldn’t simply be about choosing the lowest salary possible to reduce payroll taxes. Your compensation needs to be reasonable for the work you’re performing, and it can affect other areas of your financial strategy as well.
C Corporation
If you work for your C Corporation, you can generally receive W-2 wages as an employee. Profits may also be distributed as dividends.
C Corporations have different tax considerations because the corporation itself is a separate taxpayer, and dividends paid to shareholders can potentially be taxed again at the individual level.
Your entity structure helps determine how money gets from your practice to you.
But it still doesn’t answer the bigger question:
How much should you actually take?
For that, we need to look at the rest of the practice.
How Much Should a Private Practice Owner Set Aside for Taxes?
This is another question where I wish there were one percentage I could give every practice owner.
There isn’t.
Your actual tax liability can depend on your practice’s profit, other household income, filing status, tax bracket, state taxes, entity structure, retirement contributions, deductions, credits, and several other factors.
That’s why I generally prefer using an actual tax projection instead of blindly setting aside a certain percentage of revenue.
A CPA can estimate your expected federal and state tax liability based on what’s actually happening in your business and personal finances. From there, you can determine how much should be reserved and whether quarterly estimated payments are needed.
At a minimum, practice owners should also understand the IRS safe harbor rules for estimated taxes. Meeting a safe harbor may help you avoid an underpayment penalty, although it doesn’t necessarily mean you won’t owe additional tax when you file your return.
You can learn more about the IRS underpayment and estimated tax rules here.
The important point is this:
Money sitting in your business account that you expect to use for taxes isn’t necessarily money available to pay yourself.
How Much Cash Should Stay in Your Private Practice?
This is where looking at your bank balance can get you into trouble.
You might have $100,000 sitting in your business checking or savings account and think:
“The practice has plenty of cash. I can distribute $75,000 to myself.”
Maybe.
But before making that decision, ask what that cash needs to do over the next several months.
That could include:
- Payroll
- Rent
- Recurring operating expenses
- Taxes
- Equipment
- Insurance
- Debt payments
- Hiring
- Planned investments in the practice
- Unexpected expenses
- A slower-than-normal period
Rather than choosing an arbitrary dollar amount, I prefer thinking about reserves in terms of months of operating expenses.
For example, if your practice normally requires $30,000 per month to operate, a $90,000 reserve represents about three months of operating expenses.
How many months you should maintain depends on your practice.
A solo, low-overhead practice with predictable collections may need a different reserve than a group practice with significant payroll, rent, equipment costs, and insurance reimbursements that can take time to collect.
The goal isn’t to leave every extra dollar sitting in the business forever.
It’s to know which dollars have a job and which dollars are truly excess cash.
Don’t Forget About Retirement
When deciding how much to pay yourself, it’s easy to focus on what you need right now.
Mortgage. Groceries. Vacations. Kids. Debt. Life.
But some of the cash flow your practice generates should ideally help fund your future income too.
Private practice owners may have several retirement plan options, including a 401(k), Solo 401(k), SIMPLE IRA, SEP IRA, or a 401(k) that allows employer profit-sharing contributions.
Which option makes sense depends on factors such as your business structure, compensation, practice income, number of employees, and how much you’re trying to save.
This is another reason I don’t like looking at owner compensation as an isolated tax decision.
For example, if your practice is taxed as an S Corporation, your W-2 compensation can affect the amount of certain employer retirement contributions you’re able to make.
And once you have employees, the decision can become even more important.
A retirement plan designed to maximize your own contributions may also create contribution requirements or other costs for eligible employees. So you have to look at the plan within the context of the entire practice.
The goal isn’t simply to find the retirement plan with the highest contribution limit.
It’s to find the retirement strategy that makes sense for you, your employees, your practice’s cash flow, and your long-term financial plan.
What Happens After the Money Leaves Your Practice?
The financial strategy doesn’t stop when money moves from your business account to your personal account.
That’s actually when the personal financial planning begins.
Once you’ve paid yourself, that money may need to support several priorities:
- Living expenses
- Personal emergency savings
- Discretionary spending
- Giving
- Debt repayment
- Retirement accounts
- Taxable investments
- Insurance
- Major purchases
- Family goals
- Long-term wealth
And those priorities will be different for every practice owner.
Someone trying to pay off student loans while building an emergency fund has a very different financial picture from someone whose practice is established, has no significant debt, and is trying to maximize retirement contributions and build a taxable investment portfolio.
This is why I believe the question shouldn’t simply be:
“How much can I take out of my practice?”
A better question is:
“How can my practice best support the life I’m trying to build?”
An Example: A Practice With $500,000 of Revenue
Let’s go back to our original example.
Suppose a private practice has:
Annual revenue: $500,000
Operating expenses: $275,000
Profit before certain owner-level decisions and taxes: $225,000
It would be easy to look at those numbers and say:
“Great. The owner made $225,000.”
But that’s not necessarily the full picture.
What taxes need to be paid?
How much cash should remain in the practice?
Is the owner planning to hire another employee?
Does the practice need new equipment?
What retirement contributions are being made?
How is the owner compensated based on the entity structure?
And after money reaches the owner’s personal accounts, how much is actually being saved and invested?
Those are the questions that tell us whether a successful practice is actually translating into personal financial progress.
Final Thoughts
The Goal Is More Than Paying Yourself
There isn’t one salary, percentage, or formula that works for every private practice owner.
And that’s really the point.
Your practice needs enough cash to operate, handle the unexpected, and support whatever you’re trying to build next.
But you also don’t want to spend years building a successful practice only to realize that very little of that success has translated into wealth outside of the business.
The goal is to create an intentional flow of money:
Practice Revenue → Profit → Taxes & Reserves → Owner Income → Retirement & Investments → Personal Wealth
Your practice is an important part of your financial life.
It shouldn’t be the only place you’re building wealth.
At Piece of Wealth Planning, we help private practice owners coordinate their practice finances, taxes, retirement planning, and personal wealth so these decisions aren’t being made in isolation.
Ready to build a financial strategy around your practice and your life?
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