S-Corp Election for Dentists in Texas (When It Saves Tax and When It Doesn't)
Disclaimer: The information on this website (including all examples, explanations, and content) is for general informational purposes only and should not be considered tax, legal, or financial advice. The S corporation election is a complex decision with significant tax and legal consequences. Always consult with a qualified professional about your specific situation before electing.
"Should My Dental Practice Be an S Corp?"
This is one of the most common questions I hear from dental practice owners, especially in the second or third year of practice when income has stabilized and the owner starts hearing other dentists talk about S corporations at study club meetings.
The honest answer: it depends. The S corp election can save real money for the right practice at the right income level, and it can also create new compliance work and new audit risk that some owners would rather avoid. This post walks through the concepts, the eligibility rules, and the questions you have to answer before making the decision. The specific number that should be your salary under an S corp is not something to settle from a blog post. That is a conversation with a tax advisor who has access to dental compensation data for your specialty, your location, and the hours you actually work clinically versus administratively.
If you are looking for the practical operating side of running an S corp dental practice (the payroll piece), our payroll for a dental practice in Texas guide covers how owner dentist payroll works once the S election is in place.
What an S Corporation Actually Is
An S corporation is not a separate type of entity. It is a federal tax election that an existing entity (usually an LLC or a corporation) makes by filing Form 2553 with the IRS.
The underlying entity (the LLC, the PLLC, the PC, the PA) still exists for legal and state law purposes. The S election just changes how the entity is taxed federally.
What Changes Under an S Election
Before the S election, a single member LLC is taxed as a sole proprietorship by default. The net profit flows through to the owner's personal return on Schedule C, and the full net profit is subject to self employment tax (Social Security and Medicare on the first portion of income up to the Social Security wage base, then Medicare and the Additional Medicare Tax on income above that).
After the S election, the same entity is taxed as an S corporation. The owner has to be paid a salary through payroll for the work they do in the business, and that salary is subject to payroll taxes (Social Security and Medicare withheld from the employee, plus the matching employer share). Any remaining profit can be taken as a distribution, and the distribution portion is not subject to payroll tax.
The potential tax savings come from the difference: salary is subject to payroll tax, distributions are not. If you pay yourself a reasonable salary and take additional income as distributions, you have potentially eliminated the payroll tax on the distribution portion.
Why "Reasonable Compensation" Matters So Much
The IRS knows this is how S corporations save tax, and they have rules against abusing it. The salary you pay yourself as an S corp owner has to be "reasonable compensation" for the services you actually provide.
If the IRS determines that your salary is too low (you took $30,000 in salary and $400,000 in distributions on a profitable practice where the dentist did all the clinical work), they can reclassify the distributions as wages, assess back payroll taxes, and add penalties and interest.
The number that constitutes reasonable compensation depends on:
- The work you actually do in the practice (clinical, administrative, marketing, management)
- Hours worked
- Your specialty and credentials
- Geographic location
- Compensation data for similar work in similar markets
This is not a number to pick from a forum post, a friend at another practice, or a generic online calculator. It is a number that has to be defensible if challenged, and the defense is based on documented analysis with access to relevant compensation data. That is the conversation to have with a tax advisor who has done this analysis for dental practices before.
Eligibility Rules for an S Corp Election
Not every entity can make the S election. Several conditions have to be met.
Domestic Entity
The entity has to be a domestic corporation or eligible LLC (taxed as a corporation by default or by election).
Limited Shareholders
S corporations can have no more than 100 shareholders, all of whom have to be eligible (individuals, certain trusts, and certain estates). Partnerships, corporations, and non resident aliens cannot be S corp shareholders.
One Class of Stock
S corporations can only have one class of stock (with limited exceptions for voting differences).
Texas Practice of Dentistry Considerations
In Texas, the practice of dentistry has specific entity structure rules. The Texas State Board of Dental Examiners and the Texas Business Organizations Code govern how a dental practice can be owned. A dental practice typically has to be a PLLC, PA, or other dental practice eligible entity, and the owner has to be a licensed dentist (with limited exceptions for trusts and similar holders).
The S election is on top of the legal entity structure, not in place of it. You have a PLLC (the legal entity) that has elected S corporation tax treatment (the federal tax election).
This is one of the reasons getting both the legal entity setup and the tax election right requires coordination between your business attorney and your tax advisor.
When the S Election Makes Sense
The S election saves the most tax when:
Practice Net Income Is High Enough to Justify the Costs
There is no specific threshold above which the S election is automatically right, but there is a practical threshold below which it does not make sense. The S election adds compliance costs (separate corporate tax return on Form 1120-S, payroll setup and ongoing payroll service, more complex bookkeeping). Those costs have to be smaller than the tax savings for the election to be worthwhile.
Practices at low net income levels (where the owner takes most of the cash out as living expenses anyway) often do not save enough to cover the compliance costs.
The Owner Is Active in the Practice
The S corp savings come from the difference between salary and distributions. The salary has to be reasonable for the work you actually do. If you work 40+ hours per week clinically, your reasonable salary is going to be a large portion of the net income, and the remaining distribution piece is what produces the tax savings.
A practice where the owner is fully active produces a different savings calculation than a practice where the owner is largely passive (multi practice owners with associates doing the clinical work, for example).
The Practice Has Stabilized
Making the S election in the first year of practice, when income is still ramping up, often does not save much. Practices that have stabilized at a predictable income level and that have a clear picture of the owner's compensation profile are better candidates.
When the S Election Does Not Make Sense
Income Is Too Low
Below a certain net income level, the compliance costs (corporate tax return, payroll service, bookkeeping complexity) exceed the tax savings. The exact threshold depends on the practice's specific numbers and what compliance costs the owner can absorb internally versus outsource.
The Owner Wants Simplicity
S corp compliance is more complex than sole proprietorship or single member LLC compliance. Some owners prefer the simplicity of the default LLC tax treatment even at the cost of some payroll tax savings.
The Practice Has Multiple Active Owners
S corps work for single owner practices. Multi owner practices can also use S corps, but the rules around equitable distributions (one class of stock, distribution proportional to ownership) sometimes create issues that partnership taxation would handle more cleanly. This is an attorney and tax advisor conversation specific to the ownership structure.
The Owner Plans to Sell the Practice Soon
S corp shareholders have specific tax treatment on sale that may not be the most efficient structure depending on the deal type (stock sale vs asset sale). Practices that are likely to be sold in the near future should evaluate the entity structure with that exit in mind.
The Compliance Side of an S Corp
If you elect S corp status, you take on additional compliance obligations.
Annual Form 1120-S
The S corporation files its own federal tax return on Form 1120-S, separate from your personal return. The return reports the business's income and deductions and produces a Schedule K-1 that flows to your personal return.
Payroll for the Owner
You have to run yourself through payroll for the salary portion. This means:
- A real pay schedule (weekly, biweekly, semimonthly, or monthly)
- Federal income tax withholding
- Social Security and Medicare taxes withheld and matched
- FUTA paid by the practice
- Texas unemployment tax paid quarterly to the TWC
- Form 941 filed quarterly
- W-2 issued at year end
The mechanics are the same as for any other Texas business payroll. Our Texas small business payroll guide covers the full mechanics.
Owner Health Insurance Reporting
If the S corp pays health insurance for the owner (a more than 2% shareholder employee), the premium has to be reported as W-2 wages with specific exclusions from Social Security and Medicare. This is one of the most commonly missed year end adjustments. Tell your payroll provider in January.
Reasonable Compensation Analysis
The S corp owner salary needs to be reasonable, and the rationale should be documented. Compensation studies, industry data, and the specific facts of your practice's work all factor in. Keep documentation of the analysis.
Basis Tracking
S corp shareholders have to track their basis in the corporation for tax purposes. Distributions that exceed basis can produce unexpected tax consequences. Your tax advisor maintains the basis schedule.
Common Mistakes With the S Election
These are the recurring ones I see:
No salary in year one of the election. Some owners think they can take everything as a distribution in the first year and "start the salary next year." That is not how it works. Once you elect S corp status, owner compensation for services has to be reasonable salary, not distribution.
Salary set by guess. Picking a salary number from a friend at another practice or a forum post does not protect against an IRS reclassification challenge. The number should come from a defensible analysis.
Missing the year end W-2 adjustment for owner health insurance. Causes a year end mess and sometimes a corrected W-2.
Inconsistent treatment between bookkeeping and tax return. The owner takes $80,000 in distributions on the books but the tax advisor reports them as wages on the return without a corresponding payroll filing. The two have to match.
Making the election late. Form 2553 has specific deadlines (generally within 2.5 months of when you want the election to apply). Late elections are sometimes accepted with reasonable cause, but the cleanest path is to file on time.
Frequently Asked Questions
How much does the S election actually save?
Depends entirely on the practice's net income, the reasonable salary number, and the spread between them. Without those specific numbers, the savings figure is hypothetical. A tax advisor running the analysis for your specific practice can give you a real number.
Can I make the S election after I have already been operating as an LLC for a few years?
Yes. The S election can be made at any time the entity is otherwise eligible, subject to the Form 2553 filing deadlines.
Do I need to dissolve my PLLC and form a new entity?
No. The S election is a tax election on the existing entity, not a change of entity. Your PLLC stays a PLLC. The S election only changes how the PLLC is taxed federally.
What happens to my self employment tax under an S corp?
You no longer pay self employment tax on the entity's net income. Instead, you pay payroll taxes (Social Security, Medicare, FUTA) on the salary portion only. The distribution portion is not subject to either self employment tax or payroll tax.
Does Texas care if I make an S election?
Texas does not impose a personal state income tax, so the S election does not affect personal state income tax. Texas does impose a franchise tax on certain entities. Whether that applies to your practice depends on the entity structure and revenue level. Your tax advisor handles the franchise tax filing separately.
Should I make the S election?
That is the question this post cannot answer. Run the numbers for your specific practice with a tax advisor who has access to dental compensation data and who can evaluate the costs and benefits for your situation. Do not make this decision based on what another dentist did.
The Right Way to Approach the S Corp Question
The S corporation election can be a real tax saver for the right dental practice at the right income level. It is also a compliance burden and an audit exposure for the wrong practice. The difference between "right" and "wrong" depends on the specific numbers of your practice, your goals for the next several years, and your appetite for additional compliance work.
The wrong way to make this decision is to elect S corp status because someone at a study club mentioned it, then set your salary by guess. The right way is to run the analysis with a tax advisor who understands dental practice compensation, weigh the cost benefit honestly, and document the salary determination.
If the analysis says yes, our payroll for a dental practice in Texas guide covers how the owner dentist payroll piece works in practice. Our owner draw vs salary cash flow post covers how distributions and salary actually hit cash flow once the election is in place, and our year end tax planning guide covers the December moves that interact with S corp positioning.
We work with dental practice owners across Quinlan, Hunt County, Rockwall, Kaufman, and the greater Dallas area on entity structure questions, tax planning, and the year by year tax decisions that come with running a practice.
Thinking about whether the S corp election is right for your practice? Contact us here to talk through the analysis with someone who works with dental practices specifically.