The end of the year is right around the corner. Are you using this time to reflect on what kind of year of it was for you and your dental practice? Here are a few questions you should be asking yourself to determine the success of your dental practice.

… How did you grow as a dentist?

… How happy were your patients?

… Did your dental practice see growth?

… Did you get paid fairly for that growth?

… How are your being compensated?

That last question is a big one. And if your dental practice has more than one dentist, you have to consider how much they are being compensated, as well. So how should you be paid? How about your fellow dentists? The following are a few things you should keep in mind when looking at dentist compensation.

Determining Your Compensation

Deciding how much to pay yourself and how much to keep in your business, is a fine line that dentists must walk. However, there are insights into this calculation that you need to be aware of:

• Use Entity Type as Your Guide. Your entity type guides how you can be compensated. For example, if you are an S corporation, you can establish a salary and take a draw (or distribution). This differs slightly for C corporations where you can receive a salary and then a corporate dividend. Sole proprietor can’t take salaries through payroll. Rather, if this is your entity type, you can only take draws.
• Take a Reasonable Wage. Be sure to pay yourself a reasonable wage. Many dentists believe they shouldn’t pay themselves as a member of an S-corporation and only take distributions to avoid payroll taxes. This is a common misconception. You need to understand that the IRS watches for this activity – and they will catch you. It’s not worth the risk.
• Maximize Your Retirement Plan. Paying into your retirement plan is an important component of your total compensation. The maximum wage base for a full retirement plan contribution in 2013 is $255,000. This is set to increase to $260,000 in 2014, so you may need to adjust your salary to take full advantage of your retirement plan.
• Fund Your 401(k) with a Year End Bonus. Have you maxed out your 401(k) plan? That equates to you contributing up to $17,500 this year. If you are set to fall short, consider taking a bonus to maximize this benefit. The good news is that this bonus is also a corporate tax deduction for your dental practice.

Strategies for Multi-Dentist Practices

While there are compensation issues all dentists must consider, things get trickier when there is more than one dentist in your practice. Let’s look at the common practices being used today.

One method used to calculate compensation is productivity … and productivity alone. The dentist with the most collections receives the largest income and vice versa. However, in many cases, productivity doesn’t tell the whole story. That’s when dentists begin factoring in expenses.

Expenses – like travel, continuing education, auto expenses and meals & entertainment – are more individual by nature and often pulled into the equation. That’s why some practices with multiple dentists reduce a dentist’s income by his or her own expenses in certain categories. Some practices even take it a step further by factoring overhead percentages into this calculation. The theory is that a higher producing dentist may use more overhead.

Tackling the Compensation Issue

Unfortunately, there is no right answer to compensating yourself fairly. With hundreds of options, it really comes down to what works for you as well as any other dentist in your practice. Yet, this is an issue you need to review regularly and the end of the year is the perfect time, especially as you contemplate your progress thus far and make plans for the year ahead. Just remember that what works for one dental practice may not work for yours.

Contact Our Dental Practice Professionals

Need help deciding which option is best for you and your dental practice, contact Rea & Associates. Our team of bright Dental CPAs can work with you to determine the best strategy for your dental practice.

Related Articles:

A 401(k) Plan and Your Dental Practice

Ten Tips for Growing Your Dental Practice

Tax Planning – Not A Once-A-Year Event