How to Pay Yourself: Key Factors for Setting Your Owner Compensation

Your optometry practice is a phenomenal asset. Not only can you benefit from the growth of its valuation – it can be a fantastic generator of cash flow for all business and personal finance goals. It’s essential, however that you understand how to optimize compensation as owner.

One common question is how – and how much – should the owner take in income from the practice? Particularly with practices taxed as S corporations, where you must take a wage.

This article outlines seven critical factors every OD practice owner should consider when strategically setting their wage compensation.

How Optometry Practice Owners Get Compensation

Before diving into strategy, let’s review the basic ways you can take income from your practice, depending on the entity type:

Sole Proprietors or Single-Member LLCs: All practice profits flow directly to your personal tax return. There’s no formal W-2 wage; instead, you simply take draws from your business bank account. You pay self-employment taxes on the entire net income.

Partnerships: Partners in a partnership – or an LLC taxed as one – typically take distributions of profit or “guaranteed payments” – set amounts resembling wages – that are both subject to self-employment taxes. Even though it files its own tax return, the partnership doesn’t pay taxes – the income is taxed on your personal tax return.

S Corporations: Owners must take a “reasonable” W-2 wage and may take profits distributions for additional income. Wages are subject to employment taxes, but your business profit is not – often a core benefit of choosing to be taxed this way. Both are taxed on your personal tax return.

We’ll skip over C corporations for now.

As many practices choose to be taxed as S corps, let’s dive into the factors to balance when deciding how much to pay yourself as a W2 wage.

The S-Corp Wage Dilemma: Finding Your Balance

For S-corp practices, an appropriate wage depends on balancing several factors:

1. Cash Flow Sustainability

Particularly for cold-starts, your practice needs adequate operating cash before paying yourself. Setting your wage too high, too soon, risks depleting funds needed for expenses, inventory, equipment purchases or handling revenue fluctuations.

In a cold-start it may take some time before you’re paying yourself a full-time market-based wage.

2. IRS “Reasonable Wage” Requirements

The IRS explicitly requires S-corp owners to take a “reasonable” wage for their services provided to the practice. This isn’t optional—it’s a compliance requirement. What’s “reasonable”? There’s no black and white answer. The IRS provides a list of factors, which can be boiled down to “what would you pay someone else to do what you do, with similar experience?”

Consider what you would pay an associate OD performing similar clinical work, plus any management responsibilities you handle, and work with your tax professional to make sure it’s compliant.

3. Employment Taxes and Compensation

Since profit is not subject to FICA taxes, these tax savings may be the biggest federal tax benefit for choosing to be taxed as an S-corp. There’s a big incentive to keep a low wage, sometimes unreasonably so.

In 2025, wages up to $176,100 incur Social Security tax (12.4%), while all wages face Medicare tax (2.9%) – half paid by you as an “employee,” half as the business. Business profit isn’t subject to these employment taxes, creating potential savings – but remember point #2 above.

In addition, there may be state and local benefits – like disability or paid family leave – that are funded and calculated by your wage.

There’s also the point of Social Security credit. The lower the wage, the lower your crediting toward a retirement benefit. However, consider the way Social Security calculates your benefit at your full retirement age.

In 2025 dollars, when calculating your benefit, Social Security is essentially replacing the following amounts of your average monthly wages from your earnings history (adjusted for inflation up to age 60):

• 90% of the first $1,226/mo
• 32% of $1,226–$7,391/mo
• 15% of monthly income over $7,391/mo

Once your annual wage is $103,404, you’re only getting 15% on each dollar of wages.

If you have a healthy savings rate and consistent habit of investing, then you may benefit from investing the extra wages yourself. However, too often there isn’t enough saved for retirement over a career, and the owner may have been better off increasing wages and getting a higher Social Security benefit.

4. Qualified Business Income (QBI) Deduction

Since wages reduce profit, the 20% QBI deduction calculation is reduced by higher W-2 wages. This is an important item to project out and review.

5. Personal Financial Stability

Above all else, your practice should provide for your ideal lifestyle. A consistent, predictable wage supports household budgeting and personal financial planning. There’s no simpler way to bring regular income into the household and add tax withholdings.

6. Retirement Plan Maximization

Your W-2 wage directly determines retirement plan contribution limits:

• 401(k) salary deferrals require sufficient W-2 wages to support your contribution ($23,500 in 2025; $31,500 if age 50+). Same applies for SIMPLE IRA plans.
• 401(k) Profit-sharing contributions are limited to 25% of your W-2 wages. And your age and wages can directly impact that amount of the contribution that skews toward your account vs. all other employees, depending on your profit-sharing method.
• Cash balance plan contributions are directly impacted by your age and compensation history.

For owners focused on retirement accumulation, the temptation to save FICA taxes with a lower wage can directly impact your retirement savings and federal and state tax deferrals.

7. Practice Valuation and Accurate Accounting of Profit

Your wage should reflect the true replacement cost of your clinical and management work. Someone will need to do the work – whether you or someone else. It’s a true expense to the business.

Artificially low compensation inflates practice profitability, distorting your financial benchmarking and potentially complicating practice valuation discussions. Adjustments will need to be made as part of the process to reflect a full-time wage in the financials.

Beyond Tax Savings— Compensation Planning Over Time

While minimizing taxes is tempting, only focusing on tax reduction can limit your planning opportunities in other areas. It’s a balance – what do you need to live? What does tax planning suggest? What do benefits and investment opportunities require?

Your compensation structure should evolve with your practice and life circumstances:

• Practice revenue growth or profitability improvements
• Addition of a partner to the practice
• Major personal financial changes (home purchase, college planning)
• Implementation or expansion of retirement savings strategies
• Business expansions or associate additions
• Changes to tax laws affecting QBI or retirement contributions

Regularly reviewing your compensation with your financial advisor and tax professional allows you to proactively adjust your approach based on changing circumstances and goals.

Conclusion

Setting your wage is often a balance between tax savings and other important factors like household cash flow and retirement savings.

Compensation planning extends beyond maximizing this year’s tax savings – it’s about creating alignment between your personal and practice goals.

Every situation is unique. The right answers depend on your personal circumstances. Take time annually to evaluate your compensation approach and regularly review with your advisors, considering all seven factors outlined above.

Happy Planning!