As the owner of a dental practice, compensating yourself is more complicated than when you received paychecks as a dental contractor. Should your extra income be paid to you in the form of a bonus, or taken as a distribution?

For many, bonuses are the comfortable, familiar choice because they resemble pay, while distributions feel more like something you’ll sort out with help from dental contractors tax planning, when tax season comes around.

However, both types of income are taxed differently by the IRS:

Structuring dental compensation

In most instances, income is received by dentists either as wages through payroll, or through owner distributions. 

For contractors and associates, dental compensation is relatively straightforward, with income paid as wages or bonuses, and taxed through payroll. For practice owners, in particular of S Corporations, the IRS asks that they pay themselves a reasonable salary through payroll, before distributions are taken.

Dental bonuses in 2026

For tax purposes, the IRS treat bonuses in the same way as they treat regular wages; they are paid through payroll and along with Medicare taxes and Social Security, they are subject to income tax withholding at federal and state level.

Dental bonuses remain subject to supplemental wage rules in 2026, with the majority of practices withholding federal income tax on bonuses at the flat supplemental rate. Irrespective of the withholding method, the bonuses full amount is included in taxable income and subject to payroll taxes.

Reducing taxable income, bonuses are simple from a planning perspective, but as a practice owner, they are the most expensive way to pay yourself.

Taxing owner distributions

For S Corporation practice owners, distributions aren’t subject to Medicare taxes or Social Security, provided a salary deemed reasonable, has been paid through payroll. Instead, distributions are taxed as ordinary income on the owners individual return, or passed-through. However, it’s worth noting that while income tax remains applicable, payroll taxes don’t.

While distributions don’t reduce profits like wages do, the real advantage lies in avoiding payroll taxes on the part of the income that’s taken as distributions, and not as wages or bonuses.

The importance of reasonable compensation

For the work they carry out, the IRS demands that practice owners pay themselves a reasonable salary, in accordance with the number of hours worked, production levels, specialty, location and profitability. Pay yourself too little in wages and too much in distributions, and those distributions could be reclassified as wages by the IRS. You also run the risk of being audited, or penalized.

Can practice owners use bonuses and distributions?

Many practice owners use both bonuses and distributions. When compensation based on performance makes sense, income fluctuates, or in a year in which factors such as loan applications and retirement contributions benefit from higher reported wages, bonuses can be useful.  

Once a practice owner has established a reasonable salary with guidance from specialist dental accounting services, and the business is able to generate profits that are consistent, distributions are most commonly taken at periods throughout the year.

Getting the most out of how you pay yourself as a practice owner, should be guided by how your practice actually operates on a day-to-day basis, along with its goals for growth. By consulting with a specialist dental tax and accounting firm, you can better evaluate how salaries, bonuses and distributions fit within the broader framework of your practice’s financial strategy.