For a law firm, medical or dental practice, engineering firm or consultancy, the largest expense and the largest asset are usually one and the same: the owners’ time. That makes two decisions more consequential than almost anything else in the books, namely how the practice is structured and how the owners are paid. We work with professional practices across Colorado to make both decisions well and to revisit them as the practice grows.
Which entity structure fits a professional practice?
Most practices begin as a sole proprietorship, a single-member LLC or a partnership. Each of these passes profit through to the owners, who pay self-employment tax on most of it. An S corporation election changes that arrangement: owners become employees, take a salary subject to payroll taxes, and receive the remaining profit as distributions that are not.
Consider a consultant with $160,000 of net profit as a sole proprietor, who pays roughly $22,600 in self-employment tax. If the same consultant elects S corporation status and takes a $95,000 salary, combined employer and employee payroll taxes on that salary are about $14,500. That is a difference of roughly $8,000 a year, before the added cost of running payroll and filing a separate return. State licensing rules for some professions limit which entity types you can use, so the structure has to suit your license as well as your tax return.
How much should a practice owner be paid?
S corporation owners must pay themselves reasonable compensation before taking distributions. The IRS guidance on S corporation compensation lists the factors it considers, including your training and experience, your duties, the time you devote to the business, what comparable businesses pay for similar services and what you pay non-owner employees.
A sound framework begins with what you would have to pay someone else to do your job, adjusts for the hours you actually work, and records how you reached the figure. Revisit the number each year as the practice changes. A salary with a documented basis is far easier to defend than one chosen to minimize tax.
How does the QBI deduction work for professional practices?
The qualified business income (QBI) deduction allows owners of pass-through businesses, whose profit flows through to the owners’ personal returns, to deduct up to 20 percent of their qualified business income. Practices in health, law, accounting, consulting, financial services and several other fields are specified service trades or businesses under the IRS section 199A guidance, while engineering and architecture are not on that list.
For specified service owners, the deduction phases out as taxable income rises. For 2026, the phase-out begins at $201,750 of taxable income for single filers and $403,500 for joint filers, and the deduction is eliminated above $276,750 and $553,500, respectively, according to Revenue Procedure 2025-32. Owners near those ranges can sometimes remain within them through retirement plan contributions or the timing of income, and S corporation salary levels also affect the calculation. We therefore evaluate these elements together rather than one at a time.
Should your practice make Colorado’s SALT Parity Act election?
Colorado allows partnerships and S corporations to elect to pay state income tax at the entity level. The Department of Revenue’s SALT Parity Act guidance explains that the entity then deducts that tax federally, which works around the individual cap on state and local tax deductions, while owners claim a credit for their share. The election is annual, irrevocable for that year and binding on every owner, so it should be modeled before it is made. For many profitable practices, it is among the most straightforward planning tools available.
How SBA CPA works with professional practices
We keep monthly books that track partner draws, guaranteed payments and capital accounts, run payroll for owners and staff through Payroll Plus, and prepare the practice and owner returns together. Guaranteed payments are the amounts a partnership pays partners for their services or capital regardless of profit, and recording them consistently keeps each partner’s tax reporting accurate. When a partner buys in or retires, or when the practice is sold, our mergers and acquisitions team supports the valuation and the transaction. An introductory call is a sensible way to see where your structure stands.