How To · 9 min read
Owner compensation and owner discretionary spending are the two lines that stand between your profit and loss statement and what your practice actually earns. Neither has a benchmark, and there is a good reason for that.
Ask what percentage of production should go to owner compensation and you will get an answer. Ignore it. It is not a performance measure, it is a record of two choices you made for other reasons: how you elected to be taxed, and how much dentistry you personally do. Two practices with identical economics can show owner comp at 8% of production and at 32%, and neither one is healthier than the other. What matters is not the size of these lines. It is that they are separated, consistent, and documented.
This is the plumbing behind the profit and loss statement you read every month, and it is the part of the statement most likely to be quietly wrong.
Owner compensation is what the practice pays you for the work you do in it. Wages through payroll, the employer payroll taxes on those wages, and the benefits the practice provides you: retirement contributions, health coverage, disability. For an S-corp owner some of those already sit inside your W-2, so do not count the same dollars twice. Continuing education stays in operating expense, because whoever replaces you will need it too.
It is not your distributions. A distribution is a return on ownership, not payment for labor, and mixing the two makes every downstream number unusable. If you take $18,000 a month out of the practice and $9,000 of it runs through payroll while the rest arrives as a transfer, only the $9,000 plus its payroll burden belongs on this line. We cover the ordering question in more detail in what to fund before you take a distribution.
The reason this line exists as its own category, rather than sitting inside staff payroll, is that it behaves nothing like staff payroll. Staffing cost has a real benchmark, 25% to 30% of net production in the NSCHBC and Academy of Dental CPAs benchmark data, because it measures something the practice controls and a buyer inherits. Owner comp measures a decision that changes the day the practice changes hands. Leave it inside staffing and your staffing percentage is wrong, your overhead is wrong, and every comparison you make against other practices is wrong.
Owner discretionary is spending the practice pays for that a new owner would not have to. The vehicle. Travel that mixes a conference with a family trip. A phone line, a club membership, a family member on payroll whose role would not survive an interview.
Some of it is deductible, some of it is not, and that is a separate question from the one this line answers. The purpose here is not tax classification. It is to know, at any point, what the practice would cost to run without you.
Track it as it happens, by line, with the reason attached. Reconstructing 18 months of it later is one of the most common scrambles we see when a practice goes to market, and it rarely recovers the full amount, because the memory of why a $4,200 charge was business is gone and the documentation was never created.
Both lines get added back when a buyer normalizes your earnings, because both represent spending that attaches to you rather than to the practice. But they behave very differently, and the difference is what catches owners.
Owner discretionary is a straightforward add-back, limited by documentation. Owner compensation is not an add-back at all. It is a substitution. The buyer adds your pay back and then subtracts what a replacement dentist would cost, fully loaded with payroll taxes, benefits and malpractice.
Net effect on earnings = your compensation, minus a loaded market-rate replacement
Which method a buyer uses decides how this lands, so know which one you are being quoted. A solo practice is usually valued on seller's discretionary earnings, where your pay is simply added back and the figure cannot go below zero. A group or a DSO values on adjusted EBITDA, where your pay is substituted. The substitution is the one that can run against you, and it does any time you pay yourself less than your replacement would cost.
Take an owner producing $1,000,000 a year, where a loaded replacement costs about $360,000. Draw $400,000 and the adjustment gains you $40,000. Run a $250,000 salary set for tax reasons against that same $360,000 and it costs you $110,000. The second practice was not more profitable. It was showing profit that existed only because the owner was underpaid, and that ends at closing.
This is the mechanism that turns a tax-driven salary decision into a valuation surprise, and it is worth understanding a few years before it matters. It is also the line between the two earnings figures a buyer will quote you. Adjusted EBITDA is measured after paying a market wage for your chair. Seller's discretionary earnings leaves your pay and your perks in.
A buyer will only take what you can document. They accept documented, genuinely non-recurring items. They routinely reject anything undocumented, any "one-time" expense that turns up in consecutive years, savings from running short-staffed, deferred maintenance, and recurring patient-acquisition marketing, which is not discretionary at all. A family member's pay is usually added back only to the extent it exceeds what the role is worth, never in full.
We went looking for a published owner compensation percentage for dentistry. There is not one. The ADA does not publish it. The Academy of Dental CPAs does not publish it. The Bureau of Labor Statistics excludes the self-employed from its dentist wage survey by design.
The closest published figure is Table 17 of the ADA Health Policy Institute's 2025 Survey of Dental Practice, and it explains the absence rather than filling it. HPI reports practice expenses including shareholder salaries as a share of gross billings collected, for incorporated general practice owners. The average is 95.2%. The median is 97.9%. The third quartile is above 100%.
Once the owner's salary is counted as an expense, the average incorporated practice consumes almost everything it collects, and a quarter of them consume more. That is not a profession running on a 2% to 5% margin. It is a profession where HPI counts the owner's own compensation inside the expense line. The number tells you about the survey's definition, not about the practice.
So owner comp as a percentage is an artifact of entity structure and compensation election. So the percentage is an artifact, and any published range for it would be measuring the election, not the practice. Plenty of the numbers on your statement do have real benchmarks behind them, and our free Dental Practice Benchmark Scorecard checks those against healthy dental ranges in about two minutes. This is simply not one of them.
Benchmarks are absent, but for an S corporation a standard is not, and it is a different kind of thing. The IRS position on S corporation compensation is that distributions and other payments to a shareholder-officer must be treated as wages to the extent they are reasonable compensation for services rendered. Wages come before non-wage distributions for work performed. Where compensation is unreasonably low, the IRS can reclassify distributions as wages and assess employment taxes on them, and in Revenue Ruling 74-44, which the IRS cites on that same page, it did exactly that to two shareholders who took dividends in place of salary.
There is no percentage rule and no dental safe harbor. The widely repeated "60/40 split" appears nowhere in IRS guidance. Among the factors the IRS lists instead are: training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, compensation agreements, what comparable businesses pay for similar services, and payments to comparable non-shareholder employees.
That last factor matters most. In a dental practice, the closest comparable is an associate dentist, whether or not you employ one. Which means the IRS, testing whether you are paid enough, and a buyer, testing whether the practice earns anything after paying you, both end up pointing at the same number from opposite directions. The associate rate for your production is the pivot in both conversations, and a practice that already tracks it has answered two very different questions at once.
This is a description of how the rules work, not advice about your situation. What your own reasonable compensation figure should be is a conversation to have with whoever prepares your return, before the year closes rather than after, and it belongs in the same conversation as your entity structure.
None of this requires new software. It requires a chart of accounts that has somewhere to put each of these, and the discipline to use it.
Do that and you get three things you did not have. Your overhead percentage becomes comparable to other practices, because it is no longer carrying your salary decision. Your practice's real earnings become visible on a normal month rather than during a transaction. And the add-backs you will eventually want are documented at the moment they happened, which is the only moment documentation is worth anything.
P.S. Reciprocity Accounting separates owner pay, owner discretionary spending and true operating cost every month, so what the practice earns is visible long before anyone asks. See how we can help your practice.
There is no published benchmark and no honest answer as a percentage. The figure depends on your entity structure, how much clinical dentistry you personally do, and how you have chosen to split salary and distributions. The useful question is a different one: what would a replacement dentist cost to do your clinical work? That number is comparable across practices. Your compensation election is not.
Not in the way we report it. Overhead of 55% to 65% of net production, per the NSCHBC and Academy of Dental CPAs benchmark data, is measured before owner compensation, which is what makes it comparable from one practice to another. Leave owner pay inside it and a practice paying its owner a large salary looks like it has an overhead problem, when what it has is a payroll election. Report the two separately and read them separately.
Not if the practice is an S corporation and you are working in it. The IRS is explicit that distributions to a shareholder-officer are treated as wages to the extent they represent reasonable compensation for services, and Revenue Ruling 74-44 is the IRS ruling where payments labeled as dividends were treated as wages. The label does not control. What you actually did for the money does. Your own figure is a conversation with whoever prepares your return.
Spending the practice pays for that a new owner would not incur. Personal vehicle use, travel with a personal component, a family member paid above the value of their role, personal insurance premiums run through the business, memberships that are not professional. The test is simple: if you left and it would stop, it is discretionary.
No, and expecting otherwise is how negotiations sour. Documentation is the whole test, and the list of what buyers routinely reject is in the body above. The short version: if you cannot show why the money was spent, it is not an add-back.
The tax half does not, because a sole proprietor takes draws rather than wages and there is no reasonable compensation test to meet. The valuation half applies exactly the same way. A buyer still substitutes a market-rate clinical wage for your work, and your draws still tell them nothing about what the practice earns. If anything the tracking matters more, because a sole proprietorship has no payroll record to anchor the conversation to.