Understanding and Optimizing Your W-2 Income: A Guide for Plastic Surgery Practice Owners

The risks of understating W-2 income.

One of the main perils of reducing your W-2 income too much relates to the IRS’s requirement that this revenue must be “reasonable.” But what does this mean? According to the IRS, "Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances." Clear as mud, right? If the IRS determines that you’ve underpaid yourself, you could face fees, penalties, and back taxes.

A common guideline is the 60/40 rule, where 60% of profit is paid as W-2 income and 40% as a distribution. Depending on your industry, role, and profitability, you should consider the Social Security wage base as a potential floor for your salary, which fell at $176,000 in 2025. Many accountants also use geographically-centered databases to compare compensation for similar roles and help set reasonable salaries.

Is there a ceiling for W-2 income?

With some rules established on the W-2 floor, is there a ceiling for how high it should be? It's best to defer to your accountant regarding what they consider reasonable, but generally there's no benefit in exceeding the 401(a)(17) limit. This cap represents the maximum amount of wages that can be considered for non-discrimination testing in a qualified plan. For 2025, the 401(a)(17) limit is $350,000.

Determining the optimal W-2 income.

So, with both a floor and a ceiling in mind, how do you determine the right W-2 income? The answer involves a dynamic process. Ideally, as a high-income practice owner, you have a safe harbor top-heavy 401(k) plan. Your third-party administrator (TPA) can provide allocation studies that estimate the effect of various W-2 income levels on profit-sharing.

By the end of the third quarter, it's usually possible to forecast staff hours and pay for the full year with some accuracy. For the practices I work with, I typically recommend setting a reasonable salary based on prior years’ data, generally between $200,000 and $250,000. At this point, reach out to your TPA and ask them to run three scenarios: one at your current W-2 income (say, $250,000), another at $300,000, and a final one at the maximum (around $350,000).

In most cases, you’ll notice the higher your W-2 income, the more you retain in profit-sharing contributions. However, depending on your census, there is a point where the returns diminish. To make an informed decision, compare the additional profit-sharing retention against the employee portion of the Medicare tax rate of 1.45%. If you’re married and your household’s taxable income fall within the qualified business income (QBI) phaseout range — $394,600 to $494,600 for 2025 — factor in the additional 20% tax reduction on distributed income.

There are many nuances to optimizing your W-2 income as it relates to paying Social Security and Medicare taxes. If you have questions on the most tax-efficient approach for your situation, our team would love to help! Schedule a conversation with a practice integration advisor today.

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