Key Takeaways

• Payroll problems typically surface during growth, not at startup.
• Owner compensation needs to be revisited as profits rise and consider the type of reporting entity for tax purposes. 
• Hiring decisions should be tied to cash flow, not just production needs.
• Payroll strategy must evolve alongside practice complexity.

Payroll is often the single largest expense in a dental practice, yet it’s rarely treated as a strategic area of focus. When practices are small, payroll often feels manageable and intuitive. As the team grows, those same habits can quietly create risk, inefficiency, and financial strain.

Most payroll issues don’t appear suddenly. They build gradually as headcount increases, roles evolve, and decisions are made faster than the financial infrastructure supporting them.

When Payroll Becomes More Than a Process

In the early stages, payroll is largely administrative: pay people accurately and on time. As a practice grows, payroll decisions begin to influence cash flow, tax exposure, retirement contributions, and compliance. At that point, payroll is no longer just a process; it’s a financial lever.

One of the earliest warning signs is when payroll timing starts to clash with quarterly tax payments or debt service. Another is when payroll grows consistently faster than collections. Practices often don’t notice this until margins feel tighter, even though production is up.

A useful rule of thumb is to review payroll as a percentage of collections at least quarterly. If that percentage is drifting upward without a clear reason, new providers ramping up, expanded hours, or increased production, it’s time to pause and reassess.

Owner Compensation Gets Harder to Ignore

The nature of owner compensation, either wages or owner distributions, depends on the type of entity the practice is for tax purposes. The IRS requires wages based on “reasonable compensation” for owners of S-corporations.

Owner compensation often stays unchanged longer than it should. A salary that felt reasonable when the practice was smaller may no longer align with IRS expectations or the economics of the practice as profits increase. 

Inconsistent pay schedules, artificially low salaries, or “we’ll true it up later” approaches create unnecessary exposure. As income rises, so does visibility. Owner compensation should be reviewed annually and adjusted intentionally, with documentation to support the rationale.

If your practice offers a 401(k) retirement plan with profit-sharing options, the optimum wage for owners to maximize their contributions should be updated annually. A good practice is to separate owner pay into predictable wages and planned distributions, rather than treating compensation as an afterthought at year-end.

Hiring Without a Cash-Flow Model

Hiring decisions are often driven by operational pressure: full schedules, long days, or staff burnout. While those signals matter, payroll expenses begin immediately, while revenue from new hires almost always lags.

Before adding staff, it’s helpful to model:

• How long it will it take for the new role to generate revenue
• Whether existing cash reserves can support payroll during the ramp-up period
• How the hire affects benefits, overtime, and payroll taxes, not just base wages

If your practice can’t comfortably support the new payroll cost for several months without relying on future growth, the timing may be premature, or it may mean you have to take out a line of credit to cover these costs. Growth feels positive, but payroll is often where optimism turns into strain if the math isn’t tested first.

Classification and Benefits Complexity

As your practice expands, you may bring on consultants, part-time providers, or temporary staff. Worker classification mistakes are common during this phase and can be costly. Misclassifying employees as independent contractors often comes to light during audits, acquisitions, or state reviews.

At the same time, benefits and retirement plans add layers of complexity as headcount grows. Eligibility rules, employer contributions, and compliance requirements change once certain thresholds are reached.

What worked for a five-person team may not scale cleanly to a team of fifteen without adjustment.

Payroll as a Growth Tool

The most successful dental practices don’t avoid payroll complexity; they manage it intentionally. They review payroll metrics regularly, revisit compensation as profitability changes, and coordinate payroll decisions with tax and retirement planning.

When payroll is aligned with a growth strategy, it supports stability and flexibility. When it’s reactive, it becomes a source of stress and surprises.

At Edwards & Associates, we help dental practice owners treat payroll as part of the larger financial picture, so growth strengthens the practice instead of straining it.