Optimize tax planning and increase employee impact
As we move into the latter part of the year, many dental practice owners are once again grappling with questions around employee bonuses. Should we offer them this year? How much should we allocate? Should we be giving gifts versus cash bonuses, and what are the tax implications of each?
Employee bonuses can be a complicated issue, both from staff optics and tax planning perspectives. This issue is so fraught, it’s estimated that less than half of dental practices opt to offer structured employee bonuses.
Why such a low number? According to Financial Planner Mason Stern, the issue is two-fold.
“Owners tend to struggle with creating a bonus structure that rewards the star performers, motivates the staff and promotes a positive office culture going forward,” says Mason. “Made even more complicated when you then consider how much to allocate and the tax implications of different bonus plans.”
Determining whether a practice should offer employee bonuses is best discussed with a CPA or financial advisor. There are simply too many factors at play, from the practice’s financial health to the nuances of company culture.
However, if practice owners do decide to create a bonus plan, Mason says it should not come at the expense of profits.
“One rule of thumb when considering whether to implement a bonus plan is to look at total salary as a percentage of collections,” says Mason. “If your staff salaries are under the recommended percentage for your practice type, then you have some room for bonuses.”
You still can issue bonuses if you are over the recommended percentages, notes Mason, however in this case it’s important to be mindful of the amount of the bonus and the reasoning behind it.
TYPES OF BONUSES
Bonuses fall into three general categories:
This can be a physical check, added to a regular paycheck or actual cash given to the employee. Either way, it is considered taxable income. If included as part of the employee’s regular paycheck, it will be taxed like regular income. If delivered as a separate check, it’s considered supplemental income. While it’s still taxed at the employee’s marginal tax rate for the year, the IRS only mandates that taxes are withheld at 22%. As this could be different than the employee’s marginal rate, it could provide additional tax questions for the employee.
Mason suggests two tactics to ensure a cash bonus has the most impact. One, consider “grossing up” the check so the employee receives the actual bonus amount after taxes are taken out. Two, always opt for handing the employee a physical check.
“Handing an employee a check is much more impactful,” says Mason. “When it’s not wrapped into their normal compensation, it feels more like the gift that it is.”
Technically, gift cards are a form of cash compensation, meaning they should be added to payroll and taxes must be paid on the employer side. The employee then needs to pay taxes on it as well, which Mason says can be a letdown for the employee.
“Any form of cash compensation, whether cash, check or gift card, needs to be run through payroll,” adds Mason.
Gifts are considered tangible, non-cash items. They are also taxable unless they fall into the category of de minimus.
The IRS defines a de minimis gift like this: “Considering its value and the frequency with which it is provided, it is so small that it makes accounting for it unreasonable or impractical.” Some examples are holiday hams or the infamous jelly of the month club.
“The problem is, there is no set value on what is considered a de minimus gift,” says Mason. “Always talk to your advisor before writing off small gifts.”
Considering all the complexities around giving bonuses, how much to give and how to structure a plan, Mason recommends practice owners consult with a financial professional before implementing a program.
“End-of-year bonuses can be a wonderful way to reward employees for a job well done,” says Mason. “Our job is to ensure practices are putting the right plan in place for their unique situation.”
As always, CWA is here to help answer any questions about employee bonuses or any other financial questions you may have. Contact the CWA team to schedule a complimentary consultation with a CWA Advisor.