Our Office will be closed Nov.21 – Nov.25 in observance of Thanksgiving. We will return to regular business hours on Monday, Nov. 28.
Our Office will be closed Nov.21 – Nov.25 in observance of Thanksgiving. We will return to regular business hours on Monday, Nov. 28.
On August 28, 2020, the IRS issued Notice 2020-65 that provides some needed guidance for employers wondering whether and how to comply with the employee payroll tax deferral described in the August 8, 2020 Presidential memorandum (often referred to as an “executive order.”). Even though the Notice leaves many questions unanswered, it addresses some key items.
Although the IRS Notice does not specifically state whether the employee payroll tax deferral is mandatory, the deferral appears to be voluntary, which lines up with Treasury Secretary Mnuchin’s widely reported comments.
Internal Revenue Code Section 7508A (which is the basis for the memorandum and the Notice) allows the President to postpone certain tax deadlines due to a disaster, such as COVID-19. However, Section 7508A does not give the President authority to require taxpayers to use the extended deadline. In other words, even if a deadline is postponed, a taxpayer could continue to adhere to the normal deadlines. As a result, employers can continue to withhold employee Social Security tax or Railroad Retirement tax from September 1 to December 31, 2020 if they do not wish to avail themselves of the deadline extension.
The Notice clearly places responsibility on employers for withholding and depositing the deferred taxes and states that penalties generally would apply for any failure to comply (although the Notice states that employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee”). Neither the memorandum nor the Notice eliminates the tax liability.
It appears that the employee payroll tax deferral does not apply to self-employed individuals, since it only applies to Social Security tax and Railroad Retirement tax and does not include Self-Employment Contributions Act (SECA) taxes.
In an August 8, 2020 memorandum to the Secretary of the Treasury entitled, “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” President Trump directed Treasury Secretary Mnuchin to use his authority to defer the withholding, deposit and payment of employee Social Security tax on wages (i.e., 6.2% of employee wages) or Railroad Retirement tax on compensation paid to certain employees during the period September 1 through December 31, 2020. The memorandum instructed the Treasury Department to issue guidance explaining how to implement the deferral and to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes. Secretary Mnuchin made comments in an August 10 interview that employers would not be required to offer the deferral.
Since the guidance was released so close to the first available deferral date (i.e., September 1), employers have very little time to modify payroll procedures and payroll system to allow employees the deferral on the first pay cycle in September. Under the current IRS rules, it is not possible to “recover” the tax that already was withheld and remitted, but was eligible for the deferral, without causing issues with the employer tax filings and the imposition of penalties. Retroactive changes generally are not allowed simply because a taxpayer failed to use an available extension. This is consistent with the IRS’s position on employers that failed to timely defer the employer’s share of Social Security taxes (6.2%) as permitted under the CARES Act.
The two-and-a-half-page IRS guidance leaves unanswered many concerns surrounding the employee payroll tax deferral, but it does clarify several important points as they pertain to an employer’s payroll process. Below is a summary of the guidance.
Employees who are paid hourly or whose wages vary from pay period to pay period may not benefit from the payroll tax deferral in every pay period depending on whether the amount of wages exceeds the biweekly threshold of $4,000, or the equivalent. Employers should review with their IT departments or payroll service providers to ensure that the payroll system is configured correctly to determine who is eligible to participate in the employee payroll tax deferral on a pay period-by-pay period basis.
The very short-term deferral and repayment period results in a modest benefit.
An employee who earns the Federal minimum wage would have an increased biweekly paycheck of $36 (or $324 for nine pay periods, from September 1 to December 31, 2020).
For employees that earn the maximum $3,999 every two weeks for nine pay periods, the benefit is $2,231. ($3,999 x 6.2% x 9 pay periods).
Unless something happens to dramatically improve the employee’s household income before January 1, 2021, the repayment of taxes ratably over the first four months of 2021 may create a greater hardship than their current cash flow shortage.
Many questions remain in terms of how the employee payroll tax deferral will impact employees and employers, how the deferred payroll taxes are to be reported and what changes must be made to an employer’s payroll system. Until the IRS provides further guidance regarding these outstanding questions and concerns, employers that consider implementing the employee payroll tax deferral should exercise care by putting safeguards in place to ensure that they do not fall victim to the IRS penalties.
Since the employee payroll tax deferral takes effect as early as September 1, 2020, employers that consider implementing the tax deferral likely will face a dilemma due to some of the unanswered questions unless the IRS issues additional guidance soon. For example:
The statistics are sobering: You’re much more likely to become disabled than to die during your practice years. The cost of disability insurance can be daunting — anywhere from two percent to four percent of the income you are trying to replace. Still, few physicians are prepared to rely solely on their personal savings during an extended period of disability. With that in mind, consider these steps for ensuring you have a source of income should you become disabled:
Most employers provide some form of group disability coverage, and a basic employer-sponsored plan certainly helps when you are starting out in practice. Coverage under a basic employer-sponsored plan usually is limited and policies are not portable if you change employers. Well-informed medical and dental professionals treat this type of coverage as supplemental to a more comprehensive personal policy.
Personal policy premiums are higher than group plans, but the coverage and flexibility are superior. Coverage is customizable and provides substantially more control. Individual polices follow you throughout your career and can be designed around your particular practice specialty and lifestyle needs. Unlike group policies, individually owned plans are generally non-cancellable, non-taxable and benefits cannot be reduced.
What is the cost/benefit value of the policy?
Is the policy guaranteed for renewal? Is it non-cancellable?
Is the definition of disability in the policy for a “true and pure” occupation, modified occupation or regular occupation?
What is the definition of income in the policy? Is only base pay (not incentive pay) considered?
Is the policy specialty-specific?
What restrictions or exclusions are included in the policy?
Does the policy include provisions that would reduce the benefit under certain circumstances?
Does the policy include partial benefits?
Does the policy include recovery benefits?
Is the company writing the disability contract financially sound?
Consider beefing up coverage with policy riders to ensure that you obtain benefits specific to your needs and for as long as possible. A rider for Own-Occupation protects you if you are unable to perform the duties of "your own medical specialty" and continues to pay benefits if you are forced to practice a new specialty or even a new occupation because of disability. A Future Purchase Option gives you the right to purchase a pre-determined amount of coverage in the future. In particular, it allows residents and early-career physicians to increase coverage as their income grows without having to go through additional medical underwriting.
If you are working in a solo or small medical group practice, consider overhead continuation insurance for you and your partners. This insurance is relatively affordable and is designed to help pay a professional’s share of office expenses for a period of disability without the need to dip into personal or family savings, or take on more debt.
Work with an agent who specializes in disability insurance for medical and dental professionals. Consider working with an independent agent who can shop your coverage with several disability insurance companies. Each company will look at your location, gender and medical specialty a little differently, so it’s critical to request a variety of quotes.
There really is no time like the present. Because an insurer’s underwriting decisions are based on your age, current health status and accident/illness history, the best time to purchase disability coverage is when you are young and healthy.
Ultimately, the best disability policy is one that is tailored to your specific income replacement needs and specialty. If you choose your options wisely, you may have a reliable source of income even if an illness or injury forces you to stop practicing.
As you consider disability insurance options, you can turn to our firm for guidance on determining the right amount of coverage and options.
One of the most common inquiries clients have for their accountants is “What documents do I need to save, and for how long?” Retaining, organizing, and filing old records can become a burden, both at the business and individual levels. As we all strive to achieve a more "paperless" process, how do we determine what warrants taking up valuable office and storage space and what does not?
Records should be preserved only as long as they serve a useful purpose or until all legal requirements are met. To keep files manageable, it is a good idea to develop a schedule so that at the end of a specified retention period, certain records are destroyed.
At Stockman Kast Ryan + Co., we have developed a Records Retention Schedule we think you will find helpful. Although it doesn't cover every possible record, it does cover the most common ones. As always, please feel free to ask us should you have specific questions or concerns.
Reviewing end-of-quarter financials is one thing, but there are certain financial reports that practice owners should be reviewing at least on a monthly basis. These include:
Your P&L includes a treasure trove of core financial indicators. A monthly review can help you spot any troubling trends in revenue, overhead and net profit.
Action: Create a Profit & Loss statement that displays each revenue and expense line item in dollar amounts as well as percentages. Provide comparisons to previous periods and budget amounts. As an added step, use data from your state medical society or organizations such as the Medical Group Management Association to benchmark your revenue and expenses against similar practices.
Monitor how well you are turning cash over and getting it into the practice each month by reviewing an Aging Report, which measures the percent of your accounts receivable in each “aging bucket.” In an ideal AR scenario, your receivables would fall roughly into the following buckets: 0-30 days = 60 percent, 31-60 days = 20 percent, 61-90 days = 5 percent, 91-120 days = 5 percent, and over 120 days = 10 percent.
Action: If the indicators signal a problem, you’ll want to dig deeper. For instance, if you’re seeing a steady increase in receivables over 90 days, review A/R by individual payer. Try to identify the reasons for the delay by analyzing EOBs for denial patterns.
Write-offs can run the gamut from denials and contractual adjustments to discounts for multiple procedures. Substantial variations to your normal adjustment rate can be a sign of anything from a change in billing patterns to embezzlement.
Action: Depending on your billing cycles and productivity, adjustments can follow charges by two to eight weeks. To accommodate for this, compare the current month’s adjustments to charges and collections from the prior month or even the month before.
Just as important as what insurance companies owe you is what patients owe you. This has taken on added significance as patients foot more of their healthcare bills.
Action: Skip the alphabetic listing and generate a report by patient account in descending balance order — so that the largest balances will be front and center. Ask for an update from your billing department and/or practice manager on the status of the top 10 or so accounts. Next, review the payment status of patients who are on payment plans. Finally, determine which patient accounts should be sent to collections or written off as bad debt.
Just as you monitor the vital signs of your patients, you will also need to monitor the signs that reveal your practice's financial health. Have your practice administrator, physician manager or independent advisor conduct monthly monitoring of these key reports. Then, schedule a regular monthly meeting to review and discuss the information with all stakeholders in the practice.
Contact our office to learn more about monitoring your practice’s financial indicators —or for help in understanding what your current indicators are saying.
Lenders say that physicians have shown more interest in owning real estate lately than in the past. Why?
You build equity. Plain and simple, when you sell your building, you get something. Over the long term, the property can be worth more than the actual practice itself.
You lock in your cost of occupancy. Rents will always go up, but your mortgage payment won’t. This may result in higher profits in years to come when you’re likely paying less than market rental rates to occupy your facilities.
You enjoy flexibility when selling your practice. When it comes time to retire, you can include the property as part of the practice’s assets or keep the property and lease it to the new owner. These rent payments can then provide a steady retirement income.
You can replace some salary with rent payments and pay less payroll tax. Because rent is considered to be non-earned income, you can reduce your salary by the amount of rent you collect and save on payroll taxes.
Although most financial experts agree that it makes more sense to buy a home than rent an apartment, the pros and cons of office ownership aren’t quite so clear-cut. Physicians and dentists need to weigh a variety of factors when making this important decision, including:
Once you buy the property, you’ve obviously lost some flexibility if you need to move later. For this reason, purchasing may not be the best option for fast-growth practices or practices that have a hard time forecasting their space needs.
But if yours is a mature practice and you’re confident that you can take a long-term perspective, then purchasing your business facilities could be a beneficial move. And with interest rates still at lows not seen in over a generation, this could be a truly unique opportunity to lock in a low cost of occupancy for years to come.
Who better to discuss your long-term financial goals with than your accountant? Our experienced professionals can “run the numbers” and help you decide whether purchasing or leasing makes the most sense for your practice.