Help your staff determine what mixture of compensation and benefits fits their needs the best. A simple form also helps them view the practice`s `numbers` more clearly.
Curtiss O. Floyd, DDS
An ongoing area of confusion in most dental offices is the difference between what employees think they have been "paid" for their services each year vs. what it actually "costs" the practice to employ them. Most employees only look at their net pay. Nothing explains the facts better than "seeing the numbers."
To assist in compensation discussions, I have developed a form (see Figure 1) that is simple to use, yet very thorough for both the employee and employer. The unique feature of this form is that it can be used not only to report historical data, but also to help your employees plan their own salary package for the next year.
With one single form, I have been able to:
(1) Have better control over the salary portion of my overhead.
(2) Involve my team members in discussions about true overhead and what their portion is.
(3) Let them develop their own compensation package.
(4) Give the employee more take-home dollars because of tax-free fringe benefits.
This form provides an opportunity to develop a supportive team by providing full disclosure of the costs involved in running a dental practice. I recommend all employees be told what their individual true-wage package is. Since the single, largest cost category to a practice is salary, I also tell them what the total wages are for the office.
Here`s how I`ve subdivided the form I use:
Direct compensation
Category A, Direct Compensation, is made up of the obvious "paycheck" items that employees think about when they think salary. Included in this category are some behind-the-scene expenses that they may not be aware of:
Gross Base Salary - The employee`s salary before Social Security and federal and state income taxes are deducted. This line should include vacation and sick pay.
Overtime and Bonuses - This is taxable, gross salary before Social Security and federal withholding have been removed.
Employee Tax - The taxes that the practice has to pay for each employee. The total can be estimated at 10 percent of the salary or you can break it out as follows:
- FICA is the matching amount the practice has to contribute for each employee. Many employees are unaware that this happens.
- State Unemployment/FUTA is the employee`s share of the assessment by the state and federal governments to pay unemployment claims.
- Workers Compensation Insurance is the employee`s share of the required insurance premium in case the employee is injured on the job.
Retirement Plan Contribution - Qualified retirement plans are an excellent way to assist employees to save for their future. The contributions to the plan are for their future. They are fully deductible to the practice and currently are not taxable to the employee. In addition, the plan earnings are not taxed until the funds are withdrawn, which causes a more rapid accumulation of wealth.
Because of the variety of plans, I recommend you consult your dental-practice tax adviser on which plan best fits your needs. Plans can be designed to include all employees, including the dentist. Other plan designs can be structured to give each employee a choice to participate or not to participate and to choose the amount of contributions they would like to make.
Plan Administration Alloca-tion - This line is for the estimated cost to administer the retirement plan. The total cost should be allocated to all participants, perhaps based on their balances in the plan. A fair estimate would be 3-5 percent of their current contribution.
Employee fringe benefits
Over the years, a constant conflict took place among my team members about which fringe benefits should be offered by the office. Some wanted and needed medical insurance, while others had coverage through their spouses. Some wanted maternity benefits, while others were past that. Some had children in day care, others did not. There were endless variations, with me caught in the middle trying to make everyone happy. I also had to keep the practice profitable and compete in the employment market for top talent. This form and concept were the solution to the problem.
Category B, employee fringe benefits, is an area where the dentist and the team members can be creative and save both parties major dollars. It also lets our office remain competitive in the employment environment.
Cafeteria Plan Reimburse-ment - If the dentist has a formal cafeteria plan that reimburses employees for their expenses and those expenses are paid for by the employer, enter their allocated amount on this line. Be aware that a true Cafeteria Plan requires filing Form 5500 and other administrative matters. I recommend consulting your dental tax adviser if interested in setting up one of these plans.
Medical Insurance and Reim-bursements - Whether you provide this or have it as an option for the employee to choose, enter the dollar amount on this line. Employees can enter whatever amount they estimate they will spend over the next year for health-related expenses. This would include items like medical-insurance premiums, deductible amounts, glasses, pharmacy, dental or chiropractic expenses.
Keep in mind that you can provide accident and health insurance to anyone or to a select few. There are no "anti-discrimination" rules; so, again, I recommend consulting your dental tax adviser.
Group Life Insurance - Up to $50,000 in term coverage is a tax-free option for the employee to choose. Some group health-insurance policies have this as a requirement. The dollar cost per team member for the life insurance portion is broken out and entered here.
Tangible Awards Program - Every five years, the IRS allows a business to give tax-free tangible awards to employees. This can be distributed based on years of service. When a dentist is incorporated in a C Corporation, he or she is eligible to participate. Consult your dental tax adviser for details. This could be significant to the dentist if structured properly.
Annual Gift of $25 - Each year, a gift of $25 can be given to each employee tax-free. This can be used for birthday, anniversary, holiday, Secretary`s Day, Dental Hygienist`s Day or Assistant`s Day gifts. Also, the employee`s spouse and children could receive a separate $25 gift.
Uniforms - This line is completed by the employee. Items such as scrubs, shoes and laundry can be entered on this nontaxed line. It is up to the employee to keep receipts for items they claim. The practice should reimburse the employee for uniform expenditures.
Child or Elder Care - Up to $5,000 can be entered on this line. The employee must be able to show receipts for payment to a care provider. This is a nontaxed area. It is the employee`s responsibility to verify these receipts. I recommend that you discuss the rules of eligible payments and eligible dependents with your dental-practice tax adviser.
Dental Care - This is what employees would have paid for dental care for themselves and their families. We are just reminding them of how much they saved, compared to the charges for the full-office fee.
The nontaxed, fringe benefits shown on the sample form are those applicable to my practice. There are a wide variety of other fringe benefits that could be applicable to your practice, such as qualified mass-transit reimbursements, long-term care insurance, qualified parking reimbursement, etc. Most fringe benefit plans need to be in writing and have rules that you need to be aware of.
Career benefits
The line items in Category C, career benefits, are related to career development, some of which are nontaxable:
Dental Continuing Education - These are the costs the dentist incurs in providing CE to the team. I use this line for in-office costs such as consultants, CPR training, nutrition workshops, educational psychology, etc. It is each team member`s proportional share.
Tuition and Travel Reim-bursement - This would be the cost to send the team member to a course to improve his/her performance in the office.
Lodging and Meals - The cost for any overnight stay and meals for continuing education courses is entered here.
Inoculations and OSHA Safety - The office must provide the employees who are exposed to blood-borne pathogens with personal-protection equipment (outer gown, eye protection, masks and gloves). This is what the dentist spends to protect the employee and meet OSHA and CDC guidelines.
Professional Dues and Sub-scriptions - The RDH and CDA or other professional dues and publications are nontaxed items.
Total Compensation Costs - Column 1 is for the upcoming year. Column 2 is for the year just completed. Column 3 is for the prior year. I add gross salary and asterisked items from Column 2 and whatever raise is appropriate to find the starting point in compensation discussions with each employee. Once we agree on the total compensation, that number is entered on the Column 1 total compensation line. Then, the employee completes the asterisked items indicating the amount of fringe benefits he or she wants. When the employee finishes computing the items marked by an asterick (*), he/she can fill in the gross salary line. All items must add up to the total compensation/cost number.
Hidden compensation
Category D, hidden compensation, reinforces the benefits of nontaxed income and what the employee truly is being paid per hour.
Tax Savings - Add all lines with an asterisk and multiply them by an average of 38 percent to find out what your employees would have paid in FICA, federal and state taxes had they taken these fringe benefits as total gross salary. This is where the form becomes a win-win situation. Each employee then can see the advantage of maximizing the amount they list on the lines with an asterisk. This produces more spendable income, and it is as if the employee got a raise (an employee "win.") After all fringe benefits have been removed, the employer has to pay Social Security and Retirement, if applicable, on only the reduced gross-salary figure. This produces a significant savings (a doctor "win.")
True Per Hour Wage - The final line is for employee education. By adding what the dentist spent, paid or gave each employee and by dividing this number by the total number of hours actually worked, employees can see what their true total compensation/cost per hour is.
We pay our employees twice a month. The first pay period they get two checks: one for their standard wages less their taxes and one reimbursement check for half of the tax-free (astericked) categories. The second pay period of the month they receive their second, standard wage check, less taxes, and a separate tax-free check for the last half of their tax-free (astericked) categories. This spreads the fringe-benefits payments over the month and allows a better cash flow for the office.
In summary, this is an excellent tool to open communications, answer questions, expand employment packages, involve team members in overhead discussions, empower team members to design their own wage package and give the employee and the dentist more spendable income.
