Retained Earnings and Employed Children

Posted on December 19, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Payroll Tax Strategies for Doctorsdv2034034

By Edwin P. Morrow; III, JD, LLM

Staff Writers

Any business, like a medical practice with employees, has to concern itself with payroll taxes. This includes any C or S Corporation with a sole owner/employee. 

Payroll Taxes

Payroll taxes include: 1) income tax withholding for any employee for federal, state and local taxes; 2) the employer portion of federal social security and Medicare taxes (also called OASDI – old age, survivors and disability insurance); 3) the employee portion of federal social security and Medicare taxes; 4) state and federal unemployment tax [See IRS Publication 15, Employer’s Tax Guide]. These include a social security tax of 12.4% on earned income up to $106,800 (2009 number increases annually) and Medicare taxes of 2.9%. And, although there are not nearly as many tax “loopholes” with payroll taxes as with income taxes, impacting issues like these two should be noted.

1] Employ your children under 18

A sole proprietor physician may not be required to pay social security taxes on wages of his or her child under the age of 18.  This exception does not apply to an incorporated business IRC § 3121(b)

2] Understanding Retained Earnings

As some doctors are aware, earnings retained in a C or S Corporation and not distributed to shareholders are not subject to social security and Medicare taxes. This may be a substantial savings of 15.3% when you have owners working in the company. This technique is not as likely to work in a tax partnership and will certainly not work in a sole proprietorship.

Conclusion

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Net Income [P&L] Statements

Posted on March 18, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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Financial Statements [A Review for Physicians]

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]biz-book

The Net Income [Profit-and-Loss Statement] Statement [NIS] is only one of four financial statements. 

The four consolidated statements are: balance sheet, net-income, cash flow and retained earnings. 

The NIS reflects the following in a medical practice or healthcare business entity: 

  • Income from patient services, plus revenue from research grants, educational programs, gift and cafeteria sales, office space and parking lot rental, and investment income; and,
  • Expenses including general overhead, non-operating expenses like salaries and wages, fringe benefits, supplies, interest, professional fees, bad debts, depreciation, and amortization.  

Increases in working capital, current assets, the retirement of debt, and investment in new fixed assets are not considered in the Net Income Statement [NIS]. 

Assessment of Accounting Differences 

Definitional differences do occur, however, in the income statement. 

For example, the NIS may report physician compensation and benefits in the expense category, during a period of time.

Small physician practices, on the other hand, may report income and expenses on a “cash accounting” basis reflecting income actually received and expenses actually paid.  

The “accrual method” of accounting records expenses when they are incurred and income when earned, not when paid or received as in the cash method.

The cash method is easier, but the accrual method is more accurate and most healthcare entities use this method. Accrual accounting will increase going forward because of the nature of discounted contracts, capitated contracts, or other fixed reimbursement arrangements.  

Conclusion

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