As the end of 2021 draws near, you may have questions regarding staff bonuses. We are often asked, what is the standard bonus system for dental practices? Based on our years of experience, there is no specific standard for dental practice bonus programs. There are certainly many doctors that engage in bonus compensation arrangements, and likely an equal number that do not. This is because there are pros and cons to any bonus system.
A bonus may typically be paid when certain conditions are met. The two most common conditions are 1) the practice is doing well financially and meeting production and profitability goals, and 2) the staff has displayed exemplary performance. While the first condition can be quantified with objective data, the second condition is largely subjective. If a practice owner feels that their team has accomplished practice goals such as these two criteria, then a bonus arrangement can provide a specific and direct reward, or gesture of appreciation.
Keep in mind, however, that a bonus system can evolve into an expectation over time. Regardless of the circumstances, not paying a bonus your staff may have come to expect over time can quickly turn the bonus system from a morale booster to a morale dissatisfier. To help manage this risk, make sure that criteria for any bonus system is as objective as possible and determined by specific quantifiable benchmarks.
Finally, there is an argument to be made that rather than paying bonuses, employers should simply pay their team the highest and most competitive salary possible all year. This prevents staff from feeling their compensation is perhaps tied to factors beyond their control, such a monthly office production or the owner’s personal feelings when determining a bonus amount. Paying the highest and most competitive compensation package all year (without bonuses) also allows the staff to plan their family budgets with more consistency and obtain loans for cars or mortgages without having uncertainty regarding the amounts or timing of future potential bonus amounts.
There is no one-size-fits-all answer on whether a bonus system is right for every practice, every team, or every situation. Practice owners have been successful with and without bonus systems, so it is entirely up to each doctor to consider their office and team when deciding what is right for their practice.
Should you decide that a bonus is something you wish to offer this month, specific instructions for paying a bonus are provided below:
Direct Deposit Bonus
Perhaps the easiest way to provide a holiday or year-end bonus is to pay the amount through your payroll service as a direct deposit. Every payroll provider will allow you to add a specific dollar amount to be paid along with regular hourly wages. Adding the bonus amount to your team’s payroll will create a separate line-item on the staff’s paystub identifying the extra payment. This is the easiest and most convenient way to pay a bonus.
You can also run an off-cycle payroll to process a one-time bonus amount. This off-cycle payroll can be initiated at any time and will also be processed via direct deposit by your payroll provider. This alternative allows the bonus to be separate from regular pay, which can highlight the bonus payment to your team as it posts as a separate deposit to their bank account.
In both instances, the bonus payments are fully tax-deductible with all associated payroll tax and withholding amounts completely taken care of by your payroll provider.
Direct Deposit Bonus
If you prefer to personally pay bonus cash to your staff, there is a specific procedure you will need to follow:
- Determine the TOTAL cash to be paid to the team members.
- Withdraw that exact TOTAL amount of cash from your business bank account.
- After you deliver the cash payments to your employee(s), you will record each specific dollar amount as a ‘cash-tip’ on each employee’s paycheck on your very next regular payroll. Your payroll provider will have a section to report cash-tips, and you may need to reach out to your payroll provider if this option is not visible when you process payroll so they may activate it.
- When the cash-tips are reported on the very next payroll, all withholding and payroll taxes are recorded on your payroll, but no additional payment is included on the direct deposit because the cash has already been paid (just like a cash-tip).
- Next, you should email [email protected] with the following information:
- Date of cash withdraw used to fund the bonuses.
- Total amount of cash withdrawn.
Your accountant will match this specific cash withdrawal to your December payroll reports, ensuring that the cash taken from your business is fully tax-deductible as staff compensation. This is important as cash withdrawals are typically owner distributions, and we want this specific cash to be recorded as wage expense.
Gifts as a Bonus
Should you choose to provide a holiday gift to your staff, the IRS allows for a de minimis gift under $100 that will not be taxable for your employees. You would purchase these gifts from the practice as a tax-deductible expense. However, the gift can never be cash or gift cards if you wish to exclude the gift from their taxable income.
If you decided to go ahead and give your staff gift cards, those can be reported like a cash bonus, and the cost of the gift is still tax deductible for the practice.
For example, if you provide a gift card for $100 to a spa as holiday gift, the $100 gift amount is recorded the same as a bonus paid in cash on that employee’s next paycheck. When you purchase the gifts, you will do this through your business account and follow the same steps described in the Cash Bonus procedure so our team can record the cost of the gifts as wage expense.
Year-End Services: Closeout & Reconciliation
An integral part of our business accounting services involves work performed at the end of the tax year to close out your financial records. This year-end work is necessary to prepare your books to facilitate the preparation of your business tax return. The following is provided as part of this service:
- Creation of a separate Income Tax Financial Statement and Trial Balance for tax purposes so that your tax preparer may review and analyze account activity for the entire year.
- Reconciliation of your Capital Accounts, including an analysis of your Fixed Asset additions during the year. This analysis will be used to determine the most appropriate depreciation or other accelerated cost recovery strategies to be used by your tax preparer.
- Reconciliation of your year-end payroll forms 941, 940, W3 and W2s prepared by your payroll company to your business financial statements.
- Review of all expense accounts for applicable submission of Form 1099 to required vendors and/or contractors.
- Preparation and delivery of Form 1099 to required parties, and submission of Form 1096 to the IRS.
The annual Year-End Services are billed in December and are one month’s fee. Although much of this work will continue into January, we will bill the year-end fee on December 17th so that you may deduct it on your 2021 tax return.
We appreciate your business and look forward to serving you in 2022!