Compensation Issues for Dental Practices – October 2008

In hiring a salaried associate for a dental practice, there are profitability, production and other issues that should be considered. Additionally when hiring other staff such as office personnel or hygienists the practice owner must consider the percentage of the costs of having enough personnel to cover necessary functions of the dental practice.

Adding a salaried associate requires some cost and other considerations so that the production of the associate minus his or her salary still yields of profit of approximately 10-15 percent for the practice owner. The overall profitability percentage of the practice should still be at or above the average of existing dental practices, or about 34 percent before the associate comes into the practice, and after a certain amount of time after the associate is working in the practice. The additional anticipated costs of using an associate must be calculated in arriving at a fair compensation rate for the associate. It is generally not a good idea to hire an associate if the sole reason of the practice owner to make a profit off the associate. Other aspects of practice ownership that contribute to the overall success of the practice must be taken into account, such as the maximization of the use of the practice facility, expansion of the patient base, and the desire of the practice owner to specialize in particular areas of his practice and still allow for general practice to take place.

Associates are paid either on a production or collections basis, with a production alternative being a generally the better option, given the lag time before the associate would be paid on a collections (during this time the practice owner will have to make separate arrangements with the associate so that he or she can meet basic living expenses). If collections are below about 96 percent then the owner dentist should reconsider hiring an associate. The salary for the associate should be approximately 25-35 percent of production (including benefits) less one-half of laboratory costs. Expenses paid by the associate should be subtracted from the overall compensation percentage. If the associate is a specialist the compensation should be more in the range of 30-35 percent less one-half of laboratory costs. Any payroll taxes should be considered in this calculation, unless state law determines that the dentist is an independent contractor.

Other issues in developing a salary for the associate include the possibility of a bonus involved in compensating the associate, either monthly, quarterly or yearly depending on prior estimate of production, the associate’s performance and contribution to the practice, and the overall financial situation of the practice owner. Also, if the associate agreement is a part-time arrangement compensation may be made on an associate coming directly from dental school on an hourly or daily rate which may be adjusted up or down depending on production during those time periods. A sharing of production calculation may be used if an experienced dentist needs to be a mentor to a new associate.

There are other compensation issues which of course need to be resolved by the dental practice other than payment of an associate. Hygienists may or may not be considered independent contractors and exempt from payroll taxes depending on the length of time obtaining a degree in a program accredited by the ADA. A common mistake made by practice owners is to consider that if payment is a “salary” then the hygienist is exempt from payroll taxes. It is advisable to pay hygienists on a non-exempt basis to avoid later claims for back pay or civil penalties in this often litigated area of law. In any case, hygienists should produce about 3 to 3-1/2 times their salary. Office managers with significant discretionary tasks may also be considered independent contractors.

The total amount of wages paid by a dental office should be approximately 20-27 percent for general practices. Using these figures for all personnel including office staff, dental assistants, hygienists and associates will allow for better budgeting for the owner dentist of the total practice expenses.

References: Bette Robin, DDS, JD, Tustin, California, William Prescott, Business Legal and Tax Planning for the Dental Practice.

Setting Up A Dental Office Compensation Plan – May 2011

Setting up the correct dental office compensation plan, covering both owners, associates, hygienists, dental assistants and office staff can be a major part of the initiation of any dental practice. The owner dentist wants to realize a realistic return on his or her investment, as well as attract productive and talented personnel and associates with good compensation incentives. In budgeting for a wage package to offer, a workable plan would include about 20-27% of income paid out for wages and compensation to all staff, including associates.

For hiring associates, the owner can choose to pay a salary, by the day, by the hour, or according to production. If there is any kind of direction and control by the owner over an associates work, it is difficult to classify him or her as an independent contractor. It is often hard to pass up this option, considering that 10% of compensation is usually paid out in payroll taxes, but the laws governing this distinction are strict and well enforced.   Production bonuses can be put into any employment or associate’s agreement. Benefits often included in associate compensation packages include employer paid health insurance, malpractice insurance and continuing education.

For other employees, salaries are an option, but avoiding paying overtime for payroll tax exempt employees who don’t have a great deal of managerial or professional duties is sometimes a risky endeavor. There are some attractive features to compensation packages which may attract important employees, particularly in various types of insurance available and paid through the compensation package by the employer such as health, vision, dental, life, legal and disability insurance.

Health insurance is a primary consideration in offering a compensation plan. Massachusetts law requires all residents to obtain health insurance, and specific provisions must be offered by particular employers. Businesses with 11 or more employees must offer a Section 125 Plan to meet the rules of the Massachusetts Health Connector Authority. There are a number of approved providers of these plans, and the premiums are paid on a pre-tax basis which makes them not subject to payroll taxes. An employer’s own health insurance plan can fulfill this requirement, as long as 33% of the premium is provided by the employer. Those employers who do not provide this plan may pay a Free Rider Surcharge for employees or their dependents using the state’s Health Safety Net for uncompensated health care.

Retirement plan contributions are also a significant part of any compensation plan for dental office owners and employees.   In this area, dentists who own their own practice can realize sizeable tax savings, can help protect their assets from creditors, and can offer important benefits for employees to save on their own retirement plans. It should be emphasized that self employment plans (SEPs), IRAs, and some Keogh plans do not allow protection of these assets from creditors. It is for this reason that forming a professional corporation or an LLC which can offer ERISA qualified investment retirement plans to employees and owners is a good idea to protect retirement income from creditors. There are requirements that non-owner contributions to such plans be more than 20%, but along with other tax savings allowable under these plans for small employers like dental practices, setting up these plans can be well worth it for both employers and employees. Setting up these plans can also allow for tax credits for employers, or 50% of start up costs up to a $500 credit.

The variety of contribution allocation plans that are available in many of the 401(k) plans that employers can set up can achieve a great deal of maximization of contributions which have tax deduction potential for both employers and employees. For small businesses plans can be set up which allow discretionary contributions, profit sharing, eligibility and vesting schedules for different classes, ages and incomes of employees.   Profit sharing plans allow employers to deduct contributions up to 25% of compensation or $49,000 per employee (whichever is less). Those plans which are integrated with Social Security allow for larger portions of employer contributions for employees earning over the Social Security wage base of $106,800.   Other qualifying plans allow for employee contributions up to $16,500 annually ($22,000 if age 50) and employer contributions up to 25% of compensation or $49,000, whichever is less. Matching employer contributions of up to 4% are required for plans with low employee participation in 401(k) plans.

New retirement plans of note for small practices with owners or highly compensated employees who want to be included combine Safe Harbor and comparability provisions to allow for allow more top income contributors who can defer income. Deferrals for these employees can be up to $16,500 annually or with maximum profit sharing allocation of $49,000.   Minimum contributions are still available for other employees.

Dental practices which take advantage of the large variety of compensation plans available can often realize great savings with proper advice.   Also, the attraction of better employees and associates to a practice which features good plans can be an invaluable asset.