Private Practice / Practice Management: Payroll and Taxes for your Employees
Dental practice owners will need to have a plan for how and when to handle payroll as their practice hires staff for the first time. The dentist has the option of processing payroll through an outside source or calculating payroll and distributing checks in-house. With either option, the payroll schedule can be determined by the dentist, and should be consistent.
No one likes to think about taxes, but they are a necessary part of the employment process. It is the dentists responsibility to make themselves aware of the required tax laws and follow up to make sure all employees have proper withholdings and deductions. If taxes are not deducted correctly for employees' paychecks, fines can be assessed from the Internal Revenue Service (IRS).
If the associate dentist or other employee is a W-2 employee and not a 1099 contractor, payroll taxes must be deducted from the employee’s paycheck. State/local and federal law requires payroll tax deductions.
*If you have a business in the seven states without state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) you do not have to deduct state taxes out of employee’s paycheck. New Hampshire and Tennessee only tax on interest and dividend income.
There are numerous federal taxes that the owner/dentist, as the employer, must take out such as federal withholding, social security tax, and Medicare tax withholding. The federal tax withholding is based upon the withholding table that the employee fills out upon hiring. This withholding table form is known as IRS Form W-4. All dental associates and other employees are required to let their employer know any changes in their lives that can affect withholdings.
Events such as marriage, divorce, births, and multiple jobs can affect the amount that is needed to be withheld. If the proper amount is not withheld, the employee can be penalized when they file their yearly taxes.
FICA: The Federal Insurance Contribution Act (FICA) is a federal law that requires withholding of two separate taxes on wages earned. Failure to properly or timely withhold federal payroll taxes will incur a two to ten percent fine that is automatically assessed. FICA includes Social Security Tax and Medicare Tax. The social security is 12.4%, 6.2% is paid by the employer and 6.2% is deducted out of the employee’s paycheck. The maximum wage subject to social security tax for 2016 is $118,500. Medicare payroll tax rate is 2.9%. Of the 2.9%, the employer pays 1.45%, and 1.45% is automatically deducted from the employee’s paycheck.
**NOTE:Individuals that earn greater than $200,000/year will owe an additional 0.9% over the $200,000 threshold. If the owner dentist hires an independent contractor that contractor is required to pay the full 12.4% for Social Security Tax and 2.9% for Medicare Taxes and is also responsible for state and federal unemployment taxes.
Voluntary payroll deductions are deducted from the employee’s paycheck. The most common are health insurance and dental/vision insurance premiums. Other common deductions are life or disability insurance, and retirement plans. Voluntary deductions can be taken out with either pre-taxed or taxed options.