Preparing for the Tax Break

The other evening I had the pleasure of hearing another speech from President Obama on how he wished to jump-start the economy. He made references to lowering the payroll taxes for a year, apparently as a quick way of getting money directly back into the hands of workers and letting them decide how they were going to spend it. This made me wonder if this reduction would really have any impact on an ophthalmology practice and its doctors and owners.

As the largest share of taxes paid on an individual’s wages, tax discussions usually revolve around income tax. The so-called “hidden taxes,” or payroll taxes like Social Security and Medicare, continue to eat into our paychecks. Prior to 2011, the initial $106,800 of taxable income was subject to a 6.2% tax for Social Security and 1.45% tax for Medicare from employees and 6.2% tax for Social Security from the employer. In 2011, a one-year reduction of the Social Security tax to 4.2% for employees was introduced.

A Modest Proposal

The latest proposed plan would reduce Social Security payroll taxes from 6.2% to 3.1% for both employees and employers. This idea was put forth to promote hiring and job growth and stimulate individual and corporate spending. So what are the direct doctor benefits? Since the Social Security tax on a doctor or owner’s salary would be reduced by 3.1% on both sides on the first $106,800, there would be a savings of $6621.60. That is a nice starting point, but not likely to result in increased staff hiring or equipment purchasing.

The real benefits are seen in the employer’s Social Security tax reduction to 3.1%. The Medical Group Management Association states that for every physician there are 4.67 full-time equivalents of support staff employed. Ophthalmology staffing is probably higher than this. Using this value and a conservative estimate of an average staff salary of $35,000 per year, the practice is going to save $5066.95 per doctor’s staff in payroll tax savings.

This works out to a savings of effectively $11,688.55 per doctor. The power of six reminds us that every dollar saved is worth $6 we didn’t have to charge out—meaning that the $11,688.55 in yearly payroll tax savings would have required an additional $70,131.30 in billable charges, or roughly 700 eye exams.

Looking at Reality

We all know that there is no such thing as a free lunch. Someone is going to have to pay for these cuts and with the decline of Medicare it is most likely going to be medicine. While we are currently on track for a 30% reduction in our Medicare fee schedule, that is not likely to happen. A 5% reduction is a more realistic cut. For the payroll tax reduction to equal out to a 5% Medicare fee schedule reduction, a physician needs to bill out $1.4 million a year. This would only break even if it weren’t for the fact that Medicare cuts are going to be permanent and the payroll tax reduction is just for a year. In addition, the payroll tax reduction is essentially a defunding of Social Security, which means it will only become insolvent sooner.

The real key to these temporary perceived savings is what you are going to do with them. The smart play is to reinvest savings into systems to lower your overhead and increase your efficiency. Ironically, that will initially result in the need for fewer employees but will hopefully allow you to expand in the marketplace over the long term and increase your required staffing volume and stimulate the economy.