Simple FM billing question

[JohnGrisham]

Let's say you do 250,000 in billings to MSP. And that you are an associate in a clinic doing 80/20 split with 20% of your billings going to the clinic for overhead.

Is this pre or post tax? 20% of 250k billings is 50k, however you would still need to pay your income taxes on that total of 250k worth of income.  

My gut tells me that the split is pre tax gross billings. Just made me realize then your take home is depressed further as you'd also be paying your tax on top of that 50k.

Very likely a dumb question hah

[bearded frog]

Depends on how you set up your practice. If you set it up that you directly receive your billings then you pay for overhead out of pocket, you will be taxed at income tax levels on the full 250 000 amount. In some circumstances you can set up a corporation that receives your billings, then that corporation pays you the 80% and pays the clinic the 20%. In this case you'd pay income tax on only the 80% and you'd pay much lower business taxes on the other 20%. Alternatively the clinic receive your billings and then the clinic pays you the 80% and you just pay income tax on that 80%.

[JohnGrisham]

Figured so Thanks!

[estairella]

What bearded frog said is incorrect.

You are either salaried, or fee for service.

If you are salaried, you have no clinic overhead. Your entire income will be taxed according to regular salary - e.g. you will be deducted EI, employee CPP, federal and provincial taxes.

When you are fee for service, you can choose to receive the billings directly. In that case, you are a sole proprietorship. You can write off all expenses, including overhead, supplies, professional fees, travel, CME insurance, etc. The remainder you will be taxed on, but it won't be exactly like a salary. You will be paying employer AND employee CPP, provincial and federal taxes, but no EI.

Alternatively, you can choose to incorporate. In that case, the corporation is a separate entity that receives all income, writes off its expenses. Then the net remainder income can be held in the corporation as "retained earnings", where it will be taxed a corporate income tax. Or it can be distributed to you in the form of a salary (you get taxed personally), or as dividend income (corporation still has to pay corporate income tax, but you pay a lower dividend tax rate).

On a relevant note, there are certain tax advantages/savings to becoming an incorporated physician if you can retain earnings in the corporation. The federal Liberals are trying to get rid of them.

See here for more info: https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/proposed-tax-changes-will-shake-the-small-business-world/article35754872/

[JohnGrisham]

I don't think Beardedfrog is incorrect, just speaking to a different example than you

Thanks both for the input, re-confirms what I had thought! Just made me think that dang, you get dinged more than the % face value of the proposed split when you are just an associate in a clinic and not an owner, in certain circumstances and models of incorporation or not.

[ralk]

Incorporation doesn't matter when it comes to overhead. If you're in an 80/20 split, the 20 comes off the gross income. Then the remaining 80 goes into either your pocket as income, or into your corporation.

If you own the clinic and you're responsible for your own overhead costs. If those costs are 20% of your gross, for example, you pay those costs and the remaining 80 goes directly to you as income or into your corporation. There's no real difference either way from a tax perspective, that always comes after overhead. Personal income taxes and corporate taxes apply to net income/earnings, not gross (well, once deductions are included).

[JohnGrisham]

Thanks!

[ralk]

Business expenses are tax deductable, whether you're incorporated or not. In that scenario, the reported income would be $250k, but with $50k in deductions, leaving $200k in taxable income.

[JohnGrisham]

(Haha sorry, it's early and my brain totally missed that part of business expenses being tax deductible even in the situation of sole proprietorship) 

[ralk]

Just now, JohnGrisham said:

(Haha sorry, it's early and my brain totally missed that part of business expenses being tax deductible even in the situation of sole proprietorship) 

No worries - additionally, I should mention that billings are not automatically income. In an 80/20 split scenario, the billings would often go directly to the clinic, even if they're in your name, who would then take 20 and give you the remaining 80. My understanding is that only that 80 gets reported as income, with no deductions because you weren't the one paying the overhead.

[JohnGrisham]

11 minutes ago, ralk said:

No worries - additionally, I should mention that billings are not automatically income. In an 80/20 split scenario, the billings would often go directly to the clinic, even if they're in your name, who would then take 20 and give you the remaining 80. My understanding is that only that 80 gets reported as income, with no deductions because you weren't the one paying the overhead.

Interesting, it can get quite messy then it seems. 

Now the next order of business is figuring out how honestly clinics are reporting billings, and the billings they owe you as an associate (especially if your a locum) haha.