One reason why Books & Benchmarks insists on doing bookkeeping for optometry practices is to ensure that wages and benefits are grouped by Non-OD Staff, Owner ODs, and Associate ODs. This week let’s briefly discuss why Books & Benchmarks breaks out wages and then “nerd out” a bit about what goes into splitting payroll.
Why One Bucket of Payroll Isn’t Enough
Of all the expenses that show up on practice P&Ls, owner wages are the least predictable. Some owners take very low salaries as a tax mitigation strategy. Others have incredibly high wages because they’re funding a Profit-Sharing 401k or SEP IRA, and the match to the staff is lower when their W-2 wages are higher.
Because of this, leaving owner wages in a payroll benchmark will make that output so varied as to be useless. The same goes for Associate OD wages, as not all practices have associates. And among practices that do have associates, associates might see part or all of the patients.
Non-OD Staff wages get grouped because the investment in that part of a practice’s labor pool is reasonably consistent and predictable. When you look at OD wages, they tend to naturally fall around a reasonably meaningful midpoint (14%-20% of revenues if you’re curious).
But we still separate OD wages between owners and associates, mainly so owners know exactly how much income their practices produce before taxes and debt service.
Payroll Splits 101 – Who Pays What?
When breaking out payroll for optometry practices, the goal is to ensure each group’s amount reflects the practice’s total investment. It’s not enough to simply list the wages and have separate line items for the practice’s total health insurance costs, IRA contributions, or employees’ payroll taxes.
For each group, only the practice’s portion of wages, taxes, and benefits should show up on the P&L. This is key for taxes, but it’s also important for benefits where the practice contributes, but the employees still bear some of the cost.
A common error we often see is when the total tax bill the practice pays to the IRS and state agencies appears on the financials. But most of what’s paid to the federal and state governments is withholdings from what the practice paid its employees. If you include the employee side, you will end up double counting the payroll taxes the practice paid.
Where Do Tax and Benefits Payments Get Booked?
If only the practice’s portion of tax and benefits payments shows up on the P&L, where do the employees’ contributions go? And how do we account for the combination of employee and employer portions of taxes and benefits?
To answer that, let’s look at the Balance Sheet. Every time the practice runs payroll, there’s an obligation to pay for taxes and benefits, but these funds aren’t paid out immediately. Until they are, part of the money run through payroll is booked to a “Current Liabilities” (due within the next 12 months) account called “Payroll Liabilities.”
If your balance sheet accounting is tight, this is a great way to ensure that your employees’ withholdings are set up correctly. If payroll liabilities never reconcile out, there’s a good chance you’re under- or over-withholding something in your payroll software.
Accurate Accounting Yields Better Insights
Splitting payroll is complicated, so why would a practice go to the effort? At Books & Benchmarks, we prefer simplicity where possible, but sometimes extra work is necessary to get a clear picture.
Lumped into one bucket, payroll for optometry practices will easily amount to a third to a half of a practice’s revenue. If it seems off, consider whether the owner’s wages, associate wages, or payment to non-OD staff is the issue. Then, look into whether it’s due to headcount or average pay.
But just segmenting wages isn’t enough. Consider a practice that pays 100% of its team health insurance premiums. Even if wages—the hourly rate the practice pays its employees—are in the normal range, the benefits could push the overall proportion of revenue going to Non-OD Staff to unsustainable levels.
Intimidated? Let Books & Benchmarks Do It for You!
If you want these insights into your practice but don’t feel up to mastering the technical side of bookkeeping, you’re a smart business owner! Book a discovery call to learn how Books & Benchmarks can save you time and deepen your understanding of your optometry practice.
