By Adil Daudi, Esq.
Whether you are a physician with a wealth of experience, or a new resident paying your dues, establishing and incorporating a structure to help lessen your income taxes is a concept widely accepted and beneficial to all. If you are currently employed within a Medical Office that also employs additional physicians, chances are you are not being given the opportunity to reduce your income taxes to the optimum level, meaning you are losing out on the opportunity to save hundreds, if not thousands of dollars in income taxes.
This concept, which is commonly referred to as the â€œCorporate Employment Structure,â€ (â€œCESâ€) is a concept that is not being utilized by many physicians, and that is partly because of the unfamiliarity with the topic. In this newsletter, physicians will learn the benefits of a CES and how it can be implemented as their current method of agreement.
What is the Corporate Employment Structure?
The CES is a very simple concept that requires limited additional documents to set up, but saves you thousands of dollars.
Under your current structure where your employment agreement is between your Medical Company (MC) and yourself, individually, the MC provides you with a W-2 salary, which you receive and deposit into your account. Therefore, if you decide you would like to implement a plan that helps reduce your income, your only option would be to seek approval from your MC. By seeking MCâ€™s approval you will more or less be given the response you expect â€“ â€œNoâ€
The CES will help avoid you encountering such a problem, because under the CES, your company would be the one to implement your income reduction plans. Under the CES, you would be required to create a new Professional Corporation (PC) or a Professional Limited Liability Company (PLLC) for the purpose of having it employed by your MC. The CES is where your current employment agreement with your MC would convert your personal name with your PC.
Therefore, instead of your MC providing you personally with an income, your MC would instead provide it to your PC, who would in turn write a check out to you.
Once your PC receives the money, you have the authority and control, as the owner, of deciding when and how that money will be used. The special benefit received through the CES is that it gives you the ability to write-off various expenses that would otherwise not be allowed.
These expenses can vary depending on how you have your PC structured. Nevertheless, some of the more common expenditures that are typically considered written-off are: cell phones, mileage, food, or possibly vehicle lease payments. Moreover, you will have the flexibility of writing off additional major expenses such as insurance premiums, e.g. Disability Insurance, Long-Term Care Insurance. The advantage of a CES is that you would be able to implement your own tax reduction plans without the need of receiving your MCâ€™s approval.
How do you set up a CES?
A common misconception with a CES is that many physicians feel it is too burdensome to set up. This could be true if the physicians attempted the set up process on their own, or had an inexperienced attorney guiding them.
With the proper help and guidance from your trusted advisors, there is no reason why this process should be difficult or complicated. As long as you follow the simple four-step process, your path to saving money should be ready in no time.
The Four-Step Process
Follow these four steps to ensure you have properly created your CES:
Creating a new company: If you are debating between a Professional Corporation (PC) or a Professional Limited Liability Company (PLLC), it is important to keep in mind that depending on how your PC is structured, there would not be a difference. However, it is advised to consult with an attorney to explain how to have a PC properly structured.
Cancel current employment agreement: Once your new Company is formed, your next step would be to contact your MC and inform them (assuming you have already received their approval for allowing such a structure to take place) that your PC/PLLC has been created and you need to cancel the current employment agreement.
Creating new agreements: Once you have informed your MC about the cancellation, you must move forward with drafting the new employment agreement between your MC and your PC/PLLC. Very simply, this will involve the MC changing your personal name to your PC/PLLC name.
Save money: At this point you are ready to receive your income from your PC/PLLC and begin to write-off whichever expenses you want through your company.
If you find yourself in an employment position that restricts your ability to reduce your income taxes, then a CES may be your gateway to saving money. Although an effective plan that helps physicians preserve their hard-earned wealth, it is still a plan that has yet to be fully utilized. Take advantage and see the savings grow!
Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at email@example.com or (517) 381-2663.