You may want to be sleeping with your billing agent

As I eluded to in my prologue post about keeping the sprinkler running, there are still methods of income splitting available to all Canadians and small businesses. This, despite the suggestion that it was only the purview of tax loop-holin’ professional corporation owners.

When most people think of income splitting, they are thinking of short-term income splitting.The Minister of Fairness has tried to re-brand it as, “income sprinkling”, to generate visuals of rich, fat-cats dancing around in their fancy socks sprinkling their families with gold dust, money, or lavish trips to private islands. Whoops, that probably wasn’t the intent. Glass house. Stones.

The government clarification of the new income splitting rules specifically addresses giving dividends to spouses. With the new rules, paying a dividend to your spouse is generally not ok. However, if you get divorced and pay him or her spousal support – that is ok. In fact, it is rightfully expected. The spousal support payments are tax deductible by the payer and taxed in the hands of the recipient – Voila! Income splitting. That shows how bizarre this is.

You could sleep with your billing agent…

While that would likely lead to divorce and being able to split your income with your now ex-husband or wife. That is probably not the preferred route.  What I am suggesting is that you hire your spouse as your billing agent. And continue sleeping with them.

This has several benefits:

• You keep revenue from your business in your family rather than paying it to an outside source.
• If you are able to generate enough work (>20h/wk) with billing and other work for the business, then you could be excluded from the new income splitting rules.
• You may actually bill and recover more.
• Involving your spouse in the business that occupies such a huge part of your life can strengthen your understanding of each other and your relationship.
• Your spouse having their own income lays the foundation for more intermediate-term income splitting strategies.

The double impact of keeping money in the family

Paying your family member not only allows you to redirect income to your household instead of outside parties. It also does so tax effectively, if you have a lower income spouse.

For example, if you have a practice that bills $350K/yr. The going rate for a full medical service billing agency in Ontario is 1.5-2.5% of gross billings or $8750/yr in this case. You could use online billing software for about $600/yr. However, you still need someone to enter the data. That could be your office staff at a reduced cost relative to a full-service billing agency, but you still have to pay them for their time.

Alternatively, you could pay your spouse to do that billing. Redirect that $8750/yr to your household instead of either an agency or your office staff. Employer/employee CCP & EI costs would be ~$800, leaving ~$8K to channel into your household and be taxed at the lower income spouse’s rate. That could be no tax if they don’t have much other income.

The question in the above case is – how much is your partner’s time worth to the household?

Here is a hint: It is about the same as how much sleeping in your bed rather than the couch is worth. You want to keep harmony in the workplace. Just like this computer-generated picture of us – realistic right down to the hair colour and skin tone…

Seriously though, the answer depends on how long the billing takes and how much that cuts into other important tasks. For some objectivity, you can try to figure out an hourly rate.

For example, in my practice. If we take the costs of billing divided by the time it takes my partner to do it – she makes great money. Definitely worth it for us. My wife likes the fact that she is financially contributing to our household, in addition to all of her other contributions.

You do need to pay your spouse a reasonable wage for the work done. If the CRA audits you and considers it excessive, then payment will not count as a business expense. That would result in paying corporate tax on the amount plus the personal income tax as a punishment. This leads to the next point to consider.

Should you pay an hourly wage or pay the cost that you would have paid an outside agency to do the work?

The wage of a medical billing clerk peaks out at about $22/h around here. Back when I was starting up 12 years ago, I was quoted $33/h to pay a data entry billing clerk through the most popular billing agency that my colleagues use.  Now, that would be $40/h accounting for inflation. Almost double what the billing clerk makes.

These hourly rates are still a bit lower than what my wife earns. However, as I stated above, a full-service billing agency charges 1.5-2.5% of gross billings. That agency cost pays the billing clerk. Additionally, they have other expenses to run their company. Management, advertising, and infrastructure costs. Plus, a profit margin for the owners. My wife actually plays a larger role in our corporation than simply billing and covers off many of those other business-related infrastructure tasks.

Also not accounted for is that even if an agent develops more efficient ways of processing billing, you would still pay them the same, despite it taking them less time. Employees also do this all the time. They don’t get paid more, but many will find other ways to consume the freed up time.

We pay my wife the amount that it would cost us to purchase the service from an outside source.

She provides full-service billing to my practice. In fact, I get premium service as I will describe later in the post. We have also become very efficient at capturing and processing billable services. That efficiency goes to our bottom line rather than someone else’s.

It is very important that if you employ your spouse, that you do so as an employee. Not a contractor.

The CRA takes offense to the contractor approach because it delays the tax bill compared to a payroll with monthly tax remittance. To be counted as an independent contractor, your spouse would need to generate significant revenue for services to entities outside your corporation. The other boon of paying your spouse a salary is that it helps them to generate RRSP room. That can be used to diversify your portfolio against tax risk.

Billing is the low hanging fruit for employing a spouse in your medical practice.

There are also a number of other ways that your spouse can work for the corporation and legitimately get paid. For example, my wife also provides admin support for the non-clinical income-generating aspects of my practice (I have significant roles in physician education and leadership). She also manages the finances of my practice and our Department. In our case, it could reasonably cost us $60K/yr to hire outside agencies to provide all of these services. That is money that I redirect to my spouse instead. I will give a full job description of what she does in a later post.

If you have a complex practice that can generate 20h/week of work for a lower income spouse, that is a major tax advantage.

This amount of hours would make you an “Excluded Business” from the proposed income splitting legislation. You should be able to give your spouse dividends in addition to salary to income split and slash your annual personal tax bills. If doing this, keep careful time sheets and payroll records to prove the hours worked. It will become a question of fact about the number of hours worked in an audit.

In our case, for years we have paid my wife based on task instead of time and that has resulted in her becoming extremely efficient. Fortunately for us, as my clinical and academic leadership roles have grown, her workload has also increased to >20h/wk. We have been tracking her hours worked since the March Federal Budget confirmed the requirements.

No employee is going to be as motivated as your spouse to see that you get paid properly.

This is extremely important when it comes to medical billing. The medical schedule of benefits is convoluted. Plus, there are all sorts of hoops to jump through to get paid optimally for providing medical services. Jumping through those hoops requires effort and teamwork between you and your billing agent. That collaboration and effort can make a big difference in what you make.

For example, tracking down a referring physician name and written request for consultation can mean getting paid either $150 or $30-$75 for providing the same service. Taking the time to check the previous diagnoses billed for and choosing a different one when you see the same patient for a different problem has similar effects.

There are also many services for which the government will only pay one person on a first come, only one paid basis.

This happens even if multiple physicians are involved due to complexity or clinical need. The slower to bill physicians get their billing rejected. In Ontario, our provincial plan won’t even tell the rejected doctor who the person that did get paid was. That eliminates any opportunity for you to be able to discuss and work it out with each other. I have same day or real-time billing submission via my spouse and this problem does not happen to me very often. This is a premium service.

Does a motivated billing agent matter? Definitely.

I gave a couple of examples why above already. I usually collect 5-10% more per week of service than the average. It appears to be due to a combination of fewer downgrades in codes and fewer rejections.

On the extreme end of the spectrum, one of my mentors as a resident found a drawer in her secretary’s desk filled with unsubmitted billings that had stale-dated. This cost her about $50K! Her secretary, who was supposed to be doing the billing, merely got moved to another physician (it was a unionized environment). My mentor learned an expensive lesson.

The premium service provided by my wife results in enough more collected billings that it offsets what I pay her for doing it. Plus, that income gets kept in the family  – and at a lower tax bracket! Win-Win-Win for us. 

Having my spouse involved in my practice has benefited our relationship.

If possible, my wife does not go near hospitals.  She thinks they are germy and gross, and she has little interest in medical science. These factors made it hard for her to identify with me in my job.

However, she does get insight through working for our practice. She can tell by the pile of billings after a night on call why I may be tired and a bit cranky. She’ll see the billings for a two-hour resuscitation on a 30-year-old. Followed by the codes for pronouncement of death, and empathize with me.

As my executive assistant for my leadership roles, my partner also handles the interfaces with our physician group and The Hospital. She gets to see the type of frustrations that we face as physicians. It is also insightful for her to appreciate all of the different personalities and priorities that I try to bring together to move our mission forward.

A professional career can be consuming and hard for people outside of it to relate to. Drawing your partner in to share some of that can be a very supportive move. It may not apply to everyone, but for us, it has helped to strengthen our relationship.

Paying your spouse can open the door to further income splitting opportunities.

Many of the intermediate-term income splitting techniques require your spouse to have their own money that they have earned and kept in a separate personal account. They can use it to build income-generating assets in their name. Those are taxed in their hands without running afoul of the attribution rules.

Having your spouse participate in your business can have many benefits as I have outlined above. For a medical practice, having them act as your billing agent is a very high yield approach. Another fringe benefit is that this may be your big chance to be “the boss” in your house. If only for a short while.

Updated: Sept 26, 2018