Practice Economics
Using a "Common Paymaster"
It's a good idea when employees work for related entities.

BY MARK E. KROPIEWNICKI, J.D., LL.M.

Mary Johnson works 3 days a week as a technician in Dr. Smith's ophthalmology practice and 2 days a week assisting Dr. Smith with surgery procedures at an ambulatory surgical center. Though she always works with Dr. Smith, Mary is employed by two related corporations and has been receiving two separate paychecks and two W-2 forms.

But thanks to the "common paymaster" provision of the Internal Revenue Code, Mary is an employee who's eligible to receive a single paycheck for her full week's work and only one W-2 form. This arrangement simplifies the payroll process for everyone and ensures that employers don't pay too much in FICA, Medicare and federal unemployment taxes for workers such as Mary Johnson.

If your ophthalmology practice has technicians, nurses and/or office staff who are concurrently employed by a related corporation, they may also be eligible to be paid under a federally approved "common paymaster" arrangement.

MAKING PAYROLL SIMPLE

This arrangement allows one of the related corporations to designate the other as the common paymaster. One paycheck can then be issued on behalf of both employers, and only one set of payroll taxes is due. Only a single W-2 is issued, to each worker, but each employer is responsible for reporting the wages that it actually funded on its own tax return. As a result, the double employment tax problem is eliminated.

Corporations are considered by federal law to be related if:

• 50% or more of one corporation's officers are concurrently officers of the other corporation
• the corporations are members of a "controlled group of corporations" as defined in the Internal Revenue Code
• 30% or more of one corporation's employees are concurrently employees of the other corporation.

The corporations must meet only one of these qualifications to be considered legally related.

DESIGNATE THE PAYER

The common paymaster arrangement can be put into practice by having one of the related corporations, usually the secondary corporation with fewer employees, designate the main practice corporation as the common paymaster for concurrently employed individuals.

Accordingly, these employees receive no paycheck or W-2 from the secondary corporation. Instead, the secondary corporation pays the main practice corporation for the salary and other benefits the employees receive. The main practice corporation, or common paymaster, disburses that salary and other benefits to each of the employees as part of a single paycheck. The main practice is also responsible for issuing the employee one W-2 at the end of the year.

You'll need to accurately document all common paymaster arrangements within and between related corporations.

THERE ARE EXCEPTIONS

Be aware that the common paymaster approach can't be used if an individual works for one corporation part of the year and switches employment to the related corporation for the remainder of the year.

It's also important to note that this common paymaster provision won't work for partnerships and other non-corporations, such as limited liability companies (LLCs).

While the rules for common paymaster arrangements may initially appear somewhat complicated, this payroll arrangement is definitely legal under federal law. And many of you should be able to take advantage of it because ophthalmologists often do business through two or more related corporations.

If your practice and related entities currently don't fit exactly within the requirements for a common paymaster, it may still be possible to adjust your corporations to fall within the provision.

Mark E. Kropiewnicki, J.D., LL.M., is a principal consultant with The Health Care Group, Inc., and a principal and president of Health Care Law Associates, P.C., in Plymouth Meeting, Pa. He regularly advises physicians and practices on their contracting matters and business law obligations. He can be reached at (800) 473-0032.