Financial Wellness & Tax Advice for Doctors
Ultimate Guide to Medical Billing for New Doctors
As you shift into setting up financial tools and systems to run your independent practice, it’s essential to seek out financial advice for doctors specifically. Why? Because there are a lot of specifics. You may be asking questions like:
- How are Ontario doctors paid? What should I know about physician payment models?
- How should I prepare for paying taxes during my first year of independent practice as a physician?
- Should I incorporate my practice?
- What software do I need as a new doctor?
- Should I hire an accountant?
- How should I be investing now that I have a robust income?
- Should I hire a financial advisor?
In this section, we’ll answer these questions, leaning on the expert advice of a few professionals from law, accounting and finance.
How Are Ontario Doctors Paid? What Should I Know About Physician Payment Models?
Whether you choose to practice as a family doctor or a specialist, there are many physician payment models in Canada, While 72% of doctors in Canada work under a fee-for-service (FFS) arrangement, others are compensated on alternative payment plans (APP), and a few receive salaries. Below we’ll go over a summary of each model.
- For whom? Family physicians or specialists
- Details: Physicians bill for each individual service provided during a patient visit, similar to a self-employed, independent private contractor.
In Ontario, these claims are submitted to the Ministry of Health, who, in turn, will reimburse the physician based on a list of insured services paid for by the Ontario Health Insurance Plan (OHIP).
To govern compensation, each medical service has been assigned a code and an agreed-upon dollar amount for which OHIP will reimburse physicians.
Some FFS models may include additional bonuses and incentives (e.g. Family Health Group) for services like special-needs care, rural work and overtime or night shifts.
- Learn more about Primary Care models from the Ontario Ministry of Health and Long-Term Care (MOHLTC). And more about the OHIP Schedule of Benefits.
Alternative Payment Plans (APPs), Alternative Payment Agreements (APAs) and Alternative Funding Arrangements (AFPs)
- For whom: Academic practices, certain disciplines or regions
- Details: APPs/APAs/AFPs are contractual arrangements between the MOHLTC and a group of physicians. These contracts could involve hospitals and universities where the physician group receives funding for teaching and research; oncology groups, or special regions (ex: Northern Ontario).
Most funding arrangements combine base rate and fee-for-service or “shadow billings”, with possible additional incentive/premium payments.
This model has grown in popularity in recent years and now accounts for 28% of total clinical payments (CIHI, 2017).
- Learn more about alternative funding plans and compensation, incentives and benefits from the MOHLTC.
- For whom? Physicians at academic institutions, community health centres or hospitals
- Details: Salary models are generally calculated based on time, and can vary between hourly rates, payment per session, or annual salary.
In Canada, salaried physicians, although they provide services within institutions, generally receive their salary from the provincial insurer rather than the institution in which they work. But overall, this model is less common in Canada.
- Learn more about compensation, incentives and benefits from the MOHTLC.
What Should I Do In Preparation For Paying Taxes On My First Year Of Practice?
Accounting and Financial Advice for Newly Graduated Doctors
You’re a newly self-employed physician. This means that you have to start anticipating and setting aside money to pay your taxes; otherwise, you will receive a nasty surprise next April 30. You need to consider income earned during your last 6 months of residency, as well as income earned from or fees for service or locums. Here’s what you need to know.
Calculating and Remitting Your Own Income Tax and CPP
One of the first considerations for a new-to-practice physician is that you are now responsible for calculating and remitting your own income tax and Canada Pension Plan (“CPP”) contributions. During the course of residency (and, in some cases, fellowship), as a resident you have earned a salary as an employee; meaning that your employer has calculated and withheld income tax, CPP and Employment Insurance (“EI”) premiums and remitted this amount to the government.
However, once residency has been completed, the employer-employee relationship comes to an end. Now, as a new-to-practice physician, you’re considered a sole proprietor and no longer an employee. This means that you now bear the responsibility of remitting income tax and CPP premiums to the government.
Managing the Tax Transition from Resident to New Attending Physician
For the new-to-practice physician, the first year in practice is typically a transition year; for both you and your taxes. For the first six months, you will have earned a salary. Source deductions – CPP, EI and income tax – will have been withheld from each of your pay cheques as a resident. These amounts will have been remitted to the government to be applied toward your physician’s income tax balance, come the following April.
But that no longer occurs once you begin earning your income on a “fee-for-service” basis, as a sole proprietor. Now, you will bear the responsibility for calculating and paying income tax and CPP premiums. The income tax you owe will depend upon the amount of income you earn. As income increases, so does income tax until it reaches a certain level, which depends upon the province or territory.
For example, in Ontario, if a self-employed physician’s income exceeds $220,000 they will incur income tax at a rate of 53.53% per dollar above this amount. How does one determine the amount of income tax and CPP you will owe?
A couple of suggestions.
Set Aside 40% Of The Billed Value Of Your OHIP Claims
We suggest that 40% of the billed value be set aside in anticipation of income tax. So, for example, if a physician submits billing to OHIP for $20,000, $8,000 would be a rough estimate. But this is just a crude rule of thumb and not the most reliable approach.
Consider Contacting An Accountant
This is more reliable, as they will perform a calculation of total income tax payable on the income expected to be earned for the year. You will need to advise them of your estimated income from your various sources of income, including:
- On-call stipends
- Estimate of expenses
- Last pay stub received at the end of residency
- Income from investments
Armed with these items, a healthcare accountant will have the information required to calculate a tax estimate.
Frequently Asked Questions About Taxes for Doctors
Do I pay income tax on the value of when services are rendered, or when payments are received?
One more detail worth knowing: Income tax is paid on the value of services rendered during a year, not when payment for these services is received. For example, a physician who submits billings for $20,000 worth of services rendered in December, will receive payment for these services in January.
However, even though payment is received after the fact, the value of services rendered is the amount to be reported for income tax purposes; not the amount actually received! This is known as the accrual method of accounting. It is required by the Income Tax Act (Canada). It differs from the method in which tax is calculated for an employee. An employee’s income, for tax purposes, is based upon the amount of cash received and not the value of services rendered.
Once an estimate of the amount of tax has been calculated, this is the amount that should be set aside. Income tax owed must be paid to the Receiver General for Canada no later than April 30th of the following year. If Canada Revenue Agency does not receive a balance owing by that date, interest will be charged on the outstanding balance on a compounded basis.
MDBilling.ca makes it easy for physicians to summarize their annual earnings with a tax report. You can generate this report to reconcile against your deposits from MOHLTC. See our year-end tax report for doctors.
What about unclaimed expenses incurred during the course of training?
This is an area that is mostly ignored by other non-specialist accountants. However, many start-up costs can be claimed by a physician that warrants a conversation with a healthcare advisor or accountant. Expenses that fall into this category include accommodations and travel expenses incurred during training or to attend electives as well as CaRMs expenses to register and attend interviews.
What records should healthcare professionals keep in preparation for Canada Revenue Agency (CRA) audits?
Watch this video from Chartered Professional Accountant Jonathan Tucker on keeping records.
How should healthcare professionals be tracking expenses?
Watch this video from Chartered Professional Accountant Jonathan Tucker on tracking expenses.
Source: The accounting recommendations above were provided by Chartered Professional Accountant Jonathan Tucker. If you have additional questions or would like an estimate of income tax payable, please contact [email protected] or (905) 601-5659 ext. 101.
Should I Incorporate (Or Not)?
Considering incorporating? Operating through an incorporation offers options not otherwise available to an unincorporated health care professional. And options become important when it comes to tax planning.
But if you are in one of the following scenarios, you may want to consider holding off on incorporating your medical practice.
- If you own shares of another Canadian controlled private corporation (“CCPC”)
- If you are considering moving to another province or to another country
- If you are a US citizen (for tax purposes)
- If you earn income in multiple jurisdictions
We’ll dig more into these below.
If You Own Shares Of Another Canadian Controlled Private Corporation (“CCPC”)
If you own shares of a family member’s corporation for tax purposes (before the new Tax on Surplus Income (“TOSI”) rules took effect January 1, 2018) you should know that there may be significant adverse tax consequences to both corporations.
Read more details about CCPC
A newly incorporating physician inadvertently owning shares in both companies is not a good outcome and one instance when it is best not to incorporate – yet. If this is your situation, first ensure you no longer own shares of another Canadian controlled private corporation (PC) before incorporating.
If You Are Considering Moving To Another Province Or To Another Country
Are you uncertain where you will be practicing over the long-term? Sometimes locums begin, then other opportunities emerge. Until you are clear on whether you’ll be practicing, it may be wiser not to incorporate. Here’s why:
Learn more about moving to another location
Incorporation happens under provincial jurisdiction, and only income earned within that province can flow through the PC. Income earned in another jurisdiction is actually considered income of the physician themselves – reported as self-employed income on a personal tax return and subject to tax at marginal tax rates. This can become very complicated very quickly, and so it’s best to avoid incorporating until you are certain which province you’ll be living and practicing in for the foreseeable future.
When The Practising Physician Is A US Citizen (For Tax Purposes)
US citizens will want to obtain professional advice before proceeding with incorporation given the myriad of issues and complexity of US tax.(More) Income earned in a PC is treated differently for US tax purposes, and it can have adverse consequences to the shareholder both in the US and Canada. (More) Incorporation is still an option but warrants very careful consideration.
If You Earn Income In Multiple Jurisdictions
Only practice income earned within the province of incorporation is permitted to flow through a medical PC. Out-of-province practice income can not be earned by a PC.
Other things to think about when earning income in multiple jurisdictions
The out-of-province practice income is considered self-employed income and subject to personal income tax at marginal tax rates. Of course, a separate PC could be incorporated and authorized in each applicable province where income is earned. But usually not the most tax-efficient solution.
What About Incorporating and Debt Repayment?
One final note on debt repayment
It is not one of the reasons listed above, because every one of us will likely have some form of debt throughout our lives—whether a mortgage, line of credit or income tax liability arising on death. Debt will always be with us in all likelihood. Then, by extension, logic would hold that it’s never a good time to incorporate. But, of course, this isn’t true!
This is a summary, but there are other things to consider prior to incorporating. And this is why a physician should consult a professional accountant and a lawyer prior to incorporating. No matter how simple the scenario may seem to be, every individual has their own story and set of facts to be considered before incorporating.
Source: The accounting recommendations above were provided by Chartered Professional Accountant Jonathan Tucker. If you have additional questions around incorporating your practice, please contact [email protected] or (905) 601-5659 ext. 101.
Should I Hire An Accountant Or A Bookkeeper?
As you are making decisions around how to manage the finances of your independent practice, you may be wondering if you should hire an accountant or a bookkeeper.
A bookkeeper will help you stay on top with the operational side of things, by recording and posting your day-to-day financial transactions. They may help you:
- Collect and record payments received from customers
- Reconcile monthly bank statements against your accounts
- Generate invoices for customers
- Issue payments to your suppliers
- Monitor your cash flow
- Prepare financial statements
An accountant will help make sense of all accounting data you collect to help you make better decisions for your practice’s financial health. They may help you:
- Reduce your tax burden
- Forecast your cash flow
- Analyze the financial health of your practice
- Spot trends that can help increase your revenue
- Maximize your tax credits and deductions (conference travel, office supplies, lab equipment, etc.)
- Navigate the decision around whether to incorporate or not
Indeed, many physicians opt to use the services of a bookkeeper or accountant rather than buying accounting software and doing it themselves. It all comes down to how much your time is worth.
While some doctors may start off tracking their expenses and balancing their books, as more and more responsibilities arise in the practice, many realize that it’s wiser to outsource this work.
If you get to this point, consider working with an accountant with specific expertise in financial planning for medical professionals. They will be able to help keep you up-to-date on changing regulations and trends and share financial advice pertinent to doctors.
Choosing whether to hire an accountant or a bookkeeper is closely tied to the next big question: Which types of software will I need to manage my independent practice?
Which Types Of Software Will I Need To Manage My Independent Practice?
If you opt to manage your own finances without an accountant’s assistance, you will likely need to invest in accounting software. In any case, you will need to invest in medical billing software to bill, track and manage OHIP claims.
Choosing Accounting Software
Quickbooks and Xero are two of the most popular accounting software solutions for small businesses. Both provide access to a full range of accounting tools and functionality. And both tools are web-based platforms that come with a free mobile app for managing accounting-on-the-go, as well as many integration options for third-party tools.
Additionally, they both offer multiple tiered plans to choose from priced on a monthly subscription model.
Note: We have no professional affiliation with Xero or Quickbooks and are not receiving a commission for this recommendation.
Choosing Medical Billing Software
When it comes to selecting medical billing software, there are a few key points you should consider. Here’s what you should be looking for.
6 Things to Consider When Choosing Medical Billing Software
- Mobile and Web-integrated
- Why it’s important: As you treat patients through the day, it will save you lots of time if you can quickly and easily submit claims through a mobile phone app.
- Equally important is to have a fully functional desktop software so that you can use a full keyboard and large screen and ensure that app data syncs between all devices. You can choose the type of device (mobile vs. desktop) depending on your practice and workstyle.
- Ability to Designate Sub-users
- Why it’s important: If you are too busy working with patients, you may want to delegate billing responsibilities to an office admin or a family member. For these scenarios, you need to choose a billing software that enables you to partition access to sub-users.
- The medical billing software you choose should offer different levels of access for different team members, to ensure that you only share the information that is required for each task.
- For example, you’ll want to share more financial information with your accountant for reporting purposes, but you may want to keep these details confidential from administrative staff.
- Range of Billing Service Options
- Why it’s important: When you start your practice, it’s hard to know if you want to submit billings yourself or would rather outsource this to an experienced billing agent.
- That said, you should seek out a vendor that gives you both self-serve and full-service options so you can test out both approaches and figure out the best fit for your schedule.
- Proven Track Record: Years in Business & Client Base
- Why it’s important: This goes without saying, but choose a vendor who has a proven track record of serving a high number of physicians over a number of years. It’s a bonus if their client base includes hospitals, as this indicates that their software has been tested and has met rigorous standards.
- Privacy and Security Measures (MOHLTC-conformance tested)
- Why it’s important: Ensure that your software vendor has been conformance tested by the Ministry of Health and Long Term Care (MOHLTC) to ensure the reliability of the software. It is also important that software vendors have performed a third-party privacy impact assessment (PIA) and a threat-risk assessment (TRA).
- EMR integrations
- Why it’s important: If you need to integrate with an existing EMR application, you should choose a vendor that provides API integrations.