Team Member Discounts
Heather Prendergast, RVT, CVPM, SPHR, Patterson Veterinary University, Las Cruces, New Mexico
Veterinary practice team members traditionally have received a significant discount for services rendered to their pets. In the author’s experience, most practices offer a 100% discount for services and charge either cost, or cost plus 10% in some cases, for inventoried items.
Practices can determine the discount provided to their team members; however, even though discounts are a popular benefit, practice management must follow regulations set by the Internal Revenue Service (IRS), or both owners/managers and team members may face hefty fines.
IRS Definitions
The Employer’s Tax Guide to Fringe Benefits published annually by the IRS set out the following definitions in 20171:
A fringe benefit is a form of pay for the performance of services.
If an employer provides a fringe benefit in exchange for services performed, the employer is the fringe benefit provider. Even if a third party provides the benefit for services team members perform for the employer, the employer is still considered the fringe benefit provider. For example, some veterinary manufacturers or diagnostic laboratories provide discounts for services to or products for team members’ pets.
The recipient of the fringe benefit is a person (ie, team member) who receives the service, whether or not he or she actually completed the task.
Employee discounts are a price reduction given to team members on inventory products or services offered to customers in the ordinary course of business in which the team member performs substantial service.
Applying IRS Definitions
Any fringe benefit the practice provides is taxable and must be included in the recipient’s pay, unless specifically excluded by law. Some fringe benefits are excluded (eg, accident and health benefits, health savings accounts, group term life insurance) but veterinary services do not fall under total exemption.
A practice can provide a discount up to 20% on professional services, based on the standard price charged to clients, and can charge team members cost plus 10% for inventory products. Any discount greater than 20% for professional services or cost plus 10% on inventory items is subject to employment taxes and must be reported on the Wage and Tax Statement (ie, Form W-2). The practice can report fringe benefits as frequently or infrequently as it chooses (eg, monthly, yearly).
Discount Quick Reference Guide
The IRS interprets veterinary team member discounts as fringe benefits.
The IRS allows practices to provide team members a discount up to 20% on services and cost plus 10% on inventory products without reporting the discounts to the IRS.
Any discount greater than 20% on services and cost plus 10% on inventory is allowed, but it must be included on the W-2 and subjected to employment taxes.
The practice’s policy manual must state the benefit policy, which should be applied uniformly among all team members, including associate veterinarians. If owners are considered an employee and receive a payroll check, they must also report the fringe benefit.
The practice should track team member discounts using separate codes—one for discounts on services and another for products—in the practice management software. In the event of an IRS audit, this can provide evidence that the discounts have been limited as defined in the regulation and still allow practices to track and manage the dollar amounts invested in the health of their team members’ pets.2
Example of a Team Member Discount
Samantha has worked at ABC Animal Hospital for 3 years. She has 2 dogs and 1 cat, all of whom are due for their yearly examination and vaccines, which would cost a client $467.89. Practice policy has always been that team member pets receive services for free, up to 3 pets. For reporting purposes, the equation would look like this:
$467.89 × 20% = $93.58 (team member discount)
$467.89 - $93.58 = $374.31
On the payroll report for this period, $374.31 will be added to payroll for “veterinary services” and classified as income for taxation purposes.
Potential Penalties
The IRS can conduct audits of the veterinary practice within the last 3 years; however, if a substantial error is identified, extra years can be added. Extensions typically do not exceed 6 years.3
Auditors can review patient records for team members’ pets and compare them with discounts applied in the team member’s account in the practice management system. If the practice provided discounts greater than those allowed by regulation, the IRS will calculate the taxable income and any back taxes owed. Practice owners and team members will be responsible for the back taxes and fines will be assessed for late payment.
Breaking the News
Discounts have always been a popular benefit among veterinary practice team members,4 especially given the low wage scale many practices use. If the practice is not adhering to IRS rules, breaking the bad news may induce culture shock and team members may believe the practice is taking away their benefits. In this case, the following are important:
Ensure team members understand the 20% discount is an IRS regulation, not the practice taking away their benefits
Clarify that changes to the discount policy are made to keep the practice compliant with IRS regulations to protect both the practice and the team members from having to pay back taxes and penalties for nonpayment of payroll taxes
Conclusion
Veterinary team members have always considered discounts a substantial benefit, but they must understand IRS regulations and know that adhering to them protects everyone in the practice.