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Starting up as a sole proprietor in private practice is very interesting, financially speaking. Most times, you treat the business bank account as your personal bank account because – for all intents and purposes – it is. (That is until you get yourself a really good CPA, of course.) Once you feel settled enough to have a CPA help you delineate the business account from the personal account, you’ll start to see something super fascinating: you have to pay taxes in order to pay money.

The “Payroll Tax” started as the Federal Insurance Contribution Act (FICA) in 1935 when President Franklin Roosevelt signed Social Security into law. The federal government wanted to create a form of earned benefits to provide as a source of income for its citizens to cover retirement, disability, etc. Thirty years later, President Lyndon Johnson signed the 1965 Medicare portion into law, which essentially seeks to provide healthcare coverage for retired individuals who are no longer covered by employment-tied insurance policies. In addition to being taken out of employees’ earned wages, these taxes are also paid for directly by employers, and sent to the federal government. 

Employers are required to essentially match what employees are paying in taxes (6.2% for Social Security, and 1.45% for Medicare). If you think you are losing too much money to taxes, just remember that (as required by law!!!) your employer is paying the same amount you are PLUS the equivalent percentages for each and every other employee in the business! Moral of the history lesson: it costs money to give people money. A lot. Every time.

How does this affect you as a private practice owner? Anytime you go to hire someone to work for you, you can’t just calculate their hourly rate. “Whew!” you think. “I’m paying them $15/hr for 40 hours so I need to make sure there’s $600 bucks in the bank to cover the cost of their awesome help.”

Nope.

Employers have to pay for the privilege of paying others. Once you figure in the Social Security and Medicare Payroll Tax, that $600 is actually $645.90 (given the current payroll tax rates).

So where does that extra cost come from? The owner takes less in profit. That’s part of the business owner deciding to invest in the potential of an employee and their unique skills. The keyword here, of course, is “invest,” as employers are really required to make a decision that could absolutely cost them significant amounts of money just to hire somebody and pay them what they’re worth.

Don’t want to deal with this dynamic of calculating how much money you actually have to set aside for payroll? That’s why Simply Psych is so helpful. Each contract we create with our clients makes all costs very clear and upfront. We can serve as consultants and advise you on how to recruit and retain help, or you can fractionally borrow our well trained staff (at a transparent set rate.) No muss, no fuss.

Learn more at www.simplypsych.com today And remember, we are always happy to help!

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