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Reports indicate that about 80% of physicians are offered a signing bonus with their employment contract. The prevalence of employers offering such bonuses has grown, and depending on the specific employer, there are varying reasons why a bonus will be offered. Some employers advertise the opportunity for a signing bonus in order to create more interest in the position and attract more candidates. Alternatively, some employers prefer to offer the bonus only after negotiations have begun, and then use the bonus as a closing tool to guarantee that the physician will not renege on accepting the position.
Golden Handcuffs
The use of the bonus as a “closing tool” can be very important, particularly for physicians who are just coming out of training. First off, young docs (more often than not) are in unstable financial situations. Meager salaries paid during residency and looming student loan debt leave many in a precarious situation and therefore they need a bonus just to make ends meet. A bonus may be used to help with the down payment on new home, or provide cash flow during the job transition, particularly if the doc’s significant other is seeking new employment as well. Also, employers need a way to guarantee that the physician who signs their employment agreement will actually honor that agreement and show up to work. Physicians just out of training may be fickle with their employment decisions, and may sign an agreement and then change their minds. If they have received a bonus and are contractually bound to pay back that bonus if they do not honor the employment arrangement, then they are obviously much less likely to break the deal. Hence, why signing bonuses are often referred to as “golden handcuffs.”
So – how do bonuses work? Bonuses are generally either offered as a lump sum payment, or otherwise are paid in one or two installments. As noted above, most physician employment contracts that provide for a bonus will require that the physician pay back the bonus if she does not show up for work, or if she does not remain employed for a specified period of time. In these cases, the applicable provision will provide that for every month that the physician remains employed, the requisite repayment will decrease on a pro rata basis, such that if the physician remains employed for x years, no repayment will be required at all. In this sense, the bonus is more like a loan that is forgiven over time. Alternatively, some employers will offer the bonus as a true bonus, with no strings attached. This is more common in situations where the doc is highly sought after, or the practice or hospital is underserved and in dire need of the provider’s services.
Will I Receive a Bonus? What to Expect:
Generally, hospitals are more likely to offer signing bonuses than are private practices. Furthermore, bonuses are more substantial when offered by hospitals and practices in rural areas. Conversely, employers in bustling metropolitan areas offer substantially smaller bonuses – surely a disappointment for physicians determined to live in big cities that undoubtedly have much higher costs of living. Bonus values also obviously vary based on specialty. Physicians specializing in family medicine will receive a lower bonus than an orthopaedic surgeon, for example.
Another important factor to consider in receiving a signing bonus are the tax implications. Bonuses are considered supplemental income, and on a federal level this type of income is heavily taxed. Further, state (and possibly city) taxes will further erode the bonus’s value. Specifically, the IRS specifies a flat rate of 25% on supplemental income. In some instances, an employer will a pay a bonus with a physician’s regular paycheck and treat it like normal W-2 wages, deducting the taxes before it is paid. More often, however, employers simply cut a physician a check for the full amount of the bonus, and then it is up to the physician to ensure payment of the requisite taxes when due. It is important for docs to also consider if receipt of the bonus pushes them into a higher tax bracket for the year, thereby having a further impact on the overall tax liability. These potential liabilities make it essential to discuss your bonus with your tax adviser.
For further information on physician contract review, analysis and negotiation, please contact the attorney-agents of Lauth O’Neill.
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