One of the most misunderstood and abused on-the-job benefits in veterinary practice is the employee discount. According to a 2023 Veterinary Hospital Managers Association survey, 94% of practices discount services for team members’ pets, and 88% cut product prices. If you’re new to ownership, answer the following questions to help you lay out a discount policy. If you already have one, make sure your employee handbook addresses these seven points.
1. Who is Eligible?
Is the discount applicable to the employee’s pets only or to those of family members and friends, too? Does family also mean uncles, sisters, cousins and in-laws? If the employee lives with parents, are all family pets eligible, and when would they be ineligible? What about roommates, boyfriends and girlfriends? What if the employee fosters a shelter pet?
2. When Does Eligibility Start?
Do discounts begin immediately upon an employee’s hiring or after a certain number of days or months?
3. How Many Pets?
Many veterinary professionals have multiple pets. Will discounts apply to all animals or just one or two?
4. How Much is the Discount?
For example, it is 10% off services and 20% off products? Or do you provide $10 in monthly discounts or set an annual dollar limit?
5. Any Exclusions?
Do pet food and all medical services come with a 10% discount, or are surgeries at full price?
6. How is the Price Calculated?
Does the manager or hospital owner determine the discount, or does the practice software compute it?
7. What Are the Terms?
Is payment required at the time of service or purchase? Do you offer payment plans? Payroll deductions? Are outstanding balances subject to interest or late fees?
Tax Time
It should come as no surprise that the Internal Revenue Service cares about employee discounts. Why? In short, unreported income affects payroll taxes. Also, the perceived value of a potential discount could influence employment offers and compensation packages.
For example, you might work for an equine veterinary practice that offers 50% off services, and the only reason you accepted the job for $10 an hour is because your spouse has a horse-riding business. Or perhaps you’re a dog breeder on the side or own a cattle ranch needing frequent veterinary services or products.
From the compliance side, the IRS is particular about its interpretation of the law on employee discounts. According to the agency, you can give employees up to 20% off services without creating additional taxable income. Furthermore, you must charge at least a 10% markup for product discounts to be tax-free. If you exceed those limits, the difference becomes taxable compensation in the employee’s paycheck.
Therein lies the problem. Many practice owners intentionally or unintentionally run afoul of IRS rules and face ramifications when challenged.
Do the Math
Take a team member whose dog gets a veterinary exam and vaccinations. You typically charge clients $80 and $100, respectively. The IRS is content if the employee pays:
- $64 for the exam ($80 minus the maximum allowable 20% discount).
- $22 for vaccines that cost the practice $20. (Cost plus a minimum markup of 10%).
The example leaves the employee paying $86. However, if you permit a 100% discount, $86 is added to the employee’s gross wages and treated as taxable income.
But guess what? Now, on top of your time, labor and product costs, your practice is responsible for payroll taxes on the additional amount.
Our advice: Offer a 20% discount on services and products. (Make sure all products have at least a 30% markup to be IRS compliant, as 30% less a 20% discount equals 10%.) This way, you ensure clarity on taxable benefits and eliminate much of the time spent calculating costs and discounts for payroll purposes. Your software should allow you to mark a person as an employee and automatically apply the 20% discount.
Make sure your policy on employee discounts is clarified and well understood.
Finally, consider offering pet health insurance as a benefit to avoid the hassle of discounts. While it won’t eliminate income and tax issues, it simplifies recordkeeping and enhances employee appreciation. And remember, you’re not being cheap or petty; you’re just following the law!