Q.
Thanks for all the great sound advice. I am a MSK radiology fellow looking at two offers. One is a independent contractor and one as an employee. I am having a hard time comparing apples with oranges!
A.
This is a common question and one which nearly every doctor wrestles with at some point during her career. For tax purposes, an independent contractor is self-employed and “paid on a 1099.” An employee is paid on a W-2, just like a resident or fellow.
Don't Choose A Job Based On This
First of all, I would recommend that you don't make this a huge factor in your job hunt. The after-tax, after-benefit difference between the two offers is unlikely to be very high. Besides, at the level of income at which an attending, fellowship-trained radiologist is paid, a difference of a few thousand dollars isn't going to affect your happiness one way or the other. I would place far more importance on other factors, such as how much you like the people you'll be working with, the schedule, and the location of the job. It's like choosing a residency based on the salary- just don't do it.
An Independent Contractor Should Be Paid More
As a general rule, you should have a higher salary as an independent contractor than as an employee. How much higher? Enough to cover the loss of benefits and the additional payroll taxes. So add up the monetary value of all the benefits available at the employee job and add it to the salary. Include any 401K match, dental insurance premiums, health insurance premiums, CME stipend, and moving allowance. Then add up the cost of the employer paid payroll taxes (7.65% of income up to $113,700 in salary and 1.45% on income above that limit) and add that to the salary. Now you can compare them fairly directly. At a typical physician income, I'd expect an employee salary to be $20-30K less than an independent contractor salary.
Some Benefits For Independent Contractors
There are some additional benefits of being an independent contractor. Many employee retirement plans have limited contributions or high expenses. It's pretty easy to do a Solo 401K or SEP-IRA as an independent contractor and have a $51K contribution limit and rock-bottom expenses. You'll also be able to deduct a few more items on your taxes. Some of these deductions can be quite significant, while others are nearly meaningless. For example, the employer portion of the payroll taxes is tax-deductible. On $300K of income, that would save you something like $4300 in taxes. You could also deduct anything you can justify as a business expense, such as CME costs, scrubs, stethoscope, pager, cell phone, accountant fees etc. That might save you another $1-2000 per year in taxes. Everyone will be a little different in this respect of course.
What do you think? Have you had to choose between an employee position and a contractor position? Were there any other factors you considered? Comment below!
As an independent contractor, if you will be taking call from home and can review films from home, you can deduct a home office including a percentage of your mortgage, utilities, etc. Also, while the mileage to your job from home is generally not deductible, the mileage from one job site to another is. So, a good tax strategist will generally allow a non-employee to deduct mileage. You see the non-deductible commute from your home to the job site is the walk from your bedroom to the home office. After that, you are driving from one job site to another.
I’m not sure how you keep managing to post topics as am literally thinking about them! You must have a direct connection to my brain. I’m soon to be in the middle of signing a contract in California which is mostly 1099 and this is completely new to me. Having to deal with obtaining all the insurances, retirement plans, hiring an accountant and keeping track of deductions seems extremely cumbersome, but on the other hand the flexibility and freedom seems very nice. Anyway, nice post, thank you.
GA….not as difficult as you might think. You have to learn about all of the things you can deduct (get a good tax strategist….not just a CPA). Once you know what you can and cannot deduct, then there is just two more steps. Capture your deductions and Store your deductions. A smart phone is great. You can take a picture of all of your receipts as you create them (capture) and then store them using dropbox.com or evernote.com.
Good post. I was also thinking about this. I was wondering, if we work as an employee, but get paid call money separately from the hospital, we would be considered indv contractor/ sole proprietor. In that case can we open solo 401k? And be able to put extra 25% of indv contractor earnings, and still keep backdoor Roth possible?
As to the point of deductions for home office, I am afraid trying to take too many of those deductions might just kick in AMT and Make it useless. I think it might be better if employee reimburses some of those pretax. My CPA denied to take deductions for utilities and mortgage for home office. He thinks w get mortgage deduction anyway for the house. Deductions for utilities of one room of the house might be very small amount and might raise flags for audit. Let me know what others think.
How does the hospital pay you call money? Is it additional salary or independent contractor income? Does it come on a 1099? If so, you can use it to make Solo 401K contributions (assuming you’re not already at the $50K limit.) You would be able to put all the income into the Solo 401K up to the $17K limit, then it’s about 18-19% above that. Solo 401Ks don’t eliminate the backdoor Roth option, but SEP IRAs do.
The home office deduction isn’t going to cause AMT to kick in, since you take it on Schedule C. It reduces your business income. The home office deduction is, however, a pretty big audit magnet. The deduction would be tiny for me, about 1/44th of my house. I get a much bigger break from deducting my internet service (the blog’s a business you know.)
Thanks for the info. They are paying this year as part of salary (by channeling it through my employer) but am trying to see if I can seperate it next year as 1099 income. I get to put only $17K in employer’s 401k. Tried to talk them into considering “self-match” like you do but didn’t work out. Having an option of solo 401k might work better.
I work as a 1099. I work for more than one company as a contractor which i believe is useful in proving that im not a w2 in disguise. While i have a home office, i only deduct my cell phone and internet from the house since i personally dont believe the rest is really part of my office even though i do have a room which holds all of my office stuff (some would do this but i just think its pushing it too much). I deduct my health care. I deduct all my medical related stuff such mal pract, lic, cme, prof organizations, etc. I have a 401k/profit sharing and a defined benefit. I wouldnt necessarily recommend doing it that way but i was placed into a bad situation by an insurance agent and needed to convert a 412i/e into something useful. Id recommend doing sep ira. The costs are just too high to have the DB plans (unless you are older and closer to retirement) even though you can get it pretty cheap via schwab and then just invest in their index funds. I deduct all costs related to my car but i also drive a ton to these different offices (which i track and is like 98% of the miles on this car). I do use a CPA which is expensive. I personally believe (without any evidence) that it will help me in case of an audit or make it such that im less likely to suffer an audit. i track everything in excell and have folders for all items. I scan them all at the end of the year and number them to the items in excell. In the end, i dont recommend being a 1099 instead of a partner especially with a group you like (u never really know ahead of time if you will like them regardless of what one initially thinks). I would recommend being a 1099 instead of being an employee with bad benefits assuming you are paid a little more to compensate for the benefits you dont receive.
I am a radiologist too and have 2 jobs – one is W2 (just enough hrs to qualify as full time) and the other is 1099 (part-time) so according to my tax prep guy I have the best of both worlds. The 1099 job is from a home office so I take some home office deductions which are valuable (including a percentage of rent and all commuting costs since I’m going from one workplace to another). I also have a personal 401k through Etrade, a nice feature of which is that I can take up to a 50k loan if I need it (with the interest paid back to my account, so no money is actually lost). Not all personal 401k companies will allow this. This will help for example with a down payment on a condo. With all of the teleradiology options out there nowadays, part-time 1099 work shouldn’t be too hard to find. Just make sure you have malpractice coverage for both jobs (in my case both employers arrange and pay for this). With declining reimbursements these days, rads have to pay more attention to financial details so it pays to educate yourself about this stuff.
WCI….Not just your internet connection…..Since you wrtie as a profession, make sure when you take vacations, you write about and post those. Then some of your trip will be deductible.
The trouble he is going to have with that suggestion is that you can only deduct from “this business” based on revenue and im guessing this currently isnt in the same league as his day job. If he wants to take a vacation to McDonalds then he is all set. He cant take some of his doctor pay and pretend it comes from this adventure.
Good thinking. Last year I was able to deduct enough expenses to cover all my blog income. This year will be a little trickier to do that as I had a lot more income. But I did write about a few vacations!
As an attorney with more than 20 years of experience representing healthcare providers I have confronted this issue many times. In my experience, many independent contractor relationships do not meet the criteria for truly being an independent contractor. In reality, a direct employment relationship exists. There are penalties for classifying a relationship incorrectly. If you do enter into an independent contractor relationship, be sure it meets the definitions established by the IRS and the Department of Labor.
Unfortunately that might mean not taking an otherwise very desirable job if the employer isn’t willing to call an employee an employee.
Thanks a lot for this article, especially the part on employer-paid payroll taxes, which I would have otherwise not accounted for. According to my calculations, switching from my current employer to a nearby competitor as an independent contractor would get me a raise of roughly $20/hour, or a gross raise of around $32k, which doesn’t include health/dental/vision insurance or a Flex/HSA account (for myself only; no dependents I need to pay for). So it’s an enticing offer, but nowhere near the “slam dunk” decision from a financial standpoint that I initially thought it was.
Quick question; should the additional Medicare tax of 0.9% for those earning more than $200k be included in this formula? As far as I can tell it should NOT because the employee pays it, so you’re stuck paying for it whether employee or IC.
Here’s my article on the Medicare Taxes:
https://www.whitecoatinvestor.com/2013-tax-report-and-the-new-obamacare-taxes/
My understanding of the additional Medicare tax is the same as yours- you’re going to pay it either way.
Is my understanding correct that money paid to an independent contractor must be for services ptovides (eg portion of profits from a surgery)? I gathered from my studies that you can’t pay an independent contractor a regular wage or “guaranteed base” bc this would be more similar to a salary and therefor an employee…
My husband is early in his career (less than five years out). He is not happy with his current employer and his salary is around 325k. He has a had a job offer as an employee for 500k but he feels strongly about not working for someone else again (already has had two BAD experiences) and wants to explore an independent contractor arrangement with the person or go into practice on his own. Given all the problems in the last few years I want to support his career needs but I also don’t feel ready to take on responsibility for building a practice.
He may consider contract renewal as an indepent contractor with current employer but I am strongly anticipating that relationship won’t work and that his boss wouldn’t offer a fair/competitive arrangement. Any insight/advice would be appreciated.
No, an IC doesn’t necessarily just have to be paid for medical services provided. It’s all about the contract. Certainly many IC situations are very similar to employee situations. If he doesn’t want a boss, he needs to be in practice for himself, either alone or with partners. Even in many of those situations, such as mine, there is the risk of losing the contract with the hospital, which is essentially the same thing as being fired.
Ok that’s a great point. No job security/guarantee when working in a practice as an IC. You get to be independent but you’re not protected. The guy offering the new job would offer a partnership for sure but that’s also a big decision for someone (my husband) who’s already had bad luck. Would you recommend doing at least a year as an IC or employee before working on a partnership with another surgeon? I’m sure it depends but that’s why we are collecting data. how do you usually advise on partnership arrangements vs solo private practice?
I like the idea of ownership/partnership. But it’s like marriage. Get engaged first for a while and don’t become a partner with someone with a toxic personality.
If you are moonlighting as a resident, do you get to choose if you want to be nan independent contractor vs employee or does the hospital/practice that you are moonlighting for determine that?
Do you get to chose if you are an independent contractor vs employee or does the hospital/practice that you are moonlighting for determine that?
The IRS does technically. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
But it’s generally the employer in practice.