I am often asked whether it is better to take a job as an employee or a job as an independent contractor or some other version of being self-employed. The short answer is “it depends.” The best answer may be “both.” Let me explain.
Upsides of an Employee Job
There are a few significant benefits of an employee job.
Simplified Taxes
An employee is paid on a W-2 Form. Her taxes are relatively simple to file. Her employer pays the employer half of payroll taxes (Social Security on the first $118K of earnings, and Medicare taxes on all earnings.)
Employee Benefits
Her employer may also offer some sweet benefits like a 401(k) with or without a match, some portion of the premiums on health insurance, and maybe even some portion of the premiums on a group disability or life insurance policy. To the right family, these sorts of benefits can be very valuable.
Downsides of Being an Employee
There are two significant downsides of being an employee.
Unreimbursed Business Expenses
The first is that it is harder to deduct unreimbursed business expenses. These have to be deducted on Schedule A and are subject to a floor of 2% of your income. For a physician earning (technically your Adjusted Gross Income, or Form 1040 line 38) $200K a year, that means the first $4K of unreimbursed business expenses are not deductible at all. That sucks.
Not So Sweet Benefits
The second downside is that you are stuck with whatever benefits (especially retirement plans) your employer sees fit to offer you. If the maximum contribution is low, or there is no match, or the expenses are high, or the investment options are bad, well, you're stuck with it. If your health insurance is crappy, you're welcome to go buy a plan on the open market, but if the employer is paying the premiums, it's usually a take it or leave it situation. Same with other employer-offered insurance.
Downsides of Self-Employment
More Complex Taxes
An independent contractor is paid on a 1099 Form. Her taxes are a bit more complex because she is both the employee and the employer. So she must pay both halves of the payroll taxes, although the employer half is tax-deductible.
No Automatic Benefits
She also gets no benefits except what she is willing to purchase for herself. Since she is just one person, she gets no benefits from an economy of scale when it comes to benefits (including malpractice insurance.) If she wants group disability or life insurance, she will need to get it from her specialty society.
Upsides of Being an Independent Contractor
Tax Deductions
Her work-related expenses are 100% deductible on Schedule C. Work-related expenses that go on Schedule C are far better than those that go on Schedule A because there is no floor.
She also gets to deduct her health insurance premiums, HSA contributions, and retirement plan contributions, which are all above the line deductions.
Choosing Your Own Benefits
Best of all, you get to choose your health insurance plan, your HSA, your 401(k), and if desired, your personal defined benefit plan.
Which Job Should You Take?
So, if you find yourself comparing an employee job to an independent contractor job, and you like both equally but are unsure which one pays more, it is best to try to do an apples to apples comparison.
First, take the employee job's salary and add to it the value of any benefits that you actually think are valuable.
Definitely consider any available
- 401(k) match,
- HSA contributions,
- paid CME or vacation,
- and any premium assistance on your insurance policies such as malpractice, health, disability, and life.
Then add in an amount equal to the non-deductible portion of the employer's half of your payroll taxes.
For Social Security, that is 6.2% * (1- your marginal tax rate) * $118,000.
For Medicare, that is 1.45% * (1- your marginal tax rate) * your entire salary + 0.9% * (1- your marginal tax rate) * (your salary – $200K or $250K if married).
Then take what you would be paid as an independent contractor and subtract the value of the deduction on everything you could deduct that you would not be able to deduct as an employee.
This might include the cost of
- uniforms,
- CME expenses,
- the employer half of payroll taxes,
- health insurance premiums,
- HSA contributions etc.
- If the employer-offered retirement plan is crappy, you can also assign a dollar figure to the ability to choose your own.
Now, compare the two values. If one is obviously dramatically superior to the other, you're done (or at least can use that in ongoing negotiations.) If not, then choose the job based on other factors.
As a general rule, for a physician with an income near the median physician income in the $200-225K range, I would estimate that a typical independent contractor job ought to pay about 10% more in order to be equal to the typical employee job. But that rule of thumb is worth about what you paid for it as there is so much variation out there.
The Best of Both Worlds
Perhaps the best of both worlds is to get some of your income as an employee and some of your income as an independent contractor. That way you can write off all your work expenses that are required for your independent contractor job (but are used for both jobs — like CME, uniforms, licensing fees, DEA fees, specialty society dues, etc) against your 1099 income. This way also lets you have your employer provide your benefits and at least the employer portion of the Social Security taxes, which are the lion's share of the payroll taxes for a doctor with a median physician income. Another bonus of having two jobs is you may get two 401(k)s as well, allowing you to protect more of your hard-earned money from both Uncle Sam and any potential future creditors.
A Note On Partnerships
Many doctors, including me, are members of a partnership, which is often formed into an LLC, and are paid on Schedule K-1/Form 1065. This has a lot of the benefits of being an independent contractor (lots of easily taken deductions) with a few of the benefits and downsides of being an employee. For example, you may get an economy of scale when negotiating benefits. However, you are probably also subject to the rules of your partnership 401(k) and other retirement plans.
What do you think? Are you paid on a W-2, 1099, K-1 or all of the above? What do you like about it, not like about it? What would you recommend to other physicians? Comment below!

I’m paid on a W-2 but considering branching out on my own and starting my own clinic. As WCI stated, taxes are simple to file when paid on a W-2 but I’m at a company with a 401k without a match, crummy health insurance plans, limited disability and life insurance policies. I guess it’s a double-edged sword where I’m in a high-paying specialty but paying out the nose in taxes currently with a fair number of unreimbursed business expenses that are subject to the 2% floor
Perhaps I’m just grumpy as our year-end bonuses arrive and it’s 30% of what I was expecting. Guess you’ll always have to worry about people up top skimming from you as an employee…
I love this topics that have tax planning related issues. Keep them coming.
Like Jim recommends, I have both options and am loving being an employee getting a W2 and also an independent contractor on a 1099.
I think having a spouse that is a W-2 and has decent health insurance options makes the 1099 vs W2 argument a bit more one-sided toward 1099. At least it was in our case. I loved the ability to go from contributing about $24,000 (with match) as W2 to contributing $53,000 to a 401k. My offer was slightly less than 10% more for 1099 vs W2 but I figured with the health insurance not being a factor since we could go on hers (equally as good as well) it made it a no brainer to go 1099 when offered a choice. The offer was $110/hr as a W2 vs $120/hr as 1099 which I was then able to negotiate up to $125/hr. Who knows if they would have budged if I picked the W2 option as well.
Doug – were the 1099 and W-2 options from the same employer, or were these 2 offers from 2 separate employers?
On a related topic…my wife who had been working full time, went down to part time after our second child recently. She is now paid on 1099 as a physical therapist. She probably will make about 20,000 this year working part time. I would like to start a solo 401k for her and try to shelter as much of her income into the 401k as possible since we don’t really need it given my high income. (We will be in the top tax bracket with or without her 20 grand) Question is this: if she makes 20-24 grand can we max out the solo 401k at 18 grand or can we only contribute 20% of the 20 grand?
I believe with a solo 401k we can max it out no matter how little income she makes where as a sep IRA we can only contribute 20%. Am I correct? Thanks!
Solo 401k employee contributions can be 100% of compensation up to $18,000 in 2015, plus more as catch-up contributions if she’s over 50. You can also be able to make an elective ’employer’ contribution if up to 25% of compensation, but there are some other calculations that go into that funding mechanism.
http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
Thanks,
Very helpful!
Good news. You can do even better. You can put in $18K + almost 20% of the $20-24K. It could be just about everything she makes. She’s in a really sweet spot income wise that way.
Wait…How do I add the extra 20%?
How? By making an employer contribution. If you have a Vanguard individual 401(k) you do that the same place as the employee contribution, just check the other box.
One of the main benefits we see for clients getting 1099 compensation is the ability to choose their own retirement plan, whether that’s a SEP, SIMPLE, Solo 401k, etc. For high earners who are 1099 compensated, the ability to fund a SEP at 52k represents substantial tax savings vs the system physician who is capped at $18k in their 401k.
Except the SEP prevents them doing a backdoor Roth IRA too. Almost always better for a doc to do an individual 401(k) over a SEP. And SIMPLEs? An even lousier choice for a independent contractor doc who really wants to put a lot of money away.
But I agree that is a huge benefit of self-employment. You can even add a personal defined benefit plan on top of the individual 401(k) if you really want to go crazy with pre-tax savings.
Why cant you do a backdoor ROTH and a SEP? I took a look at the forms and it doesnt seem like theres nothing that doesnt allow. If you see a specific IRS ref/ form, I’d love to see it. Thanks.
You can do them both, just have to pay taxes onyour ROTH pro-rata based on how much money you have in SEP. However if you dont have any SEP, than no taxes on ROTH.
You can do it, you just don’t want to because it will screw up what you were trying to do with your backdoor Roth IRA. Read this post (and perhaps IRS form 8606) to see why:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Thanks for providing the formulas to compute compensation for comparison purposes. I plugged in mean state and specialty specific comparisons for disability and malpractice insurance, and after tallying up all the other benefits (nice match, travel/CME fund, bonus, generous health insurance subsidy, etc.) my W-2 job is worth just shy of 50% more than the headline salary in total.
That’s a pretty serious benefits package. Don’t see that very often.
The math is a bit iffy since I counted the bonus in there (since it’s not part of listed salary). If that’s backed out the other benefits still amount to nearly 30%, driven in large part by a 10%-of-IRS-limit match and fully covered/free to us malpractice. The rest add a few percent.
I am an employee at an institution with relatively good benefits. One of the ones I am looking forward to (assuming they don’t cut it) is that they pay tuition for your kids to go to any college (even Harvard). The amount they pay will be considered taxable income though, but I think it is still a pretty good deal. Some of my colleagues have put as many as 4 of their kids through school like this.
Anyway, I have a question for WCI. My kids are 3 and 1, so a long way from college. I am funding a 529 for both of them as though this benefit might get axed. I don’t think it will since it has been in effect for decades, but as they say, there is many a slip twixt the cup and the lip, so who knows. Do you think I should fund the 529s as though this benefit did not exist at all or fund them at a scaled down version of what I otherwise would and invest the difference in something else? I’m already maxing out 403b/457/HSA, Backdoor Roth IRAs (for myself and my wife) and putting a little into taxable.
I’m not WCI, but I have looked into the 529 plan as an ideal savings vehicle. It’s very much like a Roth, in that you contribute after tax dollars, which grow tax free. In addition to those benefits, the money in the 529 is completely under the control of the parents, but is considered to belong to the children, so it is not part of your estate. This is a very valuable feature if you are concerned about being subject to the estate tax. Parents may pay for tuition directly for children without being subject to the gift tax, so if you pay tuition directly, the 529 becomes a great way to pass on money to their children or grandchildren without paying estate tax. If you use the money for other purposes, you pay the tax on earnings plus 10% extra tax on earnings only. There are a few catches, including the fact that the law can be changed at any time, and more limits may be placed on the money. Indeed, Obama proposed limits this year, but the proposal was quickly withdrawn due to widespread opposition. If you change your mind, the 10% penalty would be paid for by one average year of S&P 500 returns.
I’d scale back a bit. I already scale back my kids’ 529s. I’ve only been putting something like $3500 a piece in there each year as that is the maximum state tax benefit. You can always use other savings or cash flow to help pay.
I contribute way more because 529 in FL are protected from creditors
i work about 0.8 FTE for the local med school, meaning I get benefits. I did decline the pension though as I have to contribute fully and my employer does not contribute anything. Essentially I would be paying for someone else to manage my money, something I’ve done all my life. I am also self employed and leave most of my money in the corporation, it’s great as a tax deferment vehicle as I do most of my investing there.
You’re using a C corporation for your investments? I’m curious about how your taxes stack up after you’ve paid both the corporate tax and the personal taxes compared to just paying higher personal taxes.
Question for WCI or anyone who can answer.
I am an employed ED physician who receives my pay on a W2. Currently with my job I have a 401k with 5% match and a 457 plan which I max out every year. I also do backdoor roth conversions for my wife (homemaker) and myself every year. I also currently moonlight at a small rural hospital that is part of the hospital system I am employed at and receive that pay as an employee on a W2.
My question is this: If I did my moonlighting as an IC on a 1099 would I be able to invest income from that job into a solo 401k above the max amount I am putting into retirement accounts with my job as an employee. I guess an additional question would be could I put this money into a SEP IRA instead of solo 401k and convert it all to my ROTH account every year. Just wondering if that is possible as well, but I’m at the point now where the tax break now means more than later.
Yes. And Yes.
Thanks, Am I bound by the individual accounts (401k and 457 as employee; solo 401k as IC) yearly contribution limits or is there a total amount I can put in cumulative retirement accounts annually. I did the best to find the info for myself but was unable to.
If the two 401(k) plans are via separate employers they have separate contribution limits. Each has a $18k pot this year, for instance. If you switched one job to 1099 and did a self-employed plan than that limit would be independent of the other job’s 401(k) and 457(b) as well.
You only get one employee contribution no matter how many 401(k)s you have. So one $18K contribution. However, the $53K limit is per plan, so you can have employer contributions to another 401(k) even if you use up your employee contribution in the first one.
https://www.whitecoatinvestor.com/multiple-401k-rules/
457 and 401(k) have separate limits. Each unrelated job has a separate 401(k) limit.
This is what I’ve been thinking about for some time. I am employed and have a 401K with my employer. I also set up at S corp for moonlighting and would like to save some of that money. I also backdoor Roth each year.
So it seems that I can set up a solo 401K? My moonlighting income should be ~20K this year…could I up $18K into the new solo 401K?
See this post for a discussion of this exceedingly complicated topic:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Glad that you have amended your outlook a bit for employees from your book. I felt that you didn’t give a full perspective for the perks available to W2 employees there. I know that the benefits we receive could not be matched by working as an independent contractor: $15k CME, $20k recruitment bonus of fellow docs (x4 this year!), HSA free bonus, disability $10k/month free, weekly recruitment dinners, company perks of gym/massage/discounts/parties, 401k, 457, medical insurance, dental insurance, paid vacation, lots (12 weeks) of time off… Going to work for a big company has HUUUUUGE benefits that have been generally undersold here.
Oh yeah! There is also that whole loan forgiveness program to consider too.
what is your specialty?
Wow, I’m employed and my benefits don’t even touch those. I wouldn’t even know what to do with 12 weeks off….. I’d prolly start moonlighting 😉
Interesting that an employer is willing to pay so much. As a general rule, I find far more employees that feel they’re underpaid than overpaid, and when I look at their compensation, I would have to agree. While data is not the pleural of anecdote, the salary surveys also support a lower total compensation for employees than for partners.
Agree, and the longer someone is an employee the more they are producing and the less they are generally receiving, the opposite of private practice.
Most of these “benefits” (those yours sound quite prolific” can be had by independent practitioners for a much smaller cost than your employer tells you it costs. These things can be changed on a whim as well, whenever the management gets greedy or has a rough patch.
There is just no comparison to the 53k+defined benefit that can be done on a 1099 or mixed w2/1099. More opportunity.
Different personalities are of course interested in different things of course and some people really dont want to think about any of these things, no big deal.
Also as an independent contractor you can deduct a home office if you do any charting at home. If you have a home office and a hospital office, you can deduct commuting between the two offices. You can also deduct businessn laptops and cellphones. If you are a corporation you are allowed 1 corporate retreat per year that is tax deductible. You can fly all the employees to a remote destination and discuss business related material.
Alex, be very careful with the home office deduction. It requires quite a bit more than some charting at home. It needs to be the primary site for your business, an essential–and not just useful–part of your business model, or the site where you see patients. There are pretty high standards that I don’t think most 1099 physicians are going to be able to meet. Physicians have definitely lost in court when they had another office available to them, for instance.
I do this as an employee as well (telemedicine, home office, deducting commute to hospital office) but obviously the 2% floor limits its usefulness
It doesn’t need to be the primary site. It needs to be used exclusively and regularly for your business.
https://www.whitecoatinvestor.com/why-i-didnt-take-the-home-office-deduction/
My issue has been the exclusive part.
I feel like I get the best of both worlds. 70% of my income is w2 at a major hospital corporation with 403b with match, 457b, mega back door roth, 401a nonqualified plan. CME reimbursement, license fees, malpractice, life, health, group and individual disability all paid for. 10% is 1099 20% is k1.
That’s a nice set-up.
I have 90% W2 with all benefits/retirement plans/ Ins and 10% 1099. I have a SEP IRA that I roll into my employer 401k every year so I can continue to do the backdoor ROTH IRA (my employer 401k has an open brokerage option so I can invest in whatever I want !) I also have a side RE business that I can use to deduct more expenses and it generates passive income.
I recently went through these same calculations comparing two positions in similar community hospitals. It’s tricky estimating the effect of taxes, I came up with an AGI for both jobs and did a rough estimate of taxes I would be saving as a K1. It’s also somewhat tricky to figure how much you will make as a partner in a fee for service environment (income is variable), rather than a corporation just paying you extra per hour to work as an IC. I would think some specialties would be hard to figure out just based on what your responsibilities are, call, teaching etc- in EM we are paid hourly so after all the calculations you can get it down to one number to compare. You also need to factor in what is important- I didn’t care about life or disability insurance as I have my own, nice to have more but not that valuable to me. I took the employed job, better money and better lifestyle choice for my family. WCI mentioned in a Friday question awhile back not to make the decision based solely on how your paid, there are much more important factors to weigh in taking a job.
After reading what is written below, I think you will find being a Dr. that is an independant contractor is close to impossible. (Taken directly form the IRS.)
The courts have considered many facts in deciding whether a worker is an independent contractor or an em- ployee. These relevant facts fall into three main categories: behavioral control; financial control; and relationship of the parties. In each case, it is very important to consider all the facts – no single fact provides the answer. Carefully review the following definitions.
Behavioral Control
These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work. For example:
Instructions – if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics, for example:
• how, when, or where to do the work
• what tools or equipment to use
• what assistants to hire to help with the work • where to purchase supplies and services
If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.
Training – if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.
Financial Control
These facts show whether there is a right to direct or control the business part of the work. For example:
Significant Investment – if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a signifi- cant investment is not necessary to be an independent contractor.
Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the Parties
These are facts that illustrate how the business and the worker perceive their relationship. For example:
Employee Benefits – if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an indepen- dent contractor.
Written Contracts – a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.
I disagree. I think it can be quite easy to set yourself up as an IC as a doc, especially if your business provides services to multiple other businesses.
Strongly disagree. I am definitely setup as an independent contractor. The contract with the hospital makes that explicitly clear. I control none of the staff. I just work my own hours and collect the professional fee for my patient visits. The hospital keeps the facility fee. As a result I am 1099, and have setup a 401k, profit share plan, and defined benefit for myself. I do not get ant benefits however, and do pay both the employer and employee sides of the tax bill.
I think this IRS ruling relates to companies who try to claim that a low wage employee is an independent contractor so they won’t have to provide benefits and certain labor rights (there have been recent cases against Uber and FedEx on this issue). I think if both parties agree that you are an independent contractor and file a 1099, it’s not a problem. It only comes up if somebody calls you and independent contractor and you think you should be treated as an employee.
Would be interested to hear your opinion on my current situation, which is a diff flavor not addressed (or I don’t see) above.
I have been set up as a Professional Association, subtype of Corporation, which we’ve elected to be an S-corp. My PA has a contract as independent contractor w/ the “employer”.
I personally am a W-2 employee of the PA.
The PA pays the employer side of FICA, deducts business expenses etc. Also pays monthly distributions.
As the sole employee of the PA, retirement has been set up via SEP-IRA, to which the PA makes monthly contributions of 25% of the salary paid to me.
There are lawyer fees associated as well as more complex accounting fees. I can’t seem to get a handle if this is actually saving me anything in taxes!
I am new to the investing side, so I don’t have any additional accounts but would love to hear what options are available to me to max out. Thank you
The tax benefit is in the distributions- you don’t pay FICA taxes on those.
A SEP-IRA is generally inferior to an individual 401(k) for the self-employed. I’d have to look into whether you can have that with an S Corp, but I think so.
I just became involved in a partnership with a P.A. In a Medspa. She is getting $100,000 salary and 75% of the business. Who should pay for medical conferences, plane tickets, hotels, CMEs, fees…? She says at her previous job as a W-2, they would give her $3,000 per year for all that. Now that she’s a business owner, I say she pays out of her personal $ and writes it off. What’s the right answer?
There is no right answer. It’s whatever you decide to offer as the employer.
Regarding the calculation you gave, if I calculate 10k, does that mean I will pay 10k more in taxes if I’m a 1099 or that I will pay the nondeductible portion of 10k? Thanks.
I’m a few months out of fellowship and work as an independent contractor. I’ve incorporated as an S corp and I’m still getting the hang of the accounting involved. Are there online resources for learning to manage the day to day/month to month accounting? For example, I understand I can open an individual 401k and make employee contributions as an individual, as well as an employer contribution through my S corp. My question is how to actually do this – ie, does the S corp cut a check/transfer directly to the 401k account? And if my employee contribution is pre-tax, does the S corp withhold that from my paycheck? Similar question for HSA account. Just looking for guidance on how to manage the details of these types of transactions. Thanks for helping out this rookie!
How come you chose an S corp? Are you making some of your pay “distribution” to save on payroll taxes? If not, you’ve probably given yourself a lot of hassle for not a lot of benefit.
As far as individual 401(k)s, I’m an LLC, not an S Corp, but I do both employee and employer contributions on the Vanguard Small Business Site. It is very easy and straightforward. It transfers from my business bank account directly to the 401(k). My HSA I just transfer from my personal checking account. I don’t think you can save on employer half of payroll taxes by paying it directly from your S Corp to the HSA, but don’t quote me on that. It’s probably worth looking that up as it would save you a few bucks if you can.
I think that must be the point. Protect your dividends after giving yourself a “fair” salary by avoiding the FICA tax. The S-corp filing is actually pretty easy via the IRS (forget which form it is).
Just to clarify WCI, lets say your LLC is paid 200k/yr. You pay yourself 175k. I have my i401k setup already and the first 18k goes it at 100%. I add the employer part of 20% of the 175k to max myself out to the 53k. Should I be reporting personal income as 122k? The other 25k that sits in the LLC obviously is a different story but I’m assuming I’m taking all the pretax dollars from the income my LLC is paying myself thus minimizing my income while being able to max out the i401k.
Yes, pre-tax from S corp salary. You can put in up to 20% of net salary (net of FICA tax) so it’s a little more than $175K of salary required to max it out.
I have been offered a 1099 job in a different city that I am currently working in. The offer is definitely better than my current W2 job. The new employer has told me that I can be either on a W2 with a fixed income or 1099 directly for the first year and it will be 1099 for the subsequent years regardless. I am trying to make a decision for the first year. I am trying to think what should be the most important factors determining my decision for the first year to be either on W2 or 1099.
It doesn’t matter if everything is truly equal, but bear in mind that you should be paid something like 10% more on a 1099 to make up for the fact that you’ll pay both sides of payroll taxes and your own benefits. If the salary is precisely equal, then take the W-2.
I am considering a 1099 deal. How do I calculate the value of deductible expenses (health premiums, malpractice premiums, etc) that would be reported on schedule c? Assume a gross income of $375,000…. is there s formula for such?
Thank you!
No exact formula. Insurance estimates aren’t hard to get. Health insurance goes on 1040, not schedule C though.
Thank you.