Why ‘Going 1099’ Won’t Solve All Your Financial Problems

There is a weird belief in the physician financial space that somehow converting your earnings from W-2 (employee) earnings to 1099 (independent contractor) earnings will dramatically improve your financial life. There are even people writing articles encouraging this, coaching others to get some 1099 income, and opening “micro corporations” in order to pull off this miraculous transformation.

Now, long-time WCI readers know I'm a big fan of ownership, whether that's owning stocks, your home, or your job. But I also think it's important that doctors look through the hype and know the truth about how the financial world actually works.

Employee vs. Independent Contractor

The IRS has provided guidelines about when someone should be an employee and when someone should be an independent contractor. While there's probably a little gray in the definition, there isn't nearly as much as some doctors seem to believe. Here's what the IRS says about the subject:

“It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold and deposit income taxes, Social Security taxes, and Medicare taxes from the wages paid to an employee. Additionally, you must also pay the matching employer portion of Social Security and Medicare taxes as well as pay unemployment tax on wages paid to an employee. Generally, you do not have to withhold or pay any taxes on payments to independent contractors.”

It is primarily the employer's job to determine if you're an employee or an independent contractor. If your bosses screw up and call you an independent contractor when you're really an employee, the IRS can come after them and make them pay the payroll taxes that should have been withheld from your paychecks. How does the IRS say an employer is supposed to determine this? It's all about control and independence. The more of each you have, the more likely you are an independent contractor.

There are three main categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
3. Type of relationship: Are there written contracts or employee-type benefits (a pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?

The 20 Factor Test

Sometimes, this is called the “20 Factor Test,” but there are no absolutes on the test. It just comes down to the weight of the evidence (i.e., the opinion of the auditor). A good summary of the 20 factors is:

1. Level of instruction: If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
2. Amount of training: Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.
3. Degree of business integration: Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
4. Extent of personal services: Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
5. Control of assistants: If a company hires, supervises, and pays a worker's assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
6. Continuity of relationship: A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
7. Flexibility of schedule: People whose hours or days of work are dictated by a company are apt to qualify as its employees.
8. Demands for full-time work: Full-time work gives a company control over most of a person's time, which supports a finding of an employment relationship.
9. Need for on-site services: Requiring someone to work on company premises—particularly if the work can be performed elsewhere—indicates a possible employment relationship.
10. Sequence of work: If a company requires work to be performed in a specific order or sequence, this control suggests an employment relationship.
11. Requirements for reports: If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
12. Method of payment: Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
13. Payment of business or travel expenses: Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
14. Provision of tools and materials: Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
15. Investment in facilities: Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
16. Realization of profit or loss: Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work are generally employees.
17. Work for multiple companies: People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
18. Availability to public: If a worker regularly makes services available to the general public, this supports an independent contractor determination.
19. Control over discharge: A company's unilateral right to discharge a worker suggests an employment relationship. In contrast, a company's ability to terminate independent contractor relationships generally depends on contract terms.
20. Right of termination: Most employees can unilaterally terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.

I know that's a lot to read and digest. I didn't include all that because I wanted to put you to sleep. I included it because I wanted to disabuse you of the notion that you can just choose what you want to be, that any doctor in any work situation can be either an employee or an independent contractor. As you can see, that just isn't true. The other thing that sometimes gets suggested is that you get some of your pay from your employer as W-2 wages and some of it as 1099 payments. Sometimes this is set up as your “regular pay” and your “on-call pay.” It would be very hard to justify this sort of setup to an auditor. Maybe that's fine with you, since the penalty usually goes to the employer anyway, but it seems bogus to me to be both an independent contractor and an employee doing the same work at the same place.

More information here:

W-2 vs. Self-Employed

How to Get Locums Work Without a Locums Agency

Demanding a Change to 1099?

Another technique I see advocated is to demand that your employer make you an independent contractor because “being a 1099 is so much better.” Well, maybe it's better, maybe it's not. It really depends on how much they pay you. Remember that an employer must cover half of the payroll taxes and the costs of any provided benefits like health insurance, disability insurance, and retirement accounts. But they don't have to provide any of that to an independent contractor. They don't even have to provide work equipment or a place to accomplish the work.

So, if you somehow are going to transition to being an independent contractor, you had better make sure you're being paid a lot more to do so. The employer half of Social Security and Medicare taxes on $200,000 in 2025 is almost $14,000. Add in another $15,000 for insurance and $10,000 in matching retirement contributions, and you'd have to get a $39,000 raise with this transition just to break even. Most doctors will need to be paid 10%-20% more to come out ahead as an independent contractor.

A Little 1099 Income Doesn't Help Much

There is also this weird idea that somehow making a few thousand dollars on a 1099 results in massive tax deductions. I'm sorry, that's not the way it works. To understand why, you need to understand the tax benefits of being self-employed. There are primarily two. The first is that your work expenses are deductible. That might include scrubs and stethoscopes and CME trips and so on. However, you can't make $350,000 as an employee physician and $5,000 as an independent contractor physician and then somehow write off all your physician licensing, board certification, DEA fees, CME, travel, and equipment expenses. You have to pro-rate them. And when you only have a little bit of 1099 income, you only have a little bit of deduction.

I know there are a lot of doctors doing this wrong and claiming deductions they don't deserve, and they're not getting caught in audits. But that doesn't mean the practice is legit. It isn't. It's cheating on your taxes.

Either way, your tax deduction in the hypothetical situation above is probably less than $1,000.

The second big tax deduction associated with self-employment is choosing your own retirement plans. If you have a lot of self-employment income, you can put a lot of money away into retirement accounts. That includes $70,000 [2025 — visit our annual numbers page to get the most up-to-date figures] into a solo 401(k), $7,000 into a Backdoor Roth IRA, catch-up contributions into both if you're 50+, and massive contributions ($100,000-$200,000) (especially for older docs) into defined benefit/cash balance plans.

But you know what is required to make big contributions to self-employed retirement accounts? Large amounts of self-employed income. If you only make $5,000 in 1099 income, you're certainly not going to contribute more than $5,000 to self-employed retirement accounts.

The only exception where a little 1099 income can help a lot is having the ability to open a solo 401(k) and roll over a big traditional or SEP-IRA in there so you can do Backdoor Roth IRAs each year without being pro-rated.

More information here:

Who Owns the Doctor Jobs?

The Importance of a Career

Micro-Corporations Don't Help Much

Some advisors recommend you form a professional LLC or corporation. Fine, knock yourself out. It usually only costs a few hundred dollars and a little bit of paperwork. But don't feel like you're doing something special, especially when you're not making a lot of 1099 income. Almost all the same business expenses that you can deduct with an LLC or corporation can also be deducted by a boring old sole proprietorship that you don't have to do a thing to form.

The only real exception is if you make an S election (aka form an S Corp), which can make sense when you have a lot of 1099 income. This will save you Medicare taxes (2.9%) on any amount of your income that you can justify as a distribution rather than a salary. You still have to pay yourself a fair salary and pay both halves of the payroll taxes on the salary, of course. And no, you can't set your salary at some ridiculously low amount. It has to be reasonable and appropriate. Frankly, if you're not taking a distribution of at least $100,000 a year, it probably isn't worth the expense and hassle of forming an LLC or corporation that makes an S election. And since malpractice is always personal, incorporating doesn't reduce your main liability either.

How to Do Better

If you want to make more money, plan on working a little bit harder. You can work more for your employer or find a second employer or add on more work for yourself as an independent contractor or do something entrepreneurial that isn't really practicing medicine at all. When you work more, you shouldn't be surprised that you can earn more, whether you call this second job a “side gig,” “job stacking,” “employment-lite,” or some other euphemism. If you want a little more control over your work situation, especially a second job situation, consider going the independent contractor route, but make sure you're really an independent contractor.

Hint: if all your work is for the same company, how independent are you really?

Having significant self-employment income in addition to or instead of W-2 income opens up a few additional retirement account options to you, but you can always save more in taxable, even if you don't have another retirement account available. Also, be careful not to mix an S Corp with a W-2 job. There's a tax penalty associated with doing that.

What I don't want you to do is buy into the hype that somehow just becoming an independent contractor, especially just for a tiny amount of 1099 income, is somehow going to change your financial life dramatically. It isn't. There are no shortcuts on the pathway to financial independence. You have to earn a lot, save a big chunk of it, invest it wisely, and wait patiently. You can get there, though—even if your only income is as an employee.

What do you think? Why do so many doctors think a 1099 is the secret path to wealth? Why have you done 1099 work?