Considering an independent contract physician position can be scary. After all, as an independent contractor, you’ll be solely responsible for paying your taxes, the cost of medical malpractice insurance, and maintaining health and other benefits.
It’s natural to fear the unknown, but before you choose to remain a W-2 employee simply because it seems easier and more comfortable, educate yourself on the advantages and disadvantages of transitioning to an independent contractor role.
Employee vs Independent Contractor – What’s the Difference?
When you’re a big healthcare employee, your pay is a salary, and earnings are reported on tax form W-2. Income taxes tend to be fairly straightforward since your employer withholds all federal, state, and local income taxes (if applicable) along with your portion of FICA and Medicare tax. Employers also cover their portions of the FICA and Medicare tax.
Plus, your employer usually offers a nice a la carte menu of benefits like health, group life, and disability insurance. Employers also might cover the costs of certain business expenses like professional licensing and medical malpractice insurance. For these reasons, being an employee is easy.
However, everything has a downside. First, your take-home pay, on an after-tax basis, might be significantly lower when working as an employee versus contracting as an independent physician. Secondly, you’re stuck with employer-provided benefits, whether or not the options are good. For example, your employer may only match a small percentage of your 401K contribution. Plus, you’re unable to deduct any employee business expenses incurred but not reimbursed on your tax return, as a result of 2018 tax changes. Employee business expenses may include travel, books, meals, office supplies, or vehicles. Conversely, independent contract physicians can deduct a plethora of expenses, giving them a definite tax advantage.
As an independent contract physician, your pay is reported on Form 1099-NEC. The company paying you does not withhold taxes, so you receive the gross pay agreed upon in your contract. So, taxes are more complicated and require quarterly estimated tax payments. Additionally, you’ll be responsible for paying self-employment taxes. You’ll also need to seek out your own health care coverage as well as disability, life, and medical malpractice insurance. That said, you’ll be able to deduct certain business expenses like vehicles, business meals, business travel, continuing education, and office expenses against your gross income.
As an independent contract physician, you’ll file a Schedule C on your income tax return after receiving the Form 1099-NEC. However, you may decide to operate your practice through an S-Corporation or other business entity, which will make your tax filings more complex but potentially offer additional tax advantages. Note that Congress recently put forth proposed legislation to curtail S-Corporation benefits so you’ll need to explore this option further.
In addition to the deductions already mentioned, self-employed health insurance, 401K contributions, and half of your self-employment taxes are also deductible. While being self-employed might entail some up-front hassles, you may realize higher after-tax income in the long run. Remember, increasing income is generally never the easiest path to take.
Benefits of Independence
One key benefit of being an independent contract physician is simply the word “independent.” When you oversee your own destiny, the freedom to design the benefits and retirement plans that work best for you and your family exists. When an employer provides benefits, you’re limited to their offer because it’s usually part of the entire compensation package and is cheaper than declining and paying for your own benefits on an after-tax basis. As an independent contract physician, you don’t have to settle for inferior benefits.
Medical Malpractice Insurance Cost
One of the biggest concerns when contemplating an independent contractor route is the medical malpractice insurance cost. In our experience, though, the increased compensation realized more than covers the after-tax cost of medical malpractice insurance and other benefits. Most companies that contract with independent physicians have negotiated preferred third-party arrangements to provide medical malpractice insurance and other benefits at favorable rates.
Health Insurance Cost
Another fear we hear is health insurance costs a lot more. While your health insurance costs will likely be greater than within a large group plan, remember the following: 1) You now have the ability to choose the right plan for you and your family, 2) You have the ability to choose a high deductible plan and make tax-deductible contributions to an HSA, and 3) You can deduct your health insurance premium on a pre-tax basis. As an independent contract physician, you’ll have the flexibility and control to design your own benefit plan, including its cost.
Cost of Other Benefits
Finally, many doctors share their fear that other benefits, such as group disability and life insurance, will cost more or be unobtainable. For physicians with certain pre-existing medical conditions, that might be true. However, if you’re relatively healthy, these insurances tend to be more cost-effective over the long run when purchased independently. Since you own and control your insurance choices, you won’t need to worry about losing benefits should you choose to switch your contract to another company.
Business Perks of Independence
Again, one of the main perks of owning your business and contracting with a company is the control you have. You decide what benefits to purchase and when to terminate the ones you do not need, what retirement plans to implement and how much to contribute, what the best business structure is for your operation, plus how and who you should hire in your business. There is a lot of value to control!
There are tax perks, too. You can choose your retirement plan and contribute the maximum contribution if you so choose. This is a big advantage – as an employee, you’re subject to how much your employer wants to contribute. Plus, you can have multiple retirement plans, such as a 401K, and a defined benefit plan allowing for larger annual contributions than if you were an employee. And certain expenses paid for with after-tax dollars are now deductible on a pre-tax basis.
Did you know that if you have a child over the age of 14, you can employ them in your practice? If you employ your child, you can deduct their wages and related costs from your taxes, too. Depending on your business structure, you may or may not need to pay payroll taxes. In most instances, your children will pay little or no income taxes on their wages. Generally, the benefit works out to saving about 20-30% per year in taxes. For example, if you pay your child $12,000 and your net savings is 30%, you will save about $3,600 in income taxes.
Additionally, your child is eligible to contribute the earnings to a Roth IRA, which allows them to get a jump on retirement savings. That said, the greatest benefit is the ability to teach your child work ethic and responsibility.
While this article provides an overview of factors to consider when making the leap from employee to independent contract physician, you’ll need to think through your personal situation and prepare a unique comparison.
At Rx Wealth Advisors, we specialize in advice and consultation to Physicians exploring independence. We can assist in preparing an analysis that will help you make an educated decision. Feel free to reach out to us for a second opinion. Call us at 412-227-9007 or email firstname.lastname@example.org.
Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at email@example.com, or on the web at rxwealthadvisors.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.