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At some point during their medical career, every physician struggles to determine if they want to be an independent contractor or an employee. A big part of that decision-making process includes considering the pros and cons of both types of employment. There are many differences to be considered between the two. One major difference between an independent contractor and an employee is how they are paid.
An independent contractor is a self-employed individual. They are paid directly for services rendered, taxes are not withheld from the amount they are paid, and earnings are reported to the IRS via a 1099 tax form. An employee is paid by their employer, federal and state taxes are withheld from their earnings, and both earnings and withholdings are reported to the IRS via a W-2 tax form.
FEATURES OF 1099 INDEPENDENT CONTRACTORS
An independent contractor should be paid more. While this sounds like an upside on the surface, an increase in salary would simply compensate for the fact that independent contractors do not have taxes withheld from their earnings and they also do not receive paid benefits. This increase in pay covers the potential income tax owed and offsets the expense of paying for benefits independently. There is a difference between after-tax income and after-benefit income, but it is unlikely to be extremely high.
Certain expenses can be deducted during tax filing. Some of the deductions a self-employed physician is able to deduct on their taxes can be quite significant. Others are nearly meaningless.
- For example, if a physician has employees, the payroll taxes paid on their incomes are deductible for the independent contractor. On a standard $300K income, an additional $4,300 can be saved in taxes due to the deduction of payroll taxes that were paid on behalf of employees throughout the year. *
In addition, a self-employed physician can deduct anything that is considered a reasonable cost of doing business. There is a myriad of expenses involved in running a dermatology practice and those expenses increase if there are additional physicians who work as employees. Most business expenses are tax deductible for the business owner.
For example, expenses such as gas mileage, CME costs, scrub costs, accountant fees, etc. are all potentially deductible. Going back to the same standard $300K income, these deductions create the potential for an additional $1,000-$2,000 in savings per year in taxes. *
*Numbers stated above are for illustrative purposes only and should not be taken into consideration when seeking employment.
There are no offered benefits for independent contractors. Independent contractors are not bound by contracts to a specific group, company, or organization. They are considered independent workers and they have the leisure to commit short periods of times to various different organizations. Because of this, they do not receive benefits from any of the organizations they do business with. They are liable for purchasing their own insurance and other related benefits.
Tools and resources are not provided. It is the responsibility of an independent contractor to purchase the equipment they deem necessary to perform their job. Many would consider this a con due to the loss of personal dollars, but it can also be considered a pro. The cost of tools and resources is likely deductible on an independent contractor’s tax return and additional temporary work can be done without the loss of additional dollars. Physician employers can allow the equipment to be used for any and all services performed by their group. Physician employers should keep in mind that independent contractors are not allowed to perform the primary work of the practice.
FEATURES OF W-2 EMPLOYEES
Employees are typically offered benefits while on the job. In contrast to an independent contractor, employees receive company paid benefits. These benefits include various types of insurances, vacation days, paid time off, etc. These benefits are provided at no cost to the employee. Legality issues often arise from this feature. Employers cannot designate a hired worker as an independent contractor in order to avoid providing them with benefits.
Federal laws are behind employees. A majority of federal laws pertaining to prohibiting discrimination in the work force only apply to W-2 employees. This means that independent contractors normally do not have legal backing relative to these issues. By law, employers are required to pay a minimum wage to employees. There are no established laws requiring a specific amount to be paid to independent contractors.
Employees are paid on either a fixed or an hourly, daily, or monthly basis. This loosely guarantees a flow of income to the worker. Independent contractors differ in that they are paid in lump sums at or around the time of services rendered.
Employees have to follow specific office policy and guidelines, which may feel restrictive to some, whereas being an independent contractor is as if you are running your own business. For example, schedule and vacation flexibility may be limited as an employee versus having the freedom to take a vacation or alter your schedule as needed as an independent contractor. Another example is specific for women who plan on growing their family. Maternity leave is covered for a certain period of time as an employee, versus an independent contractor who wouldn’t get paid anytime they take off from work.
Jacquiline Habashy, MD, FAAD, is a board-certified dermatologist in Beverly Hills, Calif.
