The question comes up fairly often — some jobs are even offered as one or the other — the physician can choose to be a W-2 employee or a 1099 independent contractor.
Questions like this now often end up on the WCI forum. For example,
- 1099 vs. W2
- best option? W2 vs. 1099
- W2 vs 1099 in terms of saving
- 1099 vs W2 audits and anti-kickback
Read on for The White Coat Investor’s quick take, then read the posts above for crowdsourced answers to similar questions. This post originally appeared on The White Coat Investor.
Comparing Independent Contractor Jobs with Employee Jobs: 1099 vs. W2
Question:
Thanks for all the great sound advice. I am a MSK radiology fellow looking at two offers. One is an independent contractor and one as an employee. I am having a hard time comparing apples with oranges!
Answer:
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 The Tax Structure
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.
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 $127,200 (updated for 2017) 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 at least $20-30K less than an independent contractor salary.
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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 $54K 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 $1,000 to $2,000 per year in taxes. Everyone will be a little different in this respect of course.
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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!
Hi POF or WCI ( not sure if you both are same i.e. James),
But here is my situation. Your detailed analysis would be appreciated.
Currently I am a part of 15 physician group, all working as independent contractor. The owner wants change it to PC friendly Medical corporation model in which we will be employee.
Currently we get 1099 after subtracting overheads from the collection. Instead as an employee we will get W2 and benefits from the same amount. Employee won’t put any extra money. So basically you get what you kill.
So question is what’s better? 1099 or W2?
We are trying to decide as a group. Can someone break 1099 advantages tax wise, employment of minor in your own company, bigger 401k limit, 20% pass through deduction etc. assuming $180k amount.
Thanks,
Pran
Not exactly free money. As a 1099er you still have to pay your own taxes quarterly, double SS, medicare, health insurance, expenses, probably ACA tax, maybe malpractice, disability ins, etc. depending on the deal. But you still may come out ahead. I went W2 because I had a kid 2000 miles away in college and the health ins was great ins and covered her at college.
If you can, do both! You are allowed to contribute $18k (if under 50yrs of age) to your 401k as an employee, and even another $18K to a 457b if eligible as an employee, AND up to $54k to a solo401k or SEP(or 20% of net profits from your 1099 gig, whichever is less) annually. Pretty good deal, especially if you’re younger (I unfortunately am not), to allow plenty of time for compounded interest. That’s $90k a year that you can sock away, in tax sheltered accounts, decreasing your adjusted gross income and overall tax burden right now.
When we closed our practice, we contracted with the new provider company as employed physicians. 1099 paid $350/day more than W2. W2 was very robust with insurance matched 401k CME etc. I think 30k per year differential is way low. It was more like 90k
Best
I’ve always wondered about this. More clear now. Also, if all things are equal after the increased pay of 1099, I would choose W2 because less hassle. Payroll taxes? No thanks.
Tracking expenses is another aspect I didn’t love about working as an IC. The deduction is nice, but logging and saving so many receipts is tedious business. I do it now for this site, but there aren’t as many expenses, and I’ve developed easier systems with Google Sheets.
Best,
-PoF
I have never had 1099 income in the past. If gaining 1099 income on the side, on top of employment income, how much tax should I expect on the 1099? I am just a fellow and will probably make 100k in employment income this year, plus 50k in 1099. Am I looking at payroll tax, federal tax, state tax, FICA etc at the tax bracket over 100k? seems like a lot.
Unfortunately, yes. Just wait until you get out of fellowship. I can pretty much count on paying a 6-figure tax bill annually, or at least I did before I dropped to part-time.
One good thing is you stop paying social security taxes after $128,700 in income (2018).
Best,
-PoF
First of all, most 1099 vs. W2 setups are not “all things being equal” in most parts of Medicine. Only a newbie would say something like.
The workplaces are different and work expectations are different typically for both. For example, who will get paid, and especially who will not get paid, if work structure changes and extra work is required? If the work asks you to sit on a committee and you don’t want to, who has the easy option of saying no? Who has more freedom to take time off? Who can easily change hours and who cannot?
And whose hours get cut at the first sign of financial trouble?
This can go on and on.
This is where Dr. Dahle’s point about finding a job that makes you happy trumps every other argument. Especially as most Physicians have so many job options at any give time – this kind of freedom cannot be explained, only emotionally experienced. Non-physicians typically don’t get to feel it- think mid career people during last economic meltdown.
I trust Dr. Dahle’s calculation of difference of 30 k per year – that is about 15 dollars per hour for a full time working person. This kind of number is not that hard for most Physicians to negotiate or arbitrage. Mind you arbitrage demands flexibility and being nimble.
There is a another factor at play here. In my experience, most (almost 9 out of 10), Physicians are very nervous about making financial decisions of this kind. They talk about “benefits” or “retirement plan” like some kind of mysterious oceans that cannot be fathomed. Many stay at jobs that suck because of “benefits”.
This is where I have one more thing to add to the mantra of – Live like a Resident for 5 years. Try different jobs for 5 years and stay open for new opportunities. Try 1099 and W2 both. Don’t take up jobs with non-competing clauses. Don’t pigeon hole yourself into positions where just a change of job will be a herculean task. Earning 10 or 20 k or even 50 k more or less isn’t going to make a big difference in the bigger schema of things.
With the rising cost of health insurance and the frequent presence of additional benefits like profit sharing and 401(k) matching, I’d say the difference is quite a bit larger than $20,000 to $30,000 now.
I could easily count $15,000 for health insurance, $21,000 in match and profit sharing, $10,000 in Social Security paid, a $5,000 CME stipend and I’m already over $50,000 in benefits without including things like dental, vision, and some limited disability and life insurance. Add malpractice to the list and we’re probably close to $70,000 in benefits.
Best,
-PoF
Good points. They can be added in editorial commentary too in the article itself.
If we come at this from the point of view of your numbers, we are still talking about 35 dollars an hour difference. Let’s run with 50 dollars, for simplicity sake – 100 k per year is nothing to sneeze at.
As we have noted in many places on your site as well as WCI’s- there is a vast intra-specialty income difference, and 100k is just a beginning.
A few things –
1. Not all W2 employers are as generous as you say.
2. The health plan may not be so good, while it may take away ability to contribute to Stealth IRA – the Health Savings Account.
3. The 401 k may not add up to 54 k.
4. The investment choices may not be good in the plan. A few points here and there will cost a lot in the long run.
5. You may not have the ability to employ your family.
6. Some of things you mention are negotiable. For example, if this is a Physician group, malpractice and CME are negotiable.
7. There are soft-dollar negotiable items that are easier to negotiate in one situation vs. the other. For example – time – time to do EMR, time to see patients, time per patient, administrative time, vacation time.
8. And still W2’s will be safer than 1099’s if things go bad, working for an organization.
Anyone doing this 1099 vs. W2 comparison should not just look at the first number.
If one is really serious, then be ready to put some brain grease into it – all of this can be calculated. For example, future value of a vested retirement plan can be calculated. But do not underestimate the difference a work place can make in your quality of life.
I am a recent, happily retired DDS, age 60. I will shortly be tutoring SAT math just several hrs/wk, open a solo 401k and then be able to roll over my Dental pension into the newly created solo 401k – so as to avoid any tax-deferred rollover IRA $, and leave open the ability to continue doing annual back-door Roth conversions w/o tax consequences. I obviously wouldn’t have this option if I were an employee/W-2.
Unfortunately, my physician wife, who was self-employed/Schedule C, has now been a corporate employee for a little while, and her ‘pension guy’ says she needs to immediately pay out her old employees and herself from her self-employed pension plan. This would have to be an IRA rollover since she has a very large position in a closed-to-new-investors mutual fund that I don’t want to liquidate (she now has a 403B w/ the new corp/Northwell Health) and Schwab would accept an ‘in-kind’ rollover w/o selling any positions in the old pension to an IRA.
Ya win some, ya lose some!
Wow you’re providing so much helpful content to the reader. No wonder your blog is growing so fast and successfully!
Being an independent contractor has never crossed my mind (I’m not a doctor). After graduating from school, my natural next step was to get a full-time job with full benefits. Being an independent contractor would equal being a freelancer. I think might do that one day ^^
Yes, independent contracting / freelancing / entrepreneurship is not at all limited to the physician world. I’ve done anesthesia as both an employee and a freelancer on a 1099, and now I have income from this site, so I have both types of income now. The vast majority of bloggers who monetize for a decent income will have the benefits of the independent contractor.
Best,
-PoF
Wife is in Anesthesia and we are trying to figure this very thing out right now. What do you prefer?
1099 is good if your household taxable income doesn’t exceed $415,000 (ideally closer to $315,000). If you’re over that between the two of you, it’s kind of a tossup and depends on how the salaries compare.
Best,
-PoF
Thanks for sharing this, POF. One potential side hustle for me in retirement is contract engineering work. I haven’t read too much into the pros/cons of contract work so this article is very helpful.