Are Doctors Independent Contractors or Employees? | Independent Contractor or Employee for Doctors
Are physicians employees or independent contractors? Kind of a simple explanation. It depends upon the contract that you signed. Most physicians will be employees, meaning they must sign an employment agreement with a new employer. For some specialties like dermatology and anesthesiology. Those two are much more likely to be engaged as independent contractors than employees. Physicians can be hired as an employee and an independent contractor as well. It just depends upon what contract they signed. Let’s go through each one.
Doctor as Employee
In an employment agreement, the physician is an employee. They’ll receive a W-2, they’ll receive employee benefits: health, vision, dental, life, disability, and then have their medical license and DEA registration. There’ll be some amount paid for continuing medical education. They’ll also receive paid time off. Anyone who signed an employment agreement would typically get all the expected benefits of being an employee. The salary structure, usually, would be or could be a base salary, based on net-collections, RVU. Or it could be a combination of all three. It just depends. But in a normal situation, if you’re joining a hospital, a physician-owned practice, or a healthcare network. You’re almost always going to be an employee.
Are Doctors Independent Contractors
Some doctors choose to work as independent contractors rather than traditional employees, which impacts their tax and legal status. As independent contractor physicians, they receive payment through Form 1099-NEC instead of W-2 forms at the end of each year. This arrangement requires them to manage their taxes, including estimated quarterly payments and deductions, as well as securing their own medical malpractice insurance. The IRS views independent contractor doctors differently from employees, and they typically have more flexibility in their work arrangements, hours, and locations. However, they may not receive benefits like health insurance, retirement plans, or paid time off, which are commonly offered to W-2 employees. It’s essential for doctors to weigh the pros and cons of each working arrangement to determine the best fit for their career and personal needs.
Doctor as Independent Contractor
Let’s take anesthesiologists, for instance. Maybe they’re moonlighting on the side, infrequently working for a group, or they signed an independent contractor agreement. So, the legal distinction between independent contractors and employees will be. Instead of receiving a W-2 at the end of the year, physicians would receive 1099. In that scenario, the employer will take no taxes from whatever they earn. They get a check. Then they’re responsible for paying the taxes to the state. If you’re in a state that has that, then obviously, the federal government as well. In an independent contractor agreement, physicians usually have to pay for their own licensing and DEA registration. They won’t get time off, and they won’t receive any benefits.
The employer will usually pay for the malpractice insurance policy. But then you also must think about that scenario, alright, well, who pays for tail insurance? The normal compensation structure in an independent contractor agreement wouldn’t be a base salary but usually net collections-based or encounter-based.
You would get a flat fee for doing a certain service, something like that. Ideally, in an independent contractor agreement, you’re supposedly able to get in and out of it without hassle. The schedule should be up to physicians. The IRS has a 20-factor test to determine whether someone is an employee or an independent contractor. The physician practices utilize independent contractor agreements. The benefit to them is they don’t have to pay employment tax on any of the wages they provide to physicians. And they don’t have to give any benefits.
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Benefits Independent Contractors Get
The benefit to the physicians of utilizing the independent contractor agreement is usually a little better compensation. The percentages for net-collections might be a little bit higher. The RVU thresholds might be a little bit lower. And the compensation factor for the RVUs might be a little bit higher. They would generally create an LLC or something similar. Then be able to deduct all of the expenses associated with their practice for that employer. They could claim the things I just talked about. Licensing, DEA, if they have paid for malpractice, any business expenses, office, whatever it is. They could theoretically deduct those over time.
Which of the Two Is Better for Doctors?
Which one is better? Being an employee or independent contractor? Generally, I find physicians will come out ahead under an employment agreement versus an independent contractor agreement. In some scenarios, they’re just not going to have the choice. The employer could say you will only be an independent contractor for us. We will never issue an employment agreement to you, take it, or leave it. And in that scenario, the physician must decide.
One thing that comes up occasionally is someone who’s never been a 1099 employee. They’ve never been independent contractors before. They’re getting all this money from the job that they’re providing. Then at the end of the year, they think, oh man, I didn’t either budget for this. Or, I wasn’t sending in the quarterly earnings to the IRS. They get to the end of the year and haven’t saved all their money. So, ensure that you are budgeting if you’re working as a 1099 employee. Setting aside whatever amount is necessary to pay the taxes.
Worst Case Scenario for Independent Contractors
The worst thing that could happen for independent contractors. Get to the end of the year and not be there to pay taxes. So, can physicians be employees or independent contractors? Indeed, they could be either one. They could be both. If they work as employees somewhere else, moonlighting elsewhere as independent contractors. It simply comes down to what kind of agreement they signed. Independent contractor agreements are, in my opinion, much less complicated. Usually much shorter than employment agreements. Simply because they’re not going through all the benefits typical employees would receive from their employer. It’s generally easier to get through an independent contractor agreement, but certainly, there are negotiating points for each one. Anyway, that’s the difference between the two.
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Physician Independent Contractor vs. Employee
Considerations for physicians as employees versus independent contractors. Let’s kind of break down both. If you’re an employee, you will receive a W2 at the end of the year. It just summarizes all the compensation you’ve received and then all the taxes the employer withheld from it. If you’re an independent contractor, you won’t receive a W2. You’ll receive a 1099 at the end of the year. And that’s just a summary of the compensation received from that business. They withhold no taxes to the independent contractors. Let’s take the relationship between the two, and let’s start with when you’re an employee.
Physician as Employees
You will receive all the benefits of normal employment when you’re an employee. They’re going to pay for your malpractice insurance. They will pay for your health, vision, dental, life, disability, retirement, privileging, credentialing, and continuing medical education. And also probably provide you with moving expenses and another signing bonus. You get a lot of ancillary benefits as an employee.
Insurance in Independent Contractor Agreement
As an independent contractor, you’re not going to get any of those things. They’re not going to pay for your dues or fees. They may pay for your annual premium for your liability insurance, but I find that’s hit or miss. It’s very rare if you have a claims-made policy that they would pay for tail insurance. So, that’s something you’ll have to worry about as well. And then all of the other things, you’ll have to pay for yourself. You must find your own health, dental, and vision insurance.
You get disability, life, you set up your retirement, whatever you decide which way to go. All of that falls upon the physicians if they’re a 1099 independent contractor. Now, for some, ultimately, you come out ahead compensation-wise. As 1099, you can deduct all the things I just discussed. There are some tax advantages to being an independent contractor. I’m not a tax attorney. I’m not going to get into the specifics of that. But I would suggest reaching out to an accountant with experience with that. And can kind of walk you through what is the most advantageous compensation/tax situation for you. It’s going to be very specific to the job. If someone potentially has the option of either being an employee or an independent contractor, they have to consider several factors.
What Situation Is Best for Your Medical Practice?
I find it’s rare for it to be the option of the physician. Typically, the position is either going to be this or that. It’s not up to you. I mean, it’s very rare when I review a contract that we have to discuss. Alright, well, I do have two options and two contracts. Which way do you think I should go? Most physician-owned businesses simply don’t give the option to the physician. It’s either one or another. Now, maybe you have two separate jobs, an independent contractor and one as an employee. Then you’ll have to determine what situation is best for you. But it depends upon the physician. I find some physicians classified as independent contractors do some things wrong.
One, they don’t know where to go to get the things a normal employer would provide them. So, all those insurances and retirement and that type of thing. And they’re just not the type of person who is good at handling that side of their life. Then two, with no taxes withheld from their compensation, I find many of them spend what they get. Either they’re not giving their quarterly payments to the government. Or at the end of the year, they have an enormous tax bill they were maybe shocked to pay out. So, suppose you are going to be an independent contractor. In that case, you must be on top of setting aside an amount from each paycheck you’re getting from the business. That way, at the end of the year, you’re not entirely screwed in getting together all the money you need to pay for your taxes.
Distinction Between the Two
It’s probably safer and more secure to be an employee versus an independent contractor. Usually, the notice required to terminate the agreement is shorter as an independent contractor. That means either party can get out of the agreement without much notice to the other. Now, as a physician, continuity of care always has to be taken into account. If you’re an independent contractor unless you are in a specialty where it’s just like shift work. Or maybe if you’re anesthesia and pop in, you do the case and leave. But if you are a physician with a patient base and providing care to them, if you tell your employer, “I’m not coming in tomorrow, there will be some continuity of care issues.” It could lead to some board complaints or other problems down the road. So, it would help if you considered that as well.
Notice Period Requirement
What is the notice required to terminate the employment contract? It’s usually 60 to 90 days if you’re an employee. Whereas if you’re an independent contractor, you don’t see many notice periods less than 30. Still, sometimes it might be as low as two weeks for an independent contractor agreement. So, that’s a little breakdown between having an employee and independent contractor status in physician practice. As I said before, you need to look at the situation. And determining compensation-wise doesn’t make the most sense considering the tax deductions and that type of thing.
Is a W2 or 1099 Better for a Physician Assistant?
Is a W2 or 1099 is better for a physician assistant? Suppose you’re working as an employee for a private practice or a hospital. In that case, you’ll be classified as a W2 employee, meaning you’ll receive a W2 at the end of the year. The employer then will withhold taxes from your regularly paid compensation.
Suppose you’re working as an independent contractor. In that case, you’ll receive a 1099 at the end of the year. They won’t withhold taxes from any compensation you receive from whatever organization or practice you work for. The main difference between the two is that in 1099, no taxes were withheld. W2 taxes are. Additionally, if you’re working as an employee, you’ll receive all the good benefits an average employee would in medical practice.
W2 Physician Assistant Benefits
Most likely health, vision, dental, retirement, life, and disability. They will pay for your board license, DEA registration, and continuing education. You’re going to get paid time off. All of that, in a normal employment relationship, would be covered by the employer. If you’re working as a 1099, you will be responsible for all that, including malpractice insurance. If you want to maximize your tax deductions, you should create an LLC. Also, get an EIN, a bank account in the state you’re working in, then put all compensation and expenses through that bank account. That way, you can track whatever your expenses and revenues are. And then use that as tax deductions at the end of the year as business expenses.
Before Signing the 1099 Agreement
If you’re going to work as an independent contractor, talk to an accountant before starting or signing the agreement. Set up all those things properly to maximize your tax deductions. If you set up an LLC, you don’t have to do it for every single job you take as an independent contractor. It’s good to go from when you start until however long you want to work as an independent contractor. For multiple organizations, what they would do is in the independent contractor agreement, stating who the parties are. Use the contract they’re contracting with your LLC and not you personally.
And that way, the relationship is set up correctly. As I said before, the situation dictates which one is better. Sometimes, an employer will ask you to work as an independent contractor, but they completely treat you as an employee. Many would do that to save on paying employment taxes, which are usually around 10 to 12% of your total compensation. The IRS lists a 20-factor test to determine whether someone is an independent contractor or an employee. If you’re concerned that they’re misclassifying you, you look at that test. Then if it’s clear you’re actually an employee and they’re still classifying you as an independent contractor. They won’t pay employment taxes or give you any benefits. Bring that to the employer’s attention and say, “look, I believe you’re misclassifying me. I’m not comfortable signing this.”
Review the Contract First, Don’t Sign Immediately
If the IRS determines that they misclassified you, they could return to the employer for employment taxes. Sometimes employers will even put language there stating that the independent contractor would be responsible if the IRS returned. And says they’re misclassified for those back taxes and penalties. Do not sign something that says that.
So, that are the different scenarios where it might make sense to be a W2 versus a 1099 in medical practice. It just depends upon the situation. I mean, most people, if they’re working sporadically, maybe once or twice a month for a surgeon or something. They’re assisting in orthopedics, etc. That makes sense to be an independent contractor. You are not an independent contractor if you’re working every day from nine to five. It’s very unlikely that a scenario like that would dictate you to be classified as an independent contractor. So, you need to be careful.
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