Dentist Independent Contractor vs Employee: Dental Employees vs Independent Contractors
What are the differences between being an employee versus being an independent contractor as a dentist? First, if you are an employee, and this is the most common way of having an employment relationship with the dental practice, you’ll receive a W2 and so taxes will be withheld from your compensation. You’ll usually be paid weekly or biweekly, and at the end of the year when you file your tax returns, you don’t have to worry about paying all the taxes because they’ve already been withheld. The practice will also cover your dental license, DEA registration, and malpractice premiums. If you have a claims-made policy, they may pay for your tail and then they’ll offer health, vision, dental, disability, life, and retirement, they’ll usually pay for your continuing education, and you’ll get paid time off.
Dentistry Employment Designation
So, all of the great ancillary benefits that come with being an employee, the dentist is going to get if they have signed an employment agreement. Now, if they’re being asked or maybe they have the option of being an independent contractor, they will not receive W2 at the end of the year, taxes will not be withheld from their compensation, and they’ll get a 1099 at the end of the year. And then the dentist will be responsible for paying for all of those taxes that should have been withheld and they could do that either quarterly or at the end of the year. They will also not receive any of the benefits that I listed before. So, they will not get their license and DEA paid for, they will have none of the health, vision, dental, disability, life, or retirement.
They won’t get paid time off; they’ll have to pay for their own CE. They will be responsible for paying for all of that stuff themselves. Now, if you are a smart dentist and you are going to work as an independent contractor, then you need to meet with an accountant and you need to set up an LLC, get an EIN and set up a bank account. And then you can run all the compensation through that and then deduct most of those things as business expenses. All the stuff I just listed, for the most part, can then be deducted. Now, what’s the ultimate difference? Well, one, if you’re working as an independent contractor and have set up an LLC and you must get all of those things yourself, you have to be responsible to find all those things. So, you have to go get health, insurance, vision, dental, disability and life, and set up a retirement plan. You’re going to have to do all that yourself.
And then you’re going to pay for all of your DEA, license, CE, and then you’ll get no paid time off either. For some dentists, after kind of doing a math equation, they can come out ahead as an independent contractor and just make sense for them. They have no problem doing all those things. For others, they just loathe having to worry about all of those things on their own. They just want to work as an employee and have the employer deal with all that stuff. And then ultimately just work normal. For a dentist, just a normal nine to five, and on the weekends, maybe a little after-hours emergency call.
But for the most part, it’s much simpler to work as an employee versus an independent contractor. Now, in what situations does it make sense to be an independent contractor? Well, maybe if you’re just working part-time, so if you’re only working for a practice for a day or two a week or even shorter than that and it’s maybe up to the dentist when they work and how much they work, in that scenario, it probably makes sense to be an independent contractor. If you’re working a nine to five job and you’re at the same practice every day, and you’re working with the same staff and they’re paying for all, or at least maybe some of the things, but they want you to be an independent contractor, they’re usually just doing that to avoid having to pay employment taxes.
Employees vs Independent Contractors
That’s the reality. You’re not actually an independent contractor in that situation. You’re probably an employee. The IRS lists or at least releases a 20-factor test to determine whether someone is an employee versus an independent contractor. I would suggest Googling that and looking at it. And if you’re kind of concerned, well, they’re asking me to be an independent contractor, but I’m not entirely certain, just go through the list and see if it applies to you or not, with how many factors, okay, well, I’m this and or that. And then maybe have a discussion with the employer, well, I don’t really feel comfortable moving forward as an independent contractor, I’d prefer to be an employee. And then you can kind of decide if you want to stay with them, or if they’re willing to offer you an employment agreement as well.
It just depends upon the situation. Most of the time, as I said before, 9 times out of 10, a dentist is going to be an employee, not an independent contractor, but there are certain times where it would just make sense financially to be an independent contractor.
Independent Contractor 1099 Dentist
What is a 1099 dentist? There are two ways you can work for a dental practice, either as an employee or you would receive a W2 and taxes are withheld or you’d be an independent contractor and then you would receive a 1099 at the end of the year, and no taxes are withheld from it. You would just receive all the compensation that was agreed to, and then the dentist would be responsible for paying taxes quarterly or at the end of the year. If you are an independent contractor, what are some of the benefits and disadvantages of that? Well, the advantages are you can deduct almost all of the business expenses that would go into working as a dentist.
So, mileage, car expenses, cell phone, supplies, malpractice insurance, you can depreciate assets, licensure, DEA registration, those types of things. Normally, a dentist would create an LLC, they’d create a bank account, they’d get an EIN, and they would then run everything through that. All of the expenses would go through that, all the compensation would go through that. And then you just take draws when you want to use the money for yourself. There are situations where it doesn’t make sense to be an independent contractor. As an employee, you get all of the ancillary benefits that come with it like health, vision, dental, disability, life, and retirement. They’re going to pay for your dental license, DEA registration, continuing education, and your malpractice premium. Maybe if you have a claims-made policy, they’ll pay for your tail as well.
They’re going to pay for a ton of things and make it relatively easy for the dentist to just opt into those things. Whereas if you’re an independent contractor and you aren’t an employee anywhere and you need those things, you are going to be responsible for securing them for yourself. And then some dentists just simply don’t want to do that or are just uninterested in spending all the time and creating the LLC and running it as a business and that type of thing. For some people, they love it to have the freedom of being an independent contractor. However, there are many others that find it completely cumbersome and not worth their time. Is one better than another? It would depend upon the situation.
Ideally, an independent contractor would likely be working probably part-time or at least at their own pace, meaning, they could work as much as they want, or as little as they want, if they worked it out with the dental practice. As an employee, for most dentists, they’re paid a straight base salary, or they would receive a percentage of their net collections. Daily rates are very common for dental associates as well. And then all the taxes would be taken out of that. And then as I said before, they would just pay for all of the things necessary to be a dentist. If you have a complete set schedule, and let’s just say, you’re working nine to five, Monday through Friday, maybe you have a little bit of call responsibilities for emergency after-hour situations, in that scenario, it wouldn’t make a lot of sense to be an independent contractor.
Practice Employee Misclassification
If the employer is asking you to do that, in my opinion, it’s most likely that they just don’t want to pay employment tax. And they’re kind of passing that on to the dentist. So, if you have no control over your schedule, if you have no control over the supplies, the staff, or any of that kind of thing, you’re likely an employee or a quasi-employee. The IRS releases a 20-factor test that kind of goes through, alright, well, if this is part of the employment relationship, you’re probably an employee, or if this is part of it, you’re probably an independent contractor. If you just Google like a 20 factor IRS test, you can come up and you could just look and say, alright, well, does this fit what they’re asking me to do? And then, am I an independent contractor in this situation?
I mean, the government can, though it’s extremely rare this would happen, but they could come back and say, look, they were not an independent contractor, they were an employee. And then they could go after back taxes against the employer. I don’t really have an opinion on what is better if you have the choice between one or the other, it’s rare you would. Usually, the dental practice is going to dictate what type of employment relationship exists. I think it really is situationally dependent. If you are thinking of working as an independent contractor, I would implore you to go meet with an accountant and just kind of set everything up properly. I don’t think a tax attorney is necessary for this.
So, just meet with an accountant, let them know what you need to do, set up the LLC, and kind of get everything together so you can maximize your tax deductions and compensation ultimately.
Dental Employees Tax Deductions
What are the tax deductions that dentists can take when they are independent contractors? If you are an independent contractor or have been presented with independent contractor opportunity, at the end of the year you’ll receive a 1099 and no taxes will be taken out of the compensation that you’re being provided by the employer. You will not get a W2 and then you will be responsible to pay for those taxes either quarterly or at the end of the year. If you are thinking about being an independent contractor and haven’t before, what are some things you need to think about? And then what are the possible tax advantages of doing that? First, I’m not a tax attorney, I’m an employment contract attorney.
So, I’m going to give you kind of the bare-bones knowledge that I have based on drafting and reviewing independent contractor agreements for the last couple of decades. But I would suggest if you are thinking of beginning as a first-time independent contractor, you should talk to an accountant, I’m not sure a tax attorney is necessary. And then you would set up an LLC, a bank account and then run everything through that. But they can kind of walk you through what the tax advantages are as far as setting that up. Now, if you are a 1099 independent contractor, as I said before, you would essentially think of yourself as your own little corporation. So, you’d set up a limited liability company/corporation, and then you would get your own federal tax ID number, you would set up your own bank account, and then you’d run all the compensation through that.
All the business expenses would go out of that as well. And then you would be able, at the end of the year, to deduct those things. I’m just going to briefly go through a list of things that you can deduct, and then we’ll kind of talk about why an independent contractor arrangement might not make the most sense. First, you can deduct mileage, health insurance premiums, home office deductions, work supplies, travel, car expenses, and cell phones. In this case, be either business insurance or malpractice insurance, and then you can depreciate the assets as well. All the things that would kind of go into working as a dentist in that situation, you can deduct. Now, if you’re just coming into a practice to work a few times a week, and they’re going to pay you as an independent contractor, obviously, you’re not going to be able to deduct the supplies that they give you, or if the practice somehow decides to pay for your annual malpractice premiums, couldn’t do that either.
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