Is a W2 or 1099 Better for a Dental Associate?: Is an Associate Dentist Better Off as a W2?
Is a W2 or 1099 better for a dentist or dental associate? I would say it depends. Just kind of explaining the difference between the two. If you have an independent contractor agreement, then you’ll be a 1099 employee, meaning, you’ll receive a 1099 at the end of the year from the employer where I guess whoever you had the relationship with. and then a W2 is just a salaried employee. And so, you’ll have an employment agreement if you’re a W2. Independent contractor agreement if you’re 1099. The difference between the two is in the employment agreement, the dentist is going to benefit from benefits, meaning literal benefits like health, vision, dental, life, disability, retirement, kind of the normal things you get in a normal job.
They’ll also likely pay for your licensing board, DEA registration, continuing education, and maybe associations in societies. They’re going to financially support the dentist with those ancillary benefits. And then they’ll obviously have compensation, straight base salary. A lot of dental associates have daily rates or perhaps it could be a hybrid of a base salary, plus the dental associate will get net collections. Many times, they’ll have like a smaller, you can almost call it a draw, or the dentist could get paid a certain amount each month, and then they’ll get a percentage of any services collected based upon what they did. Normally in that scenario, it always depends, but usually, if it’s a hybrid, it’ll be somewhere between maybe 18 to 25% percent of the net collections over a certain amount. That’s not uncommon.
That’s what an employment agreement and kind of the W2 relationship is for dentists. Now, in independent contractor agreement, generally, you’re not an employee and you’re not going to receive the employment benefits of such. They may pay for your malpractice insurance, but unlikely they’re not going to pay for your licensing, DEA, they’re not going to provide any actual benefits. So, all of that is going to be on the dentist. And then as far as taxes go, federal or state taxes will be taken out of whatever you’re getting paid. I guess the theoretical benefit of an independent contractor agreement is it should be easy in, easy out. The notice requirements should be much less than in an employment agreement. There shouldn’t be a lot of strings attached. Hopefully, there’s no non-compete, but in practice, I don’t find that’s the case.
Normally, I find in most independent contractor agreements for dentist, there is a non-compete. Usually, the without cause termination notice requirement is like the employment agreement. Where it may make sense is if it’s like a part-time where you’re just filling in randomly. That certainly would make sense to have the independent contractor agreement because the employer is not going to want to provide all these benefits of someone’s working once every week or once every two weeks or something like that. In that scenario, a 1099 independent contractor agreement relationship makes total sense. If this is like a full-time gig for a dentist, I don’t think the independent contractor relationship makes a lot of sense for them. Now, expense purposes wise in this scenario the dentist should create an LLC. And then all the other things that go along with that, and then they can deduct all those expenses for the year that the employer would normally pay for.
Dental Practice Classification for Employees
Honestly, I find that most employers who absolutely require an independent contractor agreement even if the dentist is full time. It’s generally just because they want to avoid paying employment tax and that’s just the truth. The IRS has a 20-factor test to determine if an employee or an independent contractor is an employee or an independent contractor. And so, if you run through the factors of that test, you could just Google that. I mean, it’s very simple to find. Most of the time, in the scenarios where the dentist is working full time, but they’re required to sign an independent contractor agreement that they would fail the test, they’re almost always an employee. I mean, some of the things that go into that is, does the employer dictate where and when the independent contractor will work? Do they provide them with supplies, support, office?
I mean, like all the obvious things that if a dentist was working for somebody that they’re going to be provided. Now, it also gets into the benefits and the comp relationship and all that kind of stuff. I think, for the most part, if you’re full-time, an employment agreement is obviously the way to go. If it’s very kind of hit or miss part-time, fill-in, an independent contractor agreement would make sense. But if this is the only job, you work five days a week, an independent contractor agreement, in my opinion, doesn’t make a lot of sense. You’re going to lose out on all those benefits. And usually, you’re going to get all the downsides of the restrictive covenants too. So, a non-solicit, non-compete, maybe depend upon what type of liability insurance you have, if you must purchase tail insurance, that’s on you as well. Just a lot of things to think about.
Dentist 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.
But there are a whole bunch of things that you can do and there are some creative ways of making it worthwhile. Now, you’re not going to get all the ancillary benefits that a normal employee would like health, vision, dental, disability life retirement, they’re not going to pay for your dental license, DEA registration, or continuing education, you won’t get any paid time off. You’re not going to get any of that as an independent contractor. But as an independent contractor, it should be kind of easy in, easy out. Meaning, that you can kind of work as little or as much as you want. And you are essentially, or at least should be, in charge of your own schedule. There are situations where being an independent contractor would make no sense. And then there are probably other situations where being an employee wouldn’t make a lot of sense either.
It’s kind of situationally dependent, so you must weigh, alright, well, If I have to pay for all of these things, although I can ultimately most likely dig to most of them, but you’re not going to be able to easily get all the insurance if your only work is an independent contractor, the health insurance is tough to get. Disability is not tough to get but expensive, retirement, like those things are not easy to set up. And I know that some dentists are just like, I don’t want to deal with that. I just want to be an employee. I want them to set everything up and then I just opt into it. I don’t want to have to deal with all of this stuff on my own. And that’s great. But if you are an independent contractor and you are paying for all those things, then you should ultimately probably be compensated at a little higher level than if you are an employee because the employer doesn’t have to pay employment tax.
They don’t have to pay for any of the things that I went through: the licensing, the continuing education, the paid time off, all of that they’re spared from doing. So, it would make sense that if they’re going to be freed from all of those business expenses, that would at least pass on in some percentage to the dentist. Those are the tax deductions that a dentist can take when they’re an independent contractor. There are a bunch of factors that go into whether it makes sense or not. But hopefully, that was a little bit of information that you may have not had before.
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