Is a W2 or 1099 Better for a Dentist?

Is a W2 or 1099 better for a dentist or dental associate? I would say it depends—just explaining the difference between the two. If you have an independent contractor agreement, then you’ll be a 1099 employee. It means you’ll receive 1099 at the end of the year from the employer, with whom I guess you had a relationship. 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 will benefit from benefits, meaning literal benefits like health, vision, dental, life, disability, retirement, and the usual things you get in a typical job.

They’ll also likely pay for your licensing board, DEA registration, continuing education, and maybe associations in societies. They’re going to support the dentist with those ancillary benefits financially. And then they’ll have compensation, straight base salary. Many dental associates have daily rates, or perhaps it could be a hybrid of a base salary, plus the dental associate will get net-collections. They’ll often have a smaller. You can almost call it a draw or the dentist could get paid a certain monthly amount. Then they’ll get a percentage of any services collected based upon what they did. Generally, in that scenario, it always depends. Still, if it’s a hybrid, it’ll usually be somewhere between maybe 18 to 25% percent of the net-collections over a certain amount. That’s not uncommon.

Advantages of Working as an Employee in Terms of Benefits

That’s what an employment agreement and kind of the W2 relationship is for dentists. Now, in an independent contractor agreement, generally, you’re not an employee, and you’re not going to receive such employment benefits. 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 from whatever you’re getting paid. An independent contractor agreement’s theoretical benefit is that it should be accessible in and 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 I don’t find that’s the case in practice. 

Typically, I find in most independent contractor agreements for a dentist. There is a non-compete. Usually, the without-cause termination notice requirement is like the employment agreement. It may make sense if it’s a part-time job where you’re just filling in randomly. That certainly would make sense to have an independent contractor agreement because the employer will not want to provide all benefits of someone’s working once every two weeks. 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 sense to them. Now, for expense purposes wise, in this scenario, the dentist should create an LLC. Then other things that go along with that. They can deduct all those expenses for the year the employer spent.

Why do Employers Require an Independent Contractor Agreement?

Most employers require an independent contractor agreement, even if the dentist is full-time. It’s because they want to avoid paying employment tax, and that’s 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 Google that. I mean, it’s everything else. Most of the time, in the scenarios where the dentist is working full time. But they must sign an independent contractor agreement that they fail the test. They’re almost always employees. Some things go into that: does the employer dictate where and when the independent contractor will work? Do they provide them with supplies, support, or an office?

I mean,  if a dentist was working for somebody, they’re going to be provided. Now, it also gets into the benefits, the comp relationship, and everything else. For the most part, an employment agreement is a way to go if you’re full-time. An independent contractor agreement will make sense if it’s a hit-or-miss part-time fill-in. 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’ll get all the downsides of the restrictive covenants too. So, a non-solicit, non-compete maybe depends 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 consider.

Other Blogs of Interest

• Is a W2 or 1099 Better for a Dentist?
• Are Associate Dentists Independent Contractors? 
• How Does an Associate Dentist Negotiate Salary?

Dentist Independent Contractor vs. Employee: Dental Employees vs. Independent Contractors

What are the differences between employees versus being independent contractors as a dentist?

Dentist Independent Contractor vs. Employee: Dental Employee

First, if you are an employee, this is the most common way of having an employment relationship with the dental practice. In addition, You’ll receive a W2 so that 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 dental malpractice premiums. 

They may pay for your tail insurance if you have a claims-made policy. Then the employer will offer health, vision, dental, disability, life, and retirement, they’ll usually pay for your continuing education, and you’ll get paid time off. So, all of the tremendous ancillary benefits that come with being one of the dentist’s employees will get if they have signed an employment agreement.

Dentist Independent Contractor vs. Employee: If You Are an Independent Contractor

 Now, if you asked the employees, or maybe they have the option of being an independent contractor, they will not receive W2 at the end of the year. Furthermore, taxes will not be withheld from their compensation, and they’ll get 1099 at the end of the year. And then, the dentist will be responsible for paying for all 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 purchased with money. 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 CE. They will be responsible for paying for all of that stuff themselves. Now, if you are an intelligent dentist and you are going to work as an independent contractor. Moreover, 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 deduct most of those things as business expenses. For the most part, all the stuff I just listed can then be removed. Now, what’s the ultimate difference?

What Are the Responsibilities of a Dentist as an Independent Contractor?

Well, if you’re working as one of the independent contractors and have set up an LLC, you must get all those things yourself. You have to be responsible for finding all those things. So, you must 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’ll pay for all your DEA, license, and CE, and then you’ll get no paid time off either.

 For some dentists, after doing a math equation, they can come out ahead as an independent contractor and make sense of them. They have no problem doing all those things. Others loathe having to worry about those things on their own. They want to work as one of the employees and have the employer deal with all that stuff. And then ultimately work generally for a dentist, just a usual nine to five, and on the weekends, maybe a little after-hours emergency call on the weekends.

But for the most part, it’s much simpler to work as an employee versus an independent contractor. In what situations does it make sense to be an independent contractor? Well, maybe if you’re working part-time. Suppose you are working for a dental practice for a week. The dentist decides the way they work. In that scenario, it probably makes sense to be an independent contractor. 

Employees vs. Independent Contractors at Work

If you’re working a nine to five job and at the same practice every day, you’re working with the same staff. Besides, they’re paying for all or at least some things, but they want you to be an independent contractor. For this reason, they usually do that to avoid paying employment taxes. That’s the reality. You’re not an independent contractor in that situation. You’re probably one of the employees. 

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 concerned, they’re asking me to be an independent contractor, but I’m not entirely sure. Just go through the list and see if it applies to you. With how many factors, okay, I’m this and that. And then maybe discuss with the employer. I don’t feel comfortable moving forward as an independent contractor. I prefer to be an employee.

 And then you can decide if you want to stay with them or if they’re willing to offer you an employment agreement. It just depends upon the situation. Most of the time, as I said before, nine times out of 10, a dentist will be an employee, not an independent contractor. But there are certain times when 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. As an employee, you would receive a W2, and taxes are withheld, or you’d be an independent contractor, and then you would receive 1099 at the end of the year, and no taxes are withheld from it. You would receive all the compensation that both of you 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? 

The Pros and Cons of Working as an Independent Contractor

The advantages are that you can deduct almost all the business expenses that would go into working as a dentist. So, you can depreciate assets, licensure, DEA registration, mileage, car expenses, cell phone, supplies, and malpractice insurance. Usually, a dentist would create an LLC. They’d make a bank account, get an EIN, and then run everything through. All of the expenses would go through that. All the compensation would go through that. And then you 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 will pay for your dental license, DEA registration, continuing education, and dental malpractice premium. Maybe if you have a claims-made policy, they’ll also pay for your tail insurance. They’ll pay for many things and make it relatively easy for the dentist to opt into those things. 

You need those things if you’re an independent contractor and aren’t employed anywhere. You are going to be responsible for securing them for yourself. And then some dentists don’t want to do that or are just uninterested in spending all the time creating the LLC and running it as a business.

Different Perspectives on Working as an Independent Contractor

Some people love to have the freedom of being an independent contractor. However, many others find it wholly cumbersome and not worth their time. Is one better than another? It would depend upon the situation. Ideally, an independent contractor would likely work part-time or at least at their own pace. It means they could work as much or as little as they want if they worked it out with the dental practice. 

As one of the employees, most dentists they’re paid a straight base salary, or they would receive a percentage of their net-collections. Daily rates are prevalent for oral health dental associates as well. And then all the taxes would be taken out of that. And then, as I said before, they would pay for everything necessary to be a dentist if you have a complete schedule. Let’s say you’re working nine to five, Monday through Friday. You may have a few call responsibilities for emergency after-hour situations. In that scenario, it wouldn’t make much sense to be an independent contractor.

Practice Employee Misclassification

If the employer is asking you to do that, I think it’s most likely they don’t want to pay employment tax. And they’re passing that on to the dentist. So, suppose you have no control over your schedule. If you have no control over the supplies, the staff, or anything, you’re likely an employee or a quasi-employee. The IRS releases a 20-factor test that kind of goes through it. Well, suppose this is part of the employment relationship. In that case, 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 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 this would rarely happen. For instance, 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 have an opinion on what is better if you choose between one or the other; you rarely would. Usually, the dental practice is going to dictate what type of employment relationship exists. I think it’s situationally dependent. 

Suppose you’re thinking of working as an independent contractor. In that case, I will implore you to meet with an accountant and set everything up correctly. I don’t think a tax attorney is necessary for this. So, meet with an accountant, tell them what you need to do, set up the LLC, and get everything together so you can ultimately maximize your tax deductions and compensation.

Tax Deductions for Dental Employees Working as an Independent Contractor

What tax deductions can dentists take when they are independent contractors? Suppose you are an independent contractor or have been presented with an independent contractor opportunity at the end of the year. In that case, you’ll receive 1099, and taxes will not take out of the compensation that the employer is providing you. You will not get a W2, and then you will be responsible for paying those taxes quarterly or at the end of the year. 

If you are considering being an independent contractor and haven’t before, what are some things you need to consider? 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 walk you through the tax advantages for setting that up. 

Tax Deductions for a 1099 Independent Contractor

Now, if you are a 1099 independent contractor employment, as I said before, you would essentially associate yourself with your own little corporation business. So, you’d set up a limited liability company/corporation. Then you would get your own federal tax ID number, set up your bank account, and run all the compensation through that. All the business expenses would go out of that as well. And then you would be able to deduct those things at the end of the year. I’m going to go through a list of things you can deduct briefly, and then we’ll 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 or malpractice insurance, and you can depreciate the assets. You can deduct all the things that would go into working as a dentist in that situation. Now, if you’re coming into the practice to work a few times a week, they will pay you as an independent contractor. Accordingly, you will be unable to deduct the supplies they give you. Or if the practice somehow decides to pay for your annual malpractice premiums, you couldn’t do that either.

Employment Agreement: How to Negotiate a Dental Associate Contract

How should you negotiate a dental associate contract? I will give some tips and tricks to get a better associate contract. First, there is a difference between negotiating an associate contract with somebody just coming out of training. And someone who’s been established in a community for a while. You have more leverage if you are in any community classification. A corporate practice or another group is bringing out your practice and wants you to join them. You have an established employee or client base. Let’s first talk about those coming out of dental training. 

What Are the Important Outlines of a Dental Associate Contract?

What do you need to do to put yourself in the best position to negotiate a contract? Well, you need to know what’s important. For most dentists, the most important things are compensation. Is it a base salary? Is it a daily rate? Is it a net collection? How do you terminate the contract? Can you get out of it with a certain amount of notice or the benefits? Do they pay for your license, DEA registration, credentialing, or continuing education, and are they signing bonuses and relocation assistance? 

Do you have to pay them back if you leave within a particular time? And then probably the two highest priorities are who pays for dental malpractice insurance. Who must pay for tail insurance after the contract terminates if it’s a claims-made policy and the non-compete? This is some people’s absolute, most important thing in the contract. Suppose that the community tied them up, kids in school, family. In that case, they absolutely can’t leave, then you need a reasonable non-compete that’s not going to make you must move entirely out of the area.

What Are the Reasonable Outlines of a Contract for New Graduates?

Alright, those are the most important things to dental associates. Now, you’re coming on training. You have a job offer. They’re giving you a certain amount. How do you know what’s reasonable and what’s not? Well, talking to your classmates is the best way to find that information. What are the offers they’re getting? How much are they getting? How are they structured? Where is the job offers to originate? That’s the best and most, I would say, accurate means of finding out what the going rate is at that time. The compensation is going to vary wildly. As I said before, is it a base salary? It is at a daily rate. Is there some net collection involved? Is it a hybrid? Could it be half base, half net-collections?

 Many times, compensation for a job may look great. Still, the benefits are inadequate, they’re not paying for your tail insurance, or the non-compete is terrible. So, you can’t just take compensation as the number one factor in determining a good opportunity, but it is undoubtedly essential. Knowing whether a non-compete is fair or not is something you probably must consult a lawyer. For the most part, anywhere between one to two years and then maybe 5 to 15 miles from your primary practice location would be reasonable. If you’re in a non-compete that’s more than two years, it knocks out like multiple counties. And maybe they’ve attached the non-compete radius to, let’s say, a corporate practice in a big city, and they have 10 locations. And they’re saying, well, you can’t work within 10 miles of every place we own. That’s not a reasonable non-compete. 

What Happens if the Employer Provides You With an Offer Letter?

The actual negotiation will depend on two. One, do they give you an offer letter, or do they give you the employment agreement? If they give you an offer letter, they expect that those terms will be negotiated in advance and then incorporated into the employment agreement. And then, they’re going to give you the employment agreement. I find it challenging to come to terms with the main parts of an offer letter without seeing the entire employment agreement. If I had a perfect scenario, there would be no offer letter. They would give the employment agreement. Then you’d completely understand what the job entails and the expectations for both parties.

You could agree to a salary, to the length of the term, that there is a non-compete, that the things they’ll purchase with the money. On the contrary, when you see the specific language in the contract, it could significantly change how you look at the value of the contract. Just because you’ve signed an offer letter doesn’t mean you can’t renegotiate those terms if you provide proper context to the employer. Alright, I was okay with making $110,000 a year and base salary, not knowing that the non-compete effectively knocks me out of the entire state. If you want me to sign this contract with that non-compete, I need 130,000. There are many ways of going back and forth. Some employers will simply say, this is a take-it or leave-it.

Advice From a Lawyer Regarding the Employer

I would be wary of signing a contract with an organization unwilling to make any changes in the contract. It usually means they’re difficult to work with down the road or have a very rigid and unprofessional environment. So, if you find that someone says, take it or leave it, I would leave it and move on and try to find a better opportunity. If they think that they will not change anything in the contract, I’m just telling you that there will be no change in signing bonus, relocation assistance, benefits, or anything like that. It is a lousy sign moving forward. 

What if a Contract Does Not Have a Without-Cause Termination?

And then one more thing to think about and absolutely should be top of mind when you’re signing a contract or negotiating the terms of an agreement. Every employment contract should have what’s called without-cause termination. Either party should be able to terminate the agreement at any time with a certain amount of notice to the other party—usually, somewhere between 30 to 90 days. Suppose your contract does not have without-cause termination. As a result, you must fulfill the entire initial term of the agreement somewhere between one to three years. Usually, it is an enormous red flag. 

You absolutely should not sign that contract for this reason. Suppose they have been excluded without-cause termination, which is standard across all healthcare professions. In that case, it usually means they’ve had a ton of turnover or some very dissatisfied dentists that have wanted to leave. So, they’ve removed that ability and made sure that they must stay there for three or more years. If it’s not in the contract, it’s typically not in there because they’ve had a ton of turnover, which is usually due to bad management. It’s either a toxic work environment, or the compensation is not worth the time or effort you’ve put into it. It makes sense there’s always without-cause termination in the employment agreement. 

Lawyer’s Advice About Negotiating Dental Associate Contract

Don’t feel bad about asking for things. If you’re negotiating the terms of employment, most smart employers expect there will be some back and forth. Ask for a little more salary, a little more bonus, and a little less non-compete radius. The incremental things you can get changed in the agreement can significantly change the value of an opportunity. So, don’t feel bad. Now, if they’re offering a hundred and you ask for 300 or some crazy amount, they will think you have no idea what’s happening. They’ll probably move on. 

When you ask for something, it needs to be reasonable. How do you find out what’s valid or not? Talk to your classmates, talk to any mentors, and speak to attorneys who understand what they’re doing. And then deal with these contracts every day. That’s where you need to get in. But if you go in and ask for these ridiculous changes to an agreement, most places will pull the offer to say, no, we’re not doing any of that. So, that’s how you negotiate a dental associate contract.