Nurse Practitioner Independent Contractor Tax Deductions | What Nurses Can Deduct
What are the tax deductions you can take if you are an independent contractor as a nurse practitioner? Let’s say you’ve been offered a job as an independent contractor. You might be wondering, alright, well, what are the advantages or disadvantages in a scenario like this? Well, let’s kind of go through them. If you are an independent contractor, at the end of the year, you’re going to receive a 1099 and then no taxes will be withheld from your compensation throughout the year. So, you will be responsible to pay those taxes either quarterly or at the end of the year. Now, a smart nurse practitioner, before starting an independent contractor job, would create an LLC with the state that they’re in.
Nursing Independent Contractors and Tax Credits
They would get an EIN from the federal government, and then they would also get a corporate bank account for that LLC. And then all compensation and expenses should be funneled through that bank account because if you are an independent contractor who has created an LLC, you can use all of the costs associated with being an NP as a tax reduction. For instance, malpractice insurance premiums, maybe if it’s a claims-made policy, tail insurance, licensure, board cert, mileage, any home office expenses, or any kind of supplies necessary. I think any of the stuff that you would need to purchase to be an NP for that job are things that you can deduct at the end of the year. Now, the downside of being an independent contractor is you won’t get any of the ancillary benefits of being an employee.
For instance, health, vision, dental, retirement, and life disability. You’re not going to get any of those. They’re not going to pay for your malpractice insurance. You’re not going to get any money for continuing education, no paid time off. If you had the choice between two, I mean, the choice between being an employee versus a nurse practitioner as an independent contractor, you’re going to have to kind of weigh, alright, well, which way will that come out ahead? I mean, if you did get health insurance and vision and dental, those can be expenses as well, but many NPs are just not interested in taking the time to go out and find all of those things. It’s just much easier if you just go and work as an employee, and then you can just opt-in to all of those things. Now, the compensation also needs to be considered. If an employer is treating you as an independent contractor, they’re not paying any of the employment taxes associated with that, usually, it’s around 10% to 12% total of the compensation provided to the employee is paid as employment taxes. Other pages of interest include:
So, they’re saving on that. Additionally, if you’re an independent contractor, as I said before, they’re not going to pay for any of those benefits. So, they’re saving a lot of money on that. You should ask for higher compensation when working as an independent contractor because the employer is going to save a lot of money when they treat you as an independent contractor. Now, many employers will kind of misclassify employees as independent contractors. As I said before, just to get out of having to pay employment taxes. The IRS offers a 20-factor test that kind of determines whether someone is an employee or an independent contractor. I’d suggest looking at that prior to starting a job and maybe assessing it yourself. And then if you do have some concerns about being misclassified, you should approach those with the organization before you sign your employment agreement or independent contractor agreement.
Most jobs that are considered independent contractor jobs are part-time in nature. Maybe you’re going to work after hours, a few days a week, maybe only a couple of Saturdays a month, something like that. In that scenario, it makes sense to be an independent contractor. But if you’re working five days a week for an employer, they’re telling you when to come to work, and they’re telling you who to see, you’re very likely an employee and not an independent contractor. So, those are some tax deductions you can take as an independent contractor NP.
W2 or 1099
Is it better to be a W2 or a 1099 as a nurse practitioner? First, if you are a W2, you are an employee and then you’ll have taxes withheld from your regularly scheduled payroll. And then at the end of the year, you’ll get a W2, just kind of summarizing all the taxes that were withheld. If you are a 1099, you are an independent contractor and then you’ll receive the 1099 at the end of the year, and no taxes will be withheld from your compensation at all. So, you will be responsible to pay those taxes either quarterly or annually, depending upon what you want to do. That’s the main distinction between the two.
Now, the benefits of being a W2 as an employee are, you’ll get all of the great ancillary benefits of being an employee. Most organizations, they’re going to offer you health, vision, dental, disability, life, and retirement. They’re going to pay for your continuing education, licensing board, board cert, any kind of privileging, credentialing, you’ll get paid time off, whereas as a 1099 independent contractor, you’re not going to get any of those things. You are going to be responsible for paying all of that, including malpractice insurance. And if you have a claims-made policy, tail insurance as well. Now, just because you’re working as an independent contractor 1099, it doesn’t mean you can’t deduct all those business expenses, but you need to set up your kind of corporate structure in the correct way. So, you should create an LLC, get an EIN, create a bank account, and then funnel all the compensation and expenses through that account so that you can keep track.
Nurse Practitioners and Taxes
And then at the end of the year, you can deduct all those as business expenses. So, licensing, malpractice, health insurance, vehicle expenses, kind of all the things that would go into being a nurse practitioner for an organization, you can deduct if you’re an independent contractor. Now, which one is better? It just depends. I mean, theoretically, you should make more as an independent contractor because the employer is not paying for any of your benefits, any of your malpractice, they’re not paying employment tax. If you’re an employee, an employer has to pay employment tax, it’s usually somewhere between 10 to 12%. So, they’re probably saving around 15 to 20% by not giving you any of those benefits, not having to pay employment tax. At least some of that should pass through to the nurse practitioners, meaning, if you’re going to make the exact same amount as an employee versus an independent contractor, it probably makes sense to be the employee.
Now, many nurse practitioners simply don’t want to deal with the hassles of finding all of those things. They don’t want to find their malpractice. They don’t want to get health insurance, dental, vision, retirement, life, disability, all that kind of stuff set up. They don’t want to deal with it. And in that scenario, you have to find an employment opportunity. Now, the most likely opportunities you’ll have to be an independent contractor will be kind of short-term, part-time stuff. Or maybe you’re just going to work for a practice two weekends a month or something like that, just for half a Saturday. Well, in that scenario, it doesn’t really make sense for you to be an employee or for them to offer you all those benefits. And that would be kind of a normal role to be classified as an independent contractor.
Whereas if you’re working Monday through Friday, nine to five, and the employer is asking you to be an independent contractor, they’re likely misclassifying you. The IRS releases a 20-factor test that kind of goes through, alright, these are the things that can make you an employee. These are the things that can make you an independent contractor. If you’re concerned that you might be misclassified in some way, I would go through that test and then approach the employer with those concerns prior to signing an independent contractor agreement or an employment agreement after the fact, although it’s very rare. The IRS could come back, look at your employment relationship, and then state, oh, you’ve been misclassified. And then all of these back taxes will be owed usually by the employer. I have seen in some independent contractor agreements that the employer basically states if it’s found that you were misclassified and the employer has to either pay a penalty or fight it in court or whatever that the nurse practitioners will be responsible for those things, in addition to attorney’s fees.
That’s an unconscionable clause. I would never sign that. So, just be careful about that when looking at an independent contractor agreement or an employment agreement as well. Anyway, that’s kind of the difference between the two and maybe why one might work for you over the other. I mean, most of the time, an NP is going to be an employee. It’s very rare, unless, as I said before, it’s kind of like a part-time position that it would make sense to be an independent contractor. I would suggest talking to an accountant before doing any of this. I’m not a tax attorney. So, I’m just kind of giving you my side on the employment and contract side. But meeting with an accountant who can kind of set up these things for you and give you the best advice on maximizing your tax deductions makes the most sense. Hopefully, that’s helpful.
Red Flags in an Independent Contractor Agreement
What are some red flags in nurse practitioner contracts? This is kind of a long list, but I’m going to boil it down to the most common ones that I see in an employment contract. You always want to read your contract carefully. I think we can start with a red flag. If you ever read anything that you don’t understand and cannot get clarity on, that’s a red flag. You should seek out an attorney like us who are familiar with employment contract issues. And we can explain that to you. And then if we still don’t understand it, then that’s a red flag. You want to get those words clear in your employment agreement, so you know what you’re signing and what your expectations are.
I’d say that’s kind of the first red flag. It’s very general, just understanding the clauses that you’re signing. I’d say the second red flag I always look for in an agreement, and if I don’t see this, it’s a big red flag to me. There needs to be a clause in your employment agreement. That is a without cause termination, meaning, either party but especially yourself can terminate this agreement without any sort of reason or no reason at all. So, without cause termination, you give your notice to the practice or the group company, whatever, and normally there is a specific number of days that you have to give notice. Normally, that’s anywhere between 60 to 90 days, you’ll give your notice of termination, and then you are let out of the contract.
Benefits for Nurses?
Now, you want to be careful, read it carefully. There could be some sort of bonuses or non-competes that would apply, but you are allowed out of the contract. It’s a huge red flag if there’s no way to terminate the agreement. You could be stuck in this contract for however many years unless the other party breaches or you’re let out of the agreement. So, this is a huge red flag. Always look for a without cause termination. And then you want to look for how many days’ notice you must give before you can get out of that contract. Another big red flag I see a lot is overly restrictive non-compete clauses. It kind of depends on the laws of your state. But you want to read your employment agreement carefully because non-competes can be kind of sneaky. Sometimes they go by different names, or you don’t understand what a restrictive covenant is, which is just a promise not to do something.
You’re promising not to compete with your employer. But you want to be careful that you fully understand what that non-compete is restricting. For how long, normally, that’s straightforward, but when we get to red flags, it’s normally the area that you’re restricted for. It could be too many miles. If you are in New York City and they’re restricting you 20 miles, well, that takes out a huge area. That would be a huge red flag. And then also, you want to consider how many locations your non-compete applies to. It’s a red flag if you are restricted from all the locations of the practice even if you don’t provide services there. Another red flag is if you are restricted from locations where you provide any services for.
Consultation with Chelle Law
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