Nurse Practitioner Self Employed vs Independent Contractor | NP Employee
What is the difference between being self-employed versus being an independent contractor? In short, there’s not much difference at all, but there are two key distinctions. First, if you’re self-employed, I would think of that as you’re in a state where you are completely autonomous, you are able to set up and work through your own practice. And then obviously in that scenario, you’re going to have an LLC, you’re going to have an EIN with the IRS, you’re going to have a bank account, and then you’re going to run the practice as a business. Expenses, net income revenues, all that kind of stuff. Now, if you’re working as an independent contractor, although technically you’re self-employed, you’re still working for somebody else, but you should set up the business structure in the same way that you would if you had your own practice.
Self Employment and Taxes
Let’s just say you’re working a few weekends a month on the side for an organization and they’re not treating you as an employee, so they’re not giving you any benefits, no health, vision, dental, disability, life, retirement. They’re not paying for your license or malpractice or any of that stuff. In that scenario, you need to do the same thing as you would if you’re creating your own practice, meaning, you need to create the LLC, get EIN, get a bank account, and then run all the compensation expenses through that so that you can benefit from the tax deductions of working on your own. Obviously, they’re a little bit different in the fact that if you are self-employed with your own business, you could have other employees yourself, or you could then extend offers to other independent contractors.
Whereas if you’re just working part-time, it would make the most sense to be an independent contractor. Now, there may be a scenario where you’re working for an employer and they’re asking you to kind of be classified as an independent contractor, but you’re really an employee. The IRS releases a 20-factor test that you can go through, and it’ll essentially tell you whether you’re acting as an employee or an independent contractor. Some employers will misclassify an independent contractor solely to get out of having to pay employment tax, which is usually around 10 to 12% of the total compensation of the NP. In that scenario, before you sign the employment agreement or the independent contractor agreement, you want to make sure you go through that test, and then you need to run it by that organization if you’re concerned that you’re being misclassified. Other pages of interest include:
- Is a W2 or 1099 Better for a Nurse Practitioner?
- Nurse Practitioner Independent Contractor vs Employee
I’ve even seen clauses and contracts where the business will say, alright, you’re an independent contractor. And if the IRS comes back and determines that you are misclassified, you owe us our attorney’s fees for having to either deal with this or fight it, which is obviously crazy. Never agree to something like that. So, that’s the difference between being self-employed versus being an independent contractor. The kind of legal business structure will be similar, although it’s different in the fact that you either be working for yourself or then working for somebody else.
Nurse Practitioners as Independent Contractors or Employed
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.
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 practitioner, 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.
Independent Contractor Agreement
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 practitioner 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.
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