Physician Assistant Independent Contractor Tax Deductions | PA Taxes
What are the tax deductions a physician assistant can take if they are classified as an independent contractor? First, if a PA is working as an employee, they’ll receive a W2 at the end of the year, and taxes will be withheld from their compensation throughout the year. Whereas if they are an independent contractor, they’ll receive a 1099 at the end of the year, and no taxes are withheld during the year anytime they’re compensated. So, the PA will be independently responsible to pay those taxes either quarterly or at the end of the year when they file their tax returns. In what situation does it make sense to be an independent contractor? Well, for the most part, if you are working either part-time or maybe the schedule is completely up to you, especially if PAs are assisting in surgical procedures, sometimes they’ll be classified as an independent contractor. In that scenario, it might make sense.
When you’re an employee, you get all the great ancillary benefits of employment. You’ll get health, vision, dental, life, retirement, and disability. They’re going to pay for your licensing board and DEA registration. You’ll usually get an amount for continuing education. You’ll get paid time off. You won’t get any of that as a self-employed or independent contractor. You will be responsible to pay for all of those things including malpractice insurance. Now, if you are a PA who’s working as an independent contractor or self-employed, you can do some things that will make all of those expenses tax deductible. And the best way of doing that is to create an LLC and then get an EIN from the federal government, the IRS, and then you would open a bank account under that LLC in whatever state you’re in. And then you would just run all of the compensation and expenses through that account to be able to track it appropriately.
I would suggest contacting an accountant to kind of go over the best way of setting up the LLC, then how to make certain that you’re maximizing the deduction that you can take. I would not just accept an independent contractor job, sign the independent contractor agreement, and just start and not even think about all of the kind of implications of not having any tax (taxes) or benefits provided to you during the relationship. Now, there may be a situation where you are working almost as an employee, but the employer will want to classify you as an independent contractor. Now, the reason why most of them do that is to get out of paying employment tax. Usually, that’s around 10 to 12% of your total comp. Other blogs of interest include:
So, if you think of it this way, if you’re working as an independent contractor and they’re not paying any employment tax on you, and they’re also not providing you any benefits, which can be costly, you should probably get a bump in normal compensation versus an employed PA. What’s a fair percentage? Probably 5% to 15% of whatever you’re probably being paid hourly if you’re an independent contractor. So, your hourly rate should be bumped by a little bit because the employer is saving a significant amount of money by not having to pay employment tax or provide you with any benefits at all.
Now, what is a fair rate? Well, you’re going to have to ask your colleagues and it also is dependent upon where you are in the country. Certainly, rates change based on where you’re located. But you should look to negotiate a little higher rate if it’s the exact same as somebody who’s working as an employed PA. The best way of approaching an employer who is forcing you to be an independent contractor is just stating, look, the IRS offers a 20-factor test that provides an analysis of whether someone is actually an employee or an independent contractor.
Deductible and Qualified Business Income
If you think you’re being misclassified, I would go through that list and even present that to the employer and just say, look, you’re treating me as an employee, but paying me as an independent contractor. I would like to be classified properly. Many people don’t want to go through the hassles. Like, let’s just say, you’re working full-time as an independent contractor. You’re going to be responsible for getting all those benefits such as health, vision, dental, disability, life, and setting up retirement. That is a daunting cast for some people and one that some people have absolutely no interest in doing.
In that scenario, you may not want to act as an independent contractor, or if you do have an employment situation where you’re working as a full-time employee, and you’re just supplementing part-time staff as an independent contractor, then that’s fine. But if you’re working full-time as an independent contractor, you must think about all of the things that you’re going to have to do yourself: get your license, and the DEA, and pay for your CE. As I said, get privileged, credentialed, all that good stuff. A lot of complications to think about in that scenario.
1099 v W2 and Tax Deductions
Is a W2 or 1099 is better for a physician assistants? If you’re working as an employee for a private practice or a hospital, you’re going to be classified as a W2 employee, meaning, you’ll receive a W2 at the end of the year, and then taxes will be withheld (or deducted) from whatever your regularly paid compensation is. If you’re working as an independent contractor or self-employed, you’re going to receive a 1099 at the end of the year, and no taxes are going to be deducted from any compensation you receive from whatever organization that you’re working for. The main difference between the two of them is in 10 99, no deduction of tax. W2 taxes are. Additionally, if you’re working as an employee, you’re going to receive all the good benefits that a normal employee would.
Most likely health, vision, dental, retirement, life, disability, they’re going to pay for your board license, DEA registration, and continuing education, you’re going to get paid time off. All of that, in a normal employment relationship, would be covered by the employer. If you’re working as a 1099, you’re going to be responsible for all of that including malpractice insurance. Now, if you want to maximize your physician tax deduction, then what you should do is create an LLC, get an EIN, get a bank account in the state that you’re working in, and then put all compensation and expenses, have it flow through that bank account. That way, you can track whatever your expenses and revenues are. And then use that as tax deductions at the end of the year as business expenses.
I would suggest if you’re going to work as an independent contractor, you should talk to an accountant in advance of starting or signing the agreement and then set up all those things properly, so you can maximize your tax deduction. If you do set up an LLC, you don’t have to do it for every single job that you take as an independent contractor. It’s good to go from when you start until however long you want to work as an independent contractor. For multiple different organizations, what they would do is in the independent contractor agreement, it’ll state who the parties are, just use the contract they’re contracting with your LLC and not you personally.
Independent Contractor Tax
And that way, the relationship is set up correctly. Now, as I said before, the situation really dictates which one is better. There are times when an employer will ask you to work as an independent contractor, but they’re really treating you as an employee completely. The reason why most of them would do that is just to save on paying employment taxes, which is usually around 10 to 12% of your total compensation. The IRS lists kind of like a 20-factor test to determine whether someone is an independent contractor versus an employee. I would suggest if you’re concerned that you’re being misclassified, that you look at that test, and then if it’s clear you’re actually an employee, but they’re just classifying using an independent contractor, so they don’t have to pay employment taxes or give you any benefits, bring that to the attention of the employer and say, look, I believe you’re misclassifying me.
I’m not comfortable signing this. I mean, what could happen is if the IRS determines that you were misclassified, they could come back to the employer for employment taxes. Sometimes employers will even put language in there stating that the independent contractor would be responsible if the IRS comes back and says they’re misclassified for those back taxes and penalties. Absolutely do not sign something that says that. So, that’s kind of the different scenarios where it might make sense to be a W2 versus a 1099. It just depends upon the situation. I mean, most people, if they’re just working sporadically, maybe once or twice a month for a surgeon or something they’re assisting in like if you’re orthopedics or something like that, that makes sense to be an independent contractor. If you’re working every single day from nine to five, you are not an independent contractor. It’s very, very unlikely that a scenario like that would dictate you to be classified as an independent contractor. So, you just need to be careful.
Physician Assistant Red Flags in a Medical Contract
What are some red flags in physician assistants’ contracts? Sometimes the red flags are the words on the page, but other times red flags are missing. I’m going to kind of go over the most common red flags that I see. The first one would probably be unreasonable non-compete clauses. Depending on your state, most states’ non-compete clauses for healthcare providers are enforceable, but you do want to check your state law. If they are enforceable, you want to check is it reasonable? What I mean by that is, normally, a non-compete clause will be anywhere from one to two years. I always try to advocate for at least one year only, not over a year.
One year, it should be, or less. It could be six months, that would be great. And then you want to look at the restricted area. Typically, it goes by miles and it kind of depends. You must take into consideration where you’re located and what your makeup looks like. Like, are you in a rural area? Are you in a city? And then you want to see, okay, is this mileage unreasonable? Really anything over 30 miles is going to be, in my opinion, unreasonable. And I would try to negotiate that down. So, we’ve talked about how long they’re for, and then how much is included in that restricted area from competing with your employer. The other thing you want to look for is how many locations does that restricted radius apply to? This is a little tricky and a lot of times employers try to slip this in there.
They may say or have language in there that states any location of the practice with the company, or they’ll say any location you provide services at. That means if you fill in for a provider that’s on vacation, you’re a non-compete clause now attached to that location. Let’s just say you have 10 miles from your primary location, but now you could have 10 miles attached to multiple other locations. This is dangerous especially if let’s say the company expands while you work for them. And it could knock out a huge chunk of the state. You may have to move if you decide to end your employment. So, overly restrictive non-compete is a red flag. The other thing you want to look for in a non-compete itself is what services are you restricted from?
Specialties Services Restrictions
If you’re a PA who’s offering services and for a general practitioner, you shouldn’t really be excluded from providing services for maybe general surgery or psychiatric care or something like a totally different specialty, you shouldn’t be restricted from doing that. And it depends on the state if you’re allowed to switch specialties, but anyway, you just want to know what you’re restricted from providing. Those are the red flags that kind of go with the non-compete clause. The next major red flag I see in contracts is something that’s missing. There should always, and I mean, always be a without-cause termination clause in your contract. And without cause termination means either party can terminate the agreement or your employment for any reason or no reason at all. You don’t even have to give one. Normally, you just must give a certain amount of notice.
And that notice period is typically anywhere from 60 to 90 days. If you’re in a very rural area or a high-need area, sometimes I see it go up to 120, but I would probably ask to have that limited to 90 days. You just simply give your notice and then at the end of that, your agreement has terminated, and you guys can go your separate ways. Sometimes contracts don’t have that language in there. They’ll say that you’re contracted to work for your employer for anywhere, usually, two to three years. And the only way to get out of it is to ask them to be released. This is a dangerous spot to be in because they might not want to release you, and then you have to make a difficult decision if you want to breach your contract.
What an Independent Contractor Can Do that Traditional Employees Cannot
A few things that an independent contractor can do that traditional employees often cannot include:
Start Negotiations Any Time
Most traditional employees have no choice but to wait until their annual review time rolls around to even consider bringing up the prospect of negotiating a raise. Even then, many are boxed out by employer complaints that they “simply don’t have the money in the budget”. Traditional employees often feel stuck with the pay rates and benefits that they initially received for far longer than necessary. Independent contractors don’t have this same worry. Independent Contractors can attempt to negotiate with their place of employment whenever they feel it makes sense for them. The facility where they work still may be unwilling to meet their demands, but they simply take their talents to another facility in that case.
Demand Higher Rates
Independent contractors are in the unique position of knowing a lot more about the rates that various employers are willing to offer. This means that they can take those figures to different facilities and make them compete against one another to offer the best terms. Traditional employees are often blind to the various rates offered at other facilities, and this makes it more challenging for them to demand more money. You don’t know what you don’t know, and that puts traditional employees at a major disadvantage.
Leave Without Fear of Benefits Lost
Traditional employees often feel bound to their employer if for no other reason than the fact that their employer provides them with health insurance and other benefits. Independent contractors don’t have that same problem because ICs do not receive those benefits from the places where they work. Instead, they can leave anytime that makes sense to them from a personal financial standpoint.
As you can see, independent contractors have a lot more flexibility in their workplaces than many other types of workers. It is one of the reasons why so many people are drawn to being classified as ICs. The added flexibility and freedom that they receive is certainly something worth paying attention to.
Anyone who is considering signing a contract to become a physician assistant independent contractor should contact us first and get a meeting set up with one of our qualified contract attorneys. Our people can go over your contract paperwork to ensure that everything is set up just the way that you want it to be. Getting an extra set of trained eyes on it like this is exactly what you need to make the most of your contract negotiations.
Can You Make More Money as an IC Physician Assistant?
The earnings potential for an independent contractor physician assistant is very high. They can work for whatever amount the market will agree to pay them. That is to say that they can leverage their skills to seek higher and higher pay offers from various facilities. The savviest physician assistants will try to find the facilities that value their talents the most and negotiate their salary based on what the highest-paying facilities are willing to offer them. They may even pit offers against one another to see if they can get a higher rate of pay from their preferred facilities. There is nothing wrong with this, and it is all considered to be part of the negotiating process.
Consultation with Chelle Law
When your PA agreement is reviewed by a contract review attorney, you will find financial benefits which end up outweighing the cost of the review. Leave it to the experts. If you are in need of assistance with an employment agreement or contract review schedule a Physician Assistant Contract Lawyer with Chelle Law today!
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