Is a W2 or 1099 better for a physician? Obviously, this depends upon your specific situation and setting. But sometimes, a physician will have the option of whether to be an employee or an independent contractor, so let’s kind of break down the advantages and disadvantages of both. An employee receives a W2 at the end of the year. So, you’ll receive a frequency payroll where you’ll get paid salary. However, some might be on productivity compensation and are paid in a different manner, but regardless, taxes will be taken out of any of the compensation that you received. And then at the end of the year, the W2 just simply summarizes all the compensation you’ve received and the taxes that have been withheld from it.
As far as an independent contractor goes, you get a 1099 at the end of the year and that just simply says how much the business paid you. No taxes are taken out if you’re a 1099 independent contractor. What are the advantages of being an employee? Well, most of them revolve around security and benefits, so it should be easier to either get into or get out of an independent contractor agreement. Meaning, that the notice period to terminate the contract is usually shorter. Whereas if you’re an employee, normally for a physician, that’s between 60 to 90 days, meaning, if the employer gets rid of you, they still must pay you for that notice period if they don’t want you to continue on providing patient care. As an employee, you will get normal benefits that anyone will receive like health, vision, dental, life, disability, and retirement. They’re going to pay for your licensing, DEA registration, credentialing, and privileging.
They’re going to pay for your malpractice insurance, maybe they’ll pay for your tail insurance if it’s a claims-made policy. You must look at the language of the contract to determine that. And then, as I said before, retirement as well is something that you won’t get as a 1099. So, as an employee, you receive a ton of ancillary benefits in addition to the compensation that you receive. Now, as a 1099 independent contractor, you’ll receive none of those things. You’re going to have to pay for your malpractice, your license, your DEA registration, your credentialing and privileging for the facilities needed to perform the duties.
It’s very likely that whoever you’re contracting with, is not going to pay for your malpractice insurance. And certainly, they’re not going to pay for your tail insurance if it’s a claims-made policy. There are some tax advantages to being a 1099. I’m not a tax attorney, and I’m not going to get into that in this blog, but there are tax advantages. You can deduct almost all of the things that I stated before that you’ll be responsible for. Does that put you in front ultimately as far as compensation goes? I’m not sure, you’re going to have to do the math. I find that the compensation for an independent contractor generally is equivalent to what you would get paid as an employee. And so, if you’re getting paid the same, but you’re also getting none of the benefits of all the things that I stated, are you coming out ahead even with those kinds of deductions as being a 1099 independent contractor? I’m not sure, you’re going to have to figure that out.
I find that most healthcare employers or businesses that use 1099 employees, many times, they’re doing that just to get out of having to pay employment tax. I find that anesthesia and dermatology, for whatever reason, are the two specialties that utilize 1099 independent contractors the most. For anesthesia, that makes sense because you can just pop in and pop out, do a case, and there’s going to be no follow-up. So, I think in that scenario, it makes sense to be a 1099, however, if you’re in dermatology and you have a big practice base, you need to think about the continuity of care if you were to terminate the agreement. Those are things that must be taken into account. Another disadvantage of a 1099 is that many of the restrictive covenants for an employment agreement are put into an independent contractor agreement as well.
I mean, the entire point of an independent contractor agreement is kind of easy in and easy out. Physicians theoretically should have more control of their schedule when they work, how they work, that type of thing. But in any employment agreement, or at least almost all employment agreements for physicians, there are going to be restrictive covenants. So, there’s going to be a non-disparagement clause, a non-solicitation agreement, and then a non-compete. I find that most of the people that require the physician to sign an independent contractor agreement put in all of those restrictive covenants in the independent contractor agreement as well. So, even if you’re acting as an independent contractor for a business, you need to think, alright, well, if I have a non-compete, what does it prohibit me from doing?
What is the geographic radius? And then, how long does it last? I get asked a lot, well, is non-compete enforceable against an independent contractor? And the answer is yes, they can be. You need to be very careful that if you’re working for multiple businesses as an independent contractor, the contract, one, doesn’t prohibit that while the contract is ongoing, and then two, is the non-compete going to be so onerous that it knocks you out of an area for a period where you’re really scrambling to figure out what you’re going to do. Is one better than another? No, it just kind of depends upon, one, the compensation, two, the setting and what specialty you’re in, and then three, are you able to procure all of those benefits that you can’t get when you’re an employee?
Once again, as an independent contractor, if you have to get the health, vision, dental, disability, life insurance, malpractice, all of that, how easy is it going to be for you to get that? And then, is the cost going to be, I guess, much more than if you were kind of an employee, especially when it comes to tail insurance? There’s a lot of things to think about when determining what works best. Now, the percentage of independent contractors of physicians is relatively low. There aren’t a ton of independent contractor physicians out there. If they’re doing locums, moonlighting, or things like that, that makes sense for those short independent contractor relationships to exist. But physicians who just work as independent contractors, I believe it’s in the teens. It’s a low amount.
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