Is a W2 or 1099 Better for a Physician? | Physicians Contract
Is a W2 or 1099 better for a physician? 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 break down both advantages and disadvantages.
Physician as Employee vs. Independent Contractor
An employee receives a W2 at the end of the year. So, you’ll receive a frequency payroll where you’ll get paid a salary. However, some might be on productivity compensation and are paid differently. Still, regardless, taxes will be taken from any of the compensation you receive. At the end of the year, the W2 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 1099 at the end of the year, which says how much the business paid you. No taxes are taken out if you’re a 1099 independent contractor.
Advantages of an Employee
What are the advantages of being an employee? Most revolve around security and benefits, so it should be easier to get into or 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. If the employer gets rid of you, they still must pay you for that notice period if they don’t want you to continue providing patient care. As an employee, you will get normal benefits that anyone will receive, like health, vision, dental, life, disability, and retirement. They will 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. It would help if you looked at the language of the contract to determine that. And then, as I said before, retirement is also something you won’t get as a 1099. So, as an employee, you receive a ton of ancillary benefits in addition to the compensation you receive.
Advantages of an Independent Contractor
Now, as a 1099 independent contractor, you’ll receive none of those things. You will have to pay for your malpractice, your license, your DEA registration, your credentialing, and privileging for the facilities needed to perform the duties.
Likely, whoever you’re contracting with will not 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 everything I stated before that you’d 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, and also getting none of the benefits of everything I stated. Are you coming ahead even with those kinds of deductions as 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 often do that to get out of having to pay employment tax.
Some Things to Consider between W2 and 1099
For whatever reason, I find that anesthesia and dermatology are the two specialties that utilize 1099 independent contractors the most. For anesthesia, that makes sense because you can pop in and out, do a case, and there will be no follow-up. So, I think in that scenario, it makes sense to be 1099. However, suppose you’re in dermatology and have a big practice base. In that case, 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 independent contractor agreement’s restrictive covenants for an employment agreement. 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, and that type of thing. But in any employment agreement, or at least almost all employment agreements for physicians, there will be restrictive covenants.
Restrictive Covenants in the Agreement
So, there will be a non-disparagement clause, a non-solicitation agreement, and a non-compete. I find that most of the people requiring the physician to sign an independent contractor agreement put in all of those restrictive covenants in the independent contractor agreement. So, even if you’re acting as an independent contractor for a business, you need to think, alright, 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 demanding that it knocks you out of an area for a period where you’re scrambling to figure out what you’re going to do.
Is one better than another? No, it depends on, 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 health, vision, dental, disability, life insurance, malpractice, all of that, how easy will it 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 are many 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 work as independent contractors, I believe it’s in the teens. It’s a low amount.
Other Blogs of Interest
- How Long Are Most Physician Contracts? | Physician Contract
- Can a Non Compete be Enforced on a 1099 Employee (Independent Contractor)?
Physician Independent Contractor vs Employee | Independent Contractors Versus Employee
Considerations for a physician as an employee versus an independent contractor. Let’s kind of break down both. If you’re an employee, you will receive a W2 at the end of the year. It just summarizes all the compensation you’ve received and then all the taxes that have been withheld. If you’re an independent contractor, you will not receive a W2, you’ll receive 1099 at the end of the year. That’s just a summary of the compensation received from that business. No taxes are withheld as an independent contractor. Let’s take the relationship between the two and start with when you’re an employee.
Dues and Fees Coverage Under W2
You will receive all the benefits of normal employment when you’re an employee. They’re going to pay for your malpractice insurance. The employer will pay for your health, vision, dental, life, disability, retirement, privileging, credentialing, and continuing medical education. They’ll probably provide you with moving expenses and another signing bonus. You get a lot of ancillary benefits as an employee.
Dues and Fees as 1099
As an independent contractor, you’re not going to get any of those things. They’re not going to pay for your dues or fees. They may pay for your annual premium for your malpractice insurance, but I find that’s hit or miss. It’s very rare if you have a claims-made policy that they would pay for medical tail insurance. So, that’s something you’ll have to worry about as well. And then all of the other things, you’ll have to pay for yourself. You’ll have to find your health, dental, and vision insurance. You get disability, life, you set up your retirement, whatever you decide which way to go. All of that falls upon the physician if you’re a 1099 independent contractor.
Maximizing the Deduction on Taxes of 1099
Now, for some, ultimately, you come out ahead compensation-wise. As for 1099, you can deduct all the things I just discussed. There are some tax advantages to being an independent contractor. I’m not a tax attorney; I’m not going to get into that specifics, but I would suggest reaching out to an accountant with experience. I can walk you through the most advantageous compensation/tax situation. It’s going to be very specific to the job. Suppose someone asks me if potentially they had the option of either being an employee or an independent contractor. In that case, several factors must be taken into account.
I find it’s rare for it to be the option of the physician. Normally, the position is either going to be this or that. It’s not up to you. I mean, it’s very rare when I review a contract that we have to discuss, alright, well, I do have two options and two contracts. Which way do you think I should go? Most physician-owned businesses simply don’t give the option to the physician. It’s either one or another.
Common Mistakes of Independent Contractors
Now, maybe you have two separate jobs, one is an independent contractor, and one is an employee. Then you’ll have to determine what situation is best for you. But it depends upon the physician. I find some physicians who work as independent contractors do some things wrong.
One, they don’t know where to go to get the things a normal employer would provide them. So, all those insurances and retirement and that type of thing, and they’re just not the type of person who is good at handling that side of their life.
Two, with no taxes being withheld from your compensation. I find many of them spend what they get. Then, either they’re not giving their quarterly payments to the government or year-end. They have an enormous tax bill that they were maybe shocked that they have to pay out. So, suppose you are going to be an independent contractor. In that case, you need to be on top of it. I need to withhold or set aside this amount from each paycheck I get from the business. That way, you’re not screwed in getting all the money that needs to be paid for your taxes annually.
It’s probably safer and more secure to be an employee versus an independent contractor.
Required Notice Period
Usually, the notice required to terminate the agreement is shorter for an independent contractor. That means either party can get out of the agreement without much notice. Now, as a physician, continuity of care always has to be taken into account. If you’re an independent contractor unless you are in a specialty where it’s just like shift work or maybe if you’re anesthesia. You pop in, you do the case and leave. But suppose you are a physician with a patient base, and you’re providing care to them if you tell your employer, hey. In that case, I’m not coming in tomorrow. Some continuity of care issues could lead to board complaints or other problems down the road. So, that needs consideration as well.
What is the notice required to terminate the contract? It’s usually 60 to 90 days if you’re an employee. In contrast, if you’re an independent contractor, you don’t see many notice periods less than 30. Still, sometimes it might be as low as two weeks for an independent contractor agreement.
So, that’s a little breakdown between being an independent contractor and an employee as a physician. As I said before, you need to look at the situation. Then, determine that compensation-wise doesn’t make the most sense considering the tax deductions and that type of thing.
What Is a 1099 Physician?
What is a 1099 physician? A common misconception amongst some new physicians just out of training is the difference between being an employee and an independent contractor. And then also, what is a W2 versus a 1099 employee? Let’s kind of work through those things. First, an employee is considered a W2 compensated professional. At the end of the year, you’ll get a W2. That provides all the salaries and compensation you receive and covers all the taxes. As a W2 employee, you’ll get a regular pay period check in addition to whatever bonus compensation you’ve worked out with the employer. As far as 1099, an independent contractor is 1099.
And 1099 is simply a form that goes out at the end of the year. States how much you received from the business you have a contract with. No tax is taken for any 1099 individual. One issue that comes up is if a physician has never been an independent contractor before, it’s easy to spend the money that you receive. And then, at the end of the year, they have to write a huge check which can be shocking to some. One piece of advice: I had to do this myself as a small business owner. It would help if you made sure that you set aside money to pay your taxes. That is either quarterly or at the end of the year, depending upon how you want to do it.
What Are the Advantages of Being a W2 Versus 1099?
What are the advantages of being a W2 versus 1099? First, as 1099, you’re not going to receive any of the benefits you would receive as an employee. A typical employer will pay for your malpractice insurance, licensing, DEA, credentialing, privileging, and CME. They’ll probably give relocation assistance or a signing bonus. All of the things, all of the expenses that go into being a physician, you will not receive as a 1099 independent contractor. Many employers or businesses that work with physicians that are 1099 put most negatives of an employment contract into the independent contractor agreement.
The whole point of an independent contractor agreement is it’s easy in and out. You don’t have to provide that much notice to leave. And then, hopefully, wouldn’t be all of the negative things associated with the contract after it terminates, so the restrictive covenants like a non-solicitation agreement, a non-compete, and confidentiality clause. I find that for most employers that utilize 1099 physicians, one of the main reasons is to get out of paying employment tax. So, the disadvantage of which to the physician is:
- They get none of their benefits paid for
- Then two, they’re going to have all the negatives of an employment contract with potentially an onerous non-compete
- And even potentially, a longer notice period is required to terminate the agreement.
What are the benefits of being 1099? Well, there are some tax advantages. I’m not a tax attorney, so I will not get into this. Still, there are tax advantages to being a 1099 independent contractor versus an employee. You can deduct most of those expenses that I already went over. Still, you’re also not going to have any of the retirement options offered by the employer and all of the healthcare insurance-related benefits like health, vision, dental, life, and disability. All those things you would typically get from an employer. You’ll have to find yourself, and I can tell you, it’s not easy finding all of those things when you are on your own. So, one of the main benefits of being an employee is that you get all those things offered to you easily, and you don’t have to spend time looking for them on your own.
So, all of the negatives of being 1099 are also the benefits of being an employee. As I said before, they will pay for your malpractice insurance. All your dues and fees offer you all those things, health, vision, dental, life, disability, and retirement. It’s just kind of a more secure relationship.
The Difference in the Amount of Notice Between a 1099 and W2
Every physician will have what’s called without-cause termination in their contract. And what that means is either party can terminate the agreement at any time, for any reason. That is, with a certain amount of notice to the other party. Normally, it’s between 60 to 90 days for an employee. An independent contractor, theoretically, should be less than that. So, maybe two weeks to 30 days. Now, you must consider continuity of care. You can’t just call your employer one day and say, hey, I’m not working for you ever again, or I guess, maybe not. Still, if you’re an independent contractor, you must consider some continuity of care.
Specialties Utilizing 1099
The two specialties that utilize independent contractor agreements the most are anesthesiologists and dermatologists. Why is that? I can tell you. For anesthesia, it makes sense. You can pop in and do case-to-case. You don’t have to follow up much if you’re not in pain, and it’s simple. As far as dermatology goes, you will have a patient base that will have to be transitioned to another physician when you leave. That needs consideration as well. So, that’s what a 1099 physician is and the advantages and disadvantages of going into that. If you have an independent contractor agreement, I suggest getting it looked at to talk this through with an attorney. And I hope this information was helpful.
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