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 a 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 the 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.
Other Blogs of Interest
- What to Know Before Signing Your First Physician Contract | Contracts
- What is Without Cause Termination in a Physician Contract? | Physician Termination Agreement
What Are Different Types of Physician Contracts?
What are the different types of contracts physicians can sign? There are two: You have an independent contractor agreement. Then, you have the employment agreement. So, what are the differences between the two? An employment agreement means an employer and the physician an employee. They are W-2 employees. That means tax deduction is out of whatever compensation they have. And then, the employment agreement will go through the general terms of the relationship:
- How long does the contract last?
- How is it terminated?
- The process of compensation
- The liability insurance
- Restrictive covenants
That type of thing. In an independent contractor agreement, you’re not a W-2 employee. You’re a 1099 employee. That means no tax deduction of whatever the physician received via compensation.
Physicians Being an Independent Contractor
The independent physician will be responsible for paying their taxes quarterly at the end of the year. Another big difference is for most independent contractor agreements. The independent physician in the practice will be responsible for all of the ancillary costs associated with the practice:
- Medical license
- DEA, registration
- Professional associations
- Privileging and credentialing
- Malpractice insurance
- Whether they have to pay medical tail insurance
Those things are generally the cost of the independent contractor, not the person they’re working for. Sometimes, the employer utilizing the independent contractor will pay for certain things. Still, I guess another key point is that an independent contractor will also rarely get benefits. Health, vision, dental, disability, life insurance, and retirement are unavailable. So, why would someone, if given a chance, choose to be an independent contractor?
Employment Agreement From the Practice
The entire point of an independent contractor agreement is that it’s easy to get into and out of. And theoretically, the independent contractor should be able to make their schedule work when they want that type of thing. However, that doesn’t honestly happen very often. An independent contractor, if they’re smart, they’ll create an LLC. Then they’ll have some money paid and set up a bank account. They can expense all of those things I talked about previously. I find that most employers who, I don’t know, if force is the right word. They only offer the independent contractor agreement option. Maybe they’re not solely doing that, but they’re doing it often to avoid paying employment tax to the physician.
Honestly, an independent contractor agreement for a physician does not have many benefits. A long notice is a requirement to terminate the agreement if it still includes restrictive covenants.
Physician Employment Contract Depending on Specialties
As I said, they don’t get paid benefits or other licensing. Let us take anesthesiologists and dermatologists. Those are specialties that frequently use an independent contractor. Some radiologists as well, but primary care, peds, cardiology, that type of thing, are almost always going to be employees. And then, if you are working for a hospital or healthcare network, 100% of the time, you’ll be an employee rather than an independent contractor. Maybe you’re working at a hospital, but you’re working for a group contracted with the hospital to provide services. I guess that’s possible where you’d be an independent contractor, but it doesn’t happen often. So, the two types of physician contracts are independent contractor agreements and physician contracts of employment.
What to Know Before Signing Your First Physician Contract | Contracts
What should you know before you sign your first physician employment contract? This question is a broad topic, but we’re going to hit the main areas, and things to think about before signing your first employment agreement.
Ways to Determine if Compensations Offered Are of Fair Market Value
First, determine whether the compensation you’re being offered is fair market value. There are a couple of, I guess, good ways of going about trying to find that. Well, the MGMA, the medical group management association, collects annual salary data from across the country. If you can access that, they have a lot of good information about total compensation, average net-collections, and average RVUs generated by specialty. It’s hard to get that info sometimes.
I mean, if you Google around, you might be able to find some of the compensation data that’s a couple of years old. Or you can talk to someone who has access to the data, like for our firm, we have access to the data. So, we can tell the physician exactly what the numbers say. Now, that’s certainly not the be-all-end-all. There are other services out there that offer something similar. But I also think it’s limited because some specialties have a tiny sample size. In addition, just total compensation should not be the determining factor when looking for a job. Alright, so that’s compensation.
Another way of thinking about it would be, if you have classmates in your training program, you need to ask them what they’re receiving. It’s going to vary based on geography and then setting. Are they going into a hospital network? Are they going into the federal facility? Or are they going into private practice in some way? It is good to speak to people you train with to see what they’re being offered. And then mentors are another excellent place.
How To Terminate Contracts
If someone is already out and maybe they’ve been a teacher for you or a mentor, ask them if they’re willing to talk about the type of compensation they’re receiving. Next would be how to terminate the agreement. Something you need to consider. There are four ways to terminate a contract if the initial term ends. Let’s say you have a two-year contract, and no language states it automatically renews. It just ends, and the contract terminates. You can complete a contract by mutual agreement. Then you can also terminate a contract with-cause. So if one of the parties breaches the contract, either party can terminate the contract if the other party doesn’t fix the breach. It’s called cure. And then lastly, and this is what I want to hit on, is without-cause termination.
Every contract you sign must have without-cause termination in it. There are minimal circumstances where no without-cause termination would be okay. If you’re a J-1, that one would probably benefit you not to have that in there. But without-cause termination means you can terminate the contract at any point, for any reason, with a certain amount of notice to the other party. Contracts that don’t have without-cause termination, meaning you must work out whatever the initial term is. There’s no way of terminating the contract for any reason. They would have to breach it if you wanted to get out of it.
Why Do I Need No Cause Termination on My Contract?
The reason why you need that is, let’s say you start with the job, you’re paid on productivity, and the volume is not there. It’s not your fault, or maybe the employer brought you in telling you it was going to be one way, and the call is just excessive. Or perhaps it’s just a terrible personality fit; whatever reason you’re not happy in that job, you need the ability to get out of it if you want. So, it would be best if you had without-cause termination in the contract. Somewhere between 60 to 90 days is standard for physicians.
Legal Mistakes Physicians Make are not going through Non-Compete
Alright, next, the non-compete. A non-compete says the physician can’t work after the contract terminates for a period within a specific area. For example, most non-competes are one year, sometimes up to two.
And then, a reasonable mileage would be 10 to 15 miles from your primary practice location. Often, the employer will try to tag multiple locations. So, maybe if you worked in three outpatient clinics in a hospital or something. They try to attach it to all four of those, or perhaps the employer has many facilities in the area. You’ve only worked at one of them, and they might try to attach it to all the facilities they own. That’s not fair either. You want to try to get it to one year, 10 to 15 miles from maybe at most two locations. Anything beyond that would be considered unreasonable. There are a few states where it’s entirely unenforceable to have a non-compete. But for the most part, most states allow non-competes for physicians.
Health Care Malpractice Insurance, Do Not Accept Without It
Lastly, with malpractice insurance, the employer should almost always pay for your underlying annual premium. How much must they pay each year to insure you? Depending upon the policy, whether it’s a claims-made or an occurrence-based approach, it will determine if you must pay what’s called tail insurance.
If it’s a claims-made policy, medical tail insurance is necessary. A good rule of thumb is that tail insurance costs about twice your annual premium. In some specialties, it can be costly. OB-GYN, some of the higher-level surgical things could have tails that are fifty to a hundred thousand dollars. You want to avoid having to pay for that. So, make sure that there’s either a fair split between the employees and employer or having the employer pay the total cost of the medical tail insurance, or there’s also insurance called occurrence-based coverage. And in that scenario, medical tail insurance is not needed at all. It’s about a third more expensive than claims-made, but you won’t have to pay for medical tail insurance in that scenario.
Now, you probably need to think about dozens of other things. I would say, in my mind, those are probably the foremost important. But you have benefits, bonus structure, contract length, other restrictive covenants with the non-solicitation agreement, non-disparagement, confidentiality, your hours worked, and the call. I mean, you need to think about a ton of things. So, I would suggest reaching out to someone with experience reviewing contracts. I mean, when you’re signing a contract that could be worth a million dollars, at least in my opinion, it would be foolish not to get it looked at by someone who knows what they’re doing.
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, employees are considered W2 compensated professionals. 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 employees. 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.
Can a Physician Be an Independent Contractor?
One question that comes up occasionally is, are physicians independent contractors? The answer to that depends on what kind of contract you signed. There are two types of contracts for doctors. You have employment agreements and then independent contractor agreements. With an employment agreement, you’re an employee. Then the contract you signed will specify all the terms. What the physician needs to do and what the employer needs to do. Then in an independent contractor agreement, many of those terms are the same. Still, there’s much less detail in an independent contractor agreement for some employment agreements. Let’s briefly go through the two, and then we’ll get back to when a doctor is an independent contractor.
Independent Contractor Agreement for Doctors
The main differences are one, in an employment agreement. The physician receives payment via W-2. Then, the employer will pay for most of the things necessary to be a doctor:
- DEA registration
- Practice insurance
- Any expenses associated with being a doctor.
You’re not receiving payment as a W-2 employee in an independent contractor agreement. Your payment is via 1099. That means the doctor must take out the taxes when they file their returns. Then, mostly, the entity contracting with the independent contractor won’t pay the dues, fees, and other expenses. So, the physician will be the one that pays for the license, DEA, and continuing medical education. There are also no benefits associated with an independent contractor agreement generally. So employers won’t provide health vision, dental, life, disability, retirement, and all that stuff to the independent contractor. Another question is, what’s better for me, and what’s the point of both? I find it’s very specialty-dependent. Anesthesiologists and dermatologists have more independent contractor agreements than any other specialties. Suppose a physician is self-employed. Then, they’re essentially taxed as an independent contractor, although they would not receive 1099.
Medical Practice Tax Considerations
Some of these practices only utilize independent contractor agreements because they can avoid paying employment taxes. These are essentially quasi-employment agreements. The doctors kind of act as employees, their schedules set for them. They’re using the employer’s facilities and supplies and staff. However, if a physician isn’t an independent contractor, they would generally create an LLC. Then they would run all of the payments through the LLC bank account. They would also be able to deduct the expenses. I went through all the things before licensing CME, malpractice, insurance, tail insurance, and all that kind of stuff as well. I mean, if I had to weigh one versus the other. Suppose the physician does have the choice between the two. Then, it would depend upon the compensation structure whether it would be worth accepting an independent contractor agreement.
Physician Employee or Independent Contractor?
If it’s based purely on net collections, sometimes it is more lucrative to be an independent contractor. Still, suppose I have to give a percentage of which way a physician ultimately benefits more. In that case, it’s probably like 80/20 employment agreements. That’s because all the things the independent contractor has to pay for, which the employer provides, add up over time. Then another thing to think about is some individual physicians can’t get some of the things that a larger employer can. It isn’t easy to get individual health insurance because it’s expensive. Then all the other things, vision, dental, life, disability, malpractice, and tail insurance, add up quickly.
Anyway, if a physician’s debating between the two, I wish I could give a better answer besides it. It depends, but that’s an overview of whether doctors are independent contractors or not. It just depends upon what kind of contract they signed.
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.
employees receive 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 be paid differently. Still, regardless, the taxes will be taken out from any of the payments you received. At the end of the year, W2 summarizes all compensation you’ve received and taxes that were 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. If you’re a 1099 independent contractor, no taxes will take out.
What Are the Advantages of Being 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 a physician employee, 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 average 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. The employer may pay for your tail insurance if it’s a claims-made policy. It would help if you looked at the contract’s language to determine that. And then, as I said before, retirement is also something you won’t get as 1099. So, as an employee, you receive a ton of ancillary benefits in addition to the compensation you receive.
Pros and Cons as a 1099 Physician
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 privileges for the facilities needed to perform the duties. It’s very likely that whoever you’re contracting with will not pay for your malpractice insurance. And indeed, they’re not going to pay for your tail insurance if it’s a claims-made policy. There are some tax advantages to being 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 concerned about. 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. You’re 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.
Considerations to Make Between W2 and 1099
I find that most healthcare employers or businesses that use 1099 employees often do that to get out of having to pay employment tax. 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 a 1099. However, suppose you’re in dermatology and have an extensive 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 you need to consider. Another disadvantage of a 1099 is that many of the restrictive covenants for an employment agreement are put into an independent contractor agreement.
What Is the Purpose of the Independent Contractor Agreement?
I mean, the entire point of an independent contractor agreement is kind of straightforward 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 will be restrictive covenants. 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 must be very careful if you work as an independent contractor for multiple businesses.
The contract 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 upon the compensation, setting, and area of expertise. Then three, are you able to procure all those benefits 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 more than if you were an employee, especially on medical 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.
Reach Out to an Employment Contract Attorney
Before signing an employment contract, you must know all the contract benefits you are entitled to. It means reading your contract carefully and asking questions where needed. It will help you avoid misunderstanding. It will also enable you to enjoy a long and prosperous medical career. Another consideration is whether the Agreement contains a non-compete agreement.
One way to ensure all contract benefits are offered as they should is by having an employment contract lawyer review your contract or independent contractor agreement. This way, the attorney can guide and advise you accordingly. Attorney Robert Chelle is a professional contract lawyer who can help you review the benefits under your contract. He has helped many healthcare professionals, and he can help you too. Feel free to reach out for assistance today.
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