Veterinarian Independent Contractor Tax Deductions | Veterinary Tax Considerations
What are the tax deductions a veterinary associate can make if they are classified as an independent contractor? First, if you are an employee of a veterinary practice, you’ll receive W2 at the end of the year, and taxes will be withheld from your regularly scheduled paychecks. Whereas if you’re an independent contractor, you’ll receive a 1099 at the end of the year, and no taxes will be withheld from your compensation, you will be responsible for paying for all those taxes. What are the benefits of being an independent contractor? Well, it makes the most sense to be an independent contractor when you’re working part-time for an employer. For instance, maybe you’re in emergency veterinary care and you’re only going to work maybe one or two weekends a month.
Income Deduction for Practice Expenses
In that situation, it doesn’t really make sense to be an employee. It makes more sense to be an independent contractor. As an employee, you will get all the ancillary benefits. The veterinary practice should pay for your licensing, DEA registration, continuing education reimbursement, signing bonus, and moving expenses if you’re moving from out of state. And then they’re also going to offer health, vision, dental, disability, and life retirement. The employer will cover all those things. When you are an independent contractor, you will get none of those things covered. You are responsible to pay for all of that yourself. Now, does that mean you are at a disadvantage compensation-wise? Well, no, if you do the, I guess, correct things, and the correct things would be if you’re going to work as an independent contractor, you need to create an LLC.
You need to meet with an accountant to kind of go over the best way to maximize your tax deductions. You need to get an EIN from the IRS, you need to create a bank account, and you need to run all the compensation expenses through that bank account so you can track them appropriately. Those are the things you need to do to make sure that you’re setting yourself up to be able to take the tax deductions when you’re ultimately filing taxes at the end of the year. What are those things you can do? Alright, well, all the things I just discussed can be used as tax deductions. So, your license, DEA, CE, any kind of business expenses, your home office, if you’re using that to prepare in some way, although that’d be tough as vet, travel, you could depreciate other assets if you have them for the business, malpractice insurance, licensing board, and defense insurance, all those things can be used as tax deductions when you’re an independent contractor.
1099 Independent Contractor
Now, a couple of considerations, one, if you’re a 1099 independent contractor, the employer is not going to have to pay any employment tax on you. So, they are usually saving around 10 to 12% of your total compensation. They also do not have to spend any amount of money on the benefits, which can be costly at times. If you’re working as an independent contractor for somebody, you should expect to make a little bit more because the employer is saving on all of those things. If you’re making the exact same amount as somebody who’s working as an employee for practice, you’re missing out. You should have at least some leverage and point out to them all the things that they’re saving on for you to have some kind of increase. Now, how much? It depends.
I mean, probably somewhere between 5% to 15% of a bump over someone else who’s working as an employee would make financial sense for the employer. But whether they’re willing to do that or not, I can’t tell you, but everything is in negotiation. If you’re given an agreement, those are certain things you can push for because the employer is saving when classifying you as an independent contractor. I know I mentioned this, but I’m just going to drive it home. You should absolutely meet with an accountant prior to signing any kind of independent contractor agreement. You need to have the business structures set up properly in advance and know exactly what you can and can’t deduct at the end of the year, which you should run through the bank account. It makes no sense to just sign an agreement and start without having any of those things in place. You could miss out on detecting a lot of valuable business expenses.
Veterinarian Employee or Independent Contract?
Is a W2 or 1099 better for a veterinarian? Let’s just take what a W2 and 1099 mean, and then the employment relationship between both of those. And then kind of talk about which one is probably better for the vet.
W2 for Employees
First, if you are a W2 employee, you are an employee, you’re not an independent contractor and you’ve signed an employment agreement. And so, the taxes will be taken out of whatever your compensation is on a biweekly, monthly basis, whatever their pay period it is. In a normal employment relationship, the benefits you’re going to get would be, they’re going to pay for your malpractice insurance, health, insurance, vision, dental, life, disability, retirement, they’ll pay for your license, DEA registration if necessary, credentialing, those types of things. So, they will pay for all the normal things that kind of go into being a vet.
1099 for Independent Contractors
Whereas if you are a 1099, you are an independent contractor, you’ve signed an independent contractor agreement with the employer and you are not an employee, meaning, no taxes are taken out of your payment, so they’ll just pay you. And then ultimately, it will be your responsibility to then pay the state and the federal government for any of the taxes. Now, when you are an independent contractor, the employer, generally, isn’t going to provide any of those benefits at all. Sometimes, they’ll pay for the underlying malpractice insurance, although for vets, malpractice insurance is extraordinarily reasonable. I mean, for like a general vet, it could be $300 or $400 a year. They’re not going to pay for your license, for your DEA, they won’t provide benefits.
So, no health, vision, dental, disability, or life retirement. You’re just not going to get that stuff if you’re an independent contractor. Why would you be an independent contractor if you’re not going to get any of those things? Well, I guess it would come down to compensation. You should make more theoretically as an independent contractor to kind of offset not getting all those benefits. If you’re going to have a hundred thousand dollars offer from an employer and when you’re going to be an employee and they’re offering you all those benefits and then they’re going to offer you a hundred thousand dollars to be an independent contractor and not offer any of those benefits, it’s just not as good of an offer.
Independent Contractor’s LLC
For most independent contractors, you’d create an LLC and then you would expense all those things, but it’s also much more difficult to get any of the ancillary benefits when you’re completely on your own. Like, it’s very hard to find health, vision, and dental, you can’t find disability, you can’t get life insurance obviously, and then you also must pay for your own things. The reason why, I mean, this is just the honest reason why most employers would pay as an independent contractor versus an employer or an employee, is they don’t have to pay employment tax. Employment tax is usually somewhere between 8% to 12%. So, they’re saving 12% on what your compensation is each year. They’re essentially treating you as an employee. They tell you where to go, how much you’re working, who to see, and so you’re really a quasi-employee and the employer is just trying to not have to pay employment tax.
The Internal Revenue Service (IRS) lists a 20-factor test on kind of an analysis of if someone is an employee or an independent contractor. So, maybe look at that and say, alright, look, you’re not giving me or any of the benefits of being an employee, but you’re requiring me to do all the things that an employee would normally do. Being an independent contractor would make sense if it’s more of like a side gig. So, maybe you’re just doing moonlighting work for somebody. And it’s up to you how often you’re working, that would make sense to be an independent contractor. But if this is like a full-time job where you’re going in five days a week and you’re interacting with the vet tech, the front office, and all the patients and all that kind of thing, it’s unlikely that you’re an actual independent contractor and it doesn’t make a lot of sense.
Overall, most of the time, it would make the most sense to be an employee, so you’d get a W2. It wouldn’t make sense to get a 1099 and be an independent contractor for it’s a full-time job. Opinions on that may vary, but I just find overall most of the time, if an employer is offering an independent contractor position, they’re not actually an independent contractor.
Breaking a Business Contract for Veterinarians
Can a veterinarian break their employment contract? And the short answer is yes, they can. However, if this means that they’re breaching the contract and not adhering to the terms of the contract, then they would likely open themselves up to liability which includes litigation costs and arbitration. The employer can ask for damages that might include recruitment costs for a new veterinarian for the practice, they may ask for administrative fees, credentialing fees, and the list kind of goes on from there. So, it’s never a good idea. We never advise our clients to breach their contracts. The best way to break or terminate the contract is by doing it exactly how it’s outlined in the contract. Typically, there is a clause that’s called a termination clause and there are normally three ways to terminate a veterinarian contract.
The first way is that both parties, the employer and employee, mutually agree to terminate the contract and go their separate ways. However, this is kind of rare and we don’t see it happen a lot. The second way is for cause termination. And this is typically weighted more towards the employer. The employer can terminate the contract without notice if any egregious acts happen, and typically, they are listed on the contract themselves. This might be being convicted of a felony and losing your license to practice. And again, the list just goes on from there. Then the last way to terminate a contract would be for no cause, and a no-cause termination is typically outlined in the employment agreement. You just must give the other party 60 to 90 days notice, and then the contract is terminated and then you can go your separate ways.
Veterinary Independent Contractor Agreements | Veterinarian Agreement
When sickness or injuries strike your beloved family pet, you will likely rush them to your trusted veterinarian to take care of them. Most people in this situation do not realize that the vet that sees their pet today may have been working at a completely different clinic yesterday.
The work landscape for veterinarians has changed, and the days of being able to count on a specific veterinarian seeing your pet every time may be drawing to an end. While many companies still hire full-time vets that work in one location, there has been a push in recent years for more and more vets to work on an independent contractor (IC) basis versus an employed veterinary associate position. We will explore what this means for vets, their employers, and clients.
How Does This Practice Arrangement Benefit Veterinarians?
Veterinarians are often left with a decision to make regarding their own future. That decision involves whether they will ultimately decide to be an independent contractor or if they wish to pursue the full-time employee route. Some are tempted to sign on as employees simply because they are already familiar with working in this fashion. However, there are some upsides to being an independent contractor that should not be ignored.
Controlling your own time and hours is a tremendous upside to working as an independent contractor. There may be some situations in which an individual has to be at a particular location for a set time, but they are the ones who are entirely in charge of their schedule and deciding where they will go at any given time. A flexible work schedule allows them to do their best work when and where they want to:
You can have a very flexible work arrangement as a contractor, especially if you’re on a self-regulated schedule, working the hours you want and need. This also means that you can fit your schedule in with your lifestyle aspirations, deciding when the best time to work is.
Higher Earnings Potential
Taking on higher-paying work is always possible when someone is actively working as an independent contractor. They are never locked into one employer. This means that they retain the possibility of working for another company if they determine that their skills will be more handsomely rewarded somewhere else. These opportunities arise from time to time, and it is nice to know that you can take them on as an independent contractor.
The Ability to Turn Down Work
Establishing strict work-life boundaries is important to many people these days. There is a burnout crisis in the veterinarian industry, and some vets are saying enough is enough. They do not want to put their mental and physical health on the line for any employer. Thus, plenty of vets are looking to go the independent contractor route to save themselves on some of the emotional damage that working far too many hours puts on them.
This all probably sounds pretty great, but make sure you have a veterinary contract lawyer look over any veterinarian independent contractor agreements before you sign them just to be safe.
Do Employers Like IC Agreements?
Technically speaking, the party that is paying money in veterinarian independent contractor agreements is not an employer. That is one of the upsides of working as an independent contractor. The party that pays money in this scenario is avoiding many of the responsibilities of being an employer. Instead, they agree to a particular service at a specific price and contract with a veterinarian to provide that service. If both sides of the arrangement can agree on the price, then everything is all set just perfectly.
The reasons why companies like IC agreements are because:
- Less Liability – Independent contractors do not have the same rights to bring a lawsuit if they feel like they are being discriminated against. Obviously, companies should not discriminate against someone providing a service to them at any time. Still, they can rest a little easier knowing that they are shielded from accusations that they have done something like this.
- No Benefits are Provided – Employees are often provided a whole buffet of benefits to come and work at a specific place. The same is not valid for independent contractors. They don’t have to be offered anything. Thus, companies will often look to bring in independent contractors to fill some of the gaps in the services that they currently provide.
Consultation with Chelle Law
When your veterinary contract is analyzed by an experienced 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 a veterinary agreement or contract analysis schedule a Veterinarian Agreement Review with Chelle Law today!
Veterinary Contract Questions?
Contract Review, Termination Issues and more!