Personal Finance: Should you be an independent contractor?

If you are contemplating a career move, or just finishing residency, an important decision for you to consider is whether you should be an independent contractor or an employee…

 

One of the most desirable aspects of being an emergency physician is career mobility. As purely hospital-based physicians, we can move to new geographic locations, join different groups, or work at different hospitals without the hassles of an office. If you are contemplating a career move, or just finishing residency, an important decision for you to consider is whether you should be an independent contractor or an employee since each has very different financial characteristics. Like many EPs, I’ve made this decision multiple times in my career. Recently I had a chance to speak with a few different emergency medicine groups to discuss the benefits of becoming an independent contractor or an employee. Here’s what I found.

What is an Independent Contractor?

According to the Internal Revenue Service, you are an independent contractor (IC) if you have the “right to control or direct only the result of the work and not the means and methods of accomplishing the result.” The IRS looks at three aspects of your work to determine IC status: (1) Behavioral control: whether the EP is told how to work or is trained to perform services in a certain manner (2) Financial control: whether the EP controls the business aspects of the job, including the extent to which the EP has unreimbursed expenses (3) Type of relationship: whether the EP is provided with benefits and the length of the relationship. Assuming you meet the criteria of IC status, you are considered a self-employed individual (sole proprietor) for federal tax purposes and have business or self-employed income. Unlike an employee who receives a W-2 form, as an IC you receive a 1099 form and are required to report your income on Schedule C. The payment you receive is always your gross income so you are responsible for paying Social Security and Medicare taxes entirely by yourself (instead of splitting it with an employer) and must calculate and pay these taxes on Schedule SE every year. These taxes, known as self-employment taxes, amount to 15.3% on the first $102,000 of Schedule C income for 2008, and 2.9% on all amounts above $102,000. In addition the US tax system is a pay-as-you-earn system, meaning that taxes are withheld at the time you earn income. Whereas an employee’s taxes are automatically deducted from each paycheck, no taxes are deducted from your paycheck as an IC so you also face another task—paying quarterly estimated taxes. Finally, if you work in more than one state you are also responsible for determining the percentage of income earned in each state and paying taxes accordingly.

Advantages of IC status

While IC status entails administrative burdens, there are several advantages as well, foremost of which are tax advantages. Schedule C lists your IC income, but it also gives you wide latitude on deducting numerous business expenses, most of which cannot be deducted as an employee. Common business deductions for EPs who are ICs include malpractice insurance premiums, car mileage, medical license fees, CME tuition and travel, business meals and entertainment, subscriptions to medical journals, and the home office deduction. As you can see, these deductions can amount to tens of thousands of dollars. Interestingly, in calculating self-employment income, the IRS allows you to ignore 7.65% of your net Schedule C income and in addition you actually get to deduct half of the self-employment tax on your income tax return. Since you do not receive benefits as an IC, you can also setup a variety of retirement plans, from a Keogh to a SEP-IRA, and can contribute and deduct up to $46,000 in 2008. Since only you contribute to your plan (employers have the option of contributing to employee plans), you are always 100% vested in the plan so changing jobs does not result in forfeiting any retirement plan assets. Also, since it’s your plan, your investment choices are broad and self-directed. Want to dump all your money in gold or Google? Go right ahead. Finally, you can also deduct the full amount of health insurance premiums for you and your family as long as you are not covered by any other employer plan.
Next month: The advantages of being an employee.

Setu Mazumdar, MD practices emergency medicine in Atlanta, GA and is a member of the National Association of Personal Financial Advisors (NAPFA).

Acknowledgments: Thanks to the physicians of ApolloMD for their valuable insight in preparing this article
 

 

From the Horse’s Mouth
What EPs say about being an Independent Contractor

We find that most independent minded physicians embrace the…model of productivity-based compensation with an IC status. It allows true flexibility and autonomy of your financial scenario.”
-Chris Krubert, MD MBA

I was hesitant, even a bit nervous, about being an independent contractor (IC) as I’d have to handle my own health insurance, retirement and taxes. Now that I’m an IC, I prefer it.  I control my paychecks, setting aside monies for taxes in accounts that give me interest.”
-Greg Amaya MD, ED director at Cartersville Medical Center in Cartersville, GA

What do YOU like about being and Independent Contractor?