From Employee to independent contractor...

[rev ronin]

So, my SP and I are now considering moving me to an independent contractor status, so I can work at my own pace, set my own hours, etc. and will be paid based on my receipts, with no guaranteed or minimum salary.  I'm not particularly afraid of this, as I have a pretty well established occupational medicine panel, along with the family medicine folks I see.

 

Who has ever converted like this before?  What pitfalls should I avoid?  What sort of accounting software/corporation setup/etc. has worked for folks?  Is there a book about doing this that someone wants to recommend?

 

 

[Boatswain2PA]

Accounting software - none needed.  I use quickbooks for my medical business (locums), but mostly just for the invoicing.  With quickbooks I can submit an invoice when I leave one hospital and drive towards the next, helps me keep it sorted out who owes me what and who's paid.  I don't think you will be in that situation, so I would save the $130/year  

Our properties business is much more complicated (rentals, plus two houses we are selling via owner financing, with two very different financing schemes), and I no longer use quickbooks.  I used to, but now I just put all the receipts onto a running spreadsheet with one column per house.  

Corporation setup - none...unless you want to get really complicated.

      We have an S-corp LLC for our properties business because it does give us some liability protection if someone slips and falls at one of our rentals.  

     I used to have an S-corp LLC for my medical business because I thought it would offer some liability protection as well from med mal, but I've found that it doesn't. So no need to set one up.

    Unless........you want to set up a C-corp LLC so that you can pay yourself a salary (with normal taxation rate) and then give yourself a big bonus (no SS taxation).  Some people do this, but the administrative burden of a C-corp is large in comparison to an S-corp.

 

     That being said, I may actually set up a a C-corp for my medical business this year because my tax burden is becoming freaking obscene.  I will gross about $220K this year in 1099, minus $50K in expenses leaves $170K,  If I make the same numbers next year, I could give myself a $70K salary (not unusual for PAs in my area), and a $100K bonus, thus saving $12,400 in SS taxes.

 

Other things to think about

-Health insurance.  If you're covered under current company I don't think they will cover you as a 1099.  Otherwise you will have to get your own on the open market. 

 

-Disability insurance.  Same thing.  Disability insurance can be ridiculously expensive if you have any pre-existing conditions.  This is my biggest fear as a 1099/locums guy.  Don't believe the "quotes" that insurance companies give you....get the policy IN FORCE before you change from W2 to 1099.  I was quoted a relatively inexpensive premium for private disability insurance....then they got my medical records from the military/VA and the rates were freaking ridiculous!!!  I can't afford disability insurance, and it is one of the things that may drive me toward a corporate ED.

-Same thing with life insurance.  I'm healthy (except for being an orthopedic nightmare thanks to my service), so my life insurance is cheap.  If you need life insurance, but can't get it, then you may want to rethink your plan.  

 

-Retirement:  As a 1099 you won't qualify for a 401K/403B through your employer.  If you have one, you want to roll it into an individual IRA.  

      -Find a bank that offers an INVESTMENT HSA (if you have a high-deductible health insurance plan....and you probably will have one as a 1099).  One great thing with retirement planning as a 1099 is you can use the pre-tax investment AND tax-free growth of an HSA.  You put in $6750/year PRE-TAX and watch it grow, meanwhile you save up all of your healthcare receipts for years/decades.  When you retire and/or need the money, you can write yourself a tax-free check for the years/decades worth of healthcare expenses (expenses don't have to be reimbursed the year they are spent).  Optum bank (google it) offers an investment HSA.
     - Make sure you fully fund your ROTH, especially if you're young, or you have other retirement investment (401k) that you would tap into before your ROTH (thus letting it grow tax free)

      -You would need to set up a pre-tax IRA.  The easiest is a SEP-IRA that allows you to put in (I think) 18% of your net income into.  The problem with a SEP-IRA is that you can't use SEP-IRA money to do a backdoor ROTH.  This isn't a problem if your Modified Adjusted Gross Income (MAGI) is less than $184,000 so you can fully fund a ROTH for you and wife.  

 

Deductions:  If you're just working one location then you can't deduct for mileage/travel expenses.  However you MAY be able to purchase a "business vehicle" and claim depreciation...check with your tax guy.  You can deduct any reasonable business expenses, including CME, med mal, clothes, computers, etc.  Again, check with a tax guy.

Back to taxation - Remember, as a 1099 you are responsible for paying the full 15% of SS/Medicare tax (up to, I think, $250K).  Right now your employer is paying half of that (7.5%).   You gotta have a 7.5% raise right off the mark to compensate for that (plus med mal/health/disability/life insurance AND retirement).

That help?  

 

  


 

[rev ronin]

Yes, that touches on a lot of the things I'm concerned about.  I'm also kinda concerned about how I'm going to be "billed" for things that are currently provided by the clinic, from trivial things like office supplies, to more complex things like sutures and local anesthetic.

 

I want to do things right, but neither the clinic nor I have ever done things this way before.  I neither want to take advantage, nor be taken advantage of.

[rpackelly]

Your health insurance premiums are deductible from your income. If you set up a self employed IRA you can deduct more than the usual 5500 a year. That and the HSA can save you quite a bit.

[Boatswain2PA]

Are you sure about health insurance premiums being deductible?  My CPA says no.  Businesses can pay for them with pre-tax money, but there are many other rules that go with it.

Yes, a SEP IRA allows you to do more than 5500 a year.  I was specifically referring to a ROTH which grows tax free.

[BruceBanner]

Lots of potential tax deductions if you are self-employed. I'm not sure how much it will offset the extra tax you pay...depends on what you end up writing off. Health ins (?), mileage, possibly malpractice if you need it but not a lot of overhead really like you would have with a small business.

 

I have no idea how your billing will convert to income, but I imagine it would be decent. I used to work in occ med and the docs there made 70% of what they billed. As such they did see high volumes, however, like 20 ppd. They also practiced what I would call liberal coding.

 

I also used to be a 1099 and for about 5 months that was my sole source of income. I saved 35% of what I made and had more than enough to pay my quarterlies with a bit left over. My accountant recommended the same, just as a guide.

[Boatswain2PA]

Rev- another thing to think about is CME.  My wife and I were talking about that this morning. She's a CC RN and got 13 extra hours on this paycheck for taking some CME courses.  Meanwhile I had to retake ACLS last week and, being 1099, didn't get paid for that time.  

There is a LOT to account for here.  Don't forget to figgure in the instability (aka RISK) of being a 1099.  You can be "fired" tomorrow without any process, no employee rights, no unemployment, nothing.

Lot to account for here, not sure if it's going to be worth it for you.  I do almost all 1099 work, but my business construct is vastly different from what you are suggesting.

 

[Boatswain2PA]

Again, I'm about 99% positive that you CANNOT claim medical insurance as a business expense if you're a simple 1099 employee.  I believe you have to be fully incorporated to do that.  Check with a good CPA for more information.

 

Also, you can't claim mileage between home and a "primary work space", even if you're 1099.  Primary work space is defined as a permanent location where you do the majority of your work.   (I claim mileage because I'm usually bouncing between 4 different hospitals in any given year, and have worked at 10 hospitals in past 3 years...wouldn't really say any of them are permanent).

[BruceBanner]

It's a give and take...I loved the flexibility and not having a de facto "boss", but the work was inconsistent and my taxes and benefits were much more complicated. You need to make a lot more.

 

Now I have amazing union benefits, job protection, etc...but also a very rigid schedule and limited time off, relatively speaking.

 

If my "take home" pay was the same after accounting for all the necessary benefits I'd have to pay for, I'd choose to be a 1099 just for the freedom.

[Boatswain2PA]

It's a give and take...I loved the flexibility and not having a de facto "boss", but the work was inconsistent and my taxes and benefits were much more complicated. You need to make a lot more.

 

Now I have amazing union benefits, job protection, etc...but also a very rigid schedule and limited time off, relatively speaking.

 

If my "take home" pay was the same after accounting for all the necessary benefits I'd have to pay for, I'd choose to be a 1099 just for the freedom.

I'm with you.  I do love the freedom.  

 

Regarding the downside of 1099...for me, right now, the only downside is lack of disability insurance.  I'm retired military so I have health insurance, and there is more than enough need in my area.  I'm working more than I really want to already, and I could easily find contracts/shifts to work a lot more if I wanted to.

[rpackelly]

Yes, you can now do individual health insurance premiums on a schedule C up to your net profit. You are not a 1099 employee, you are the sole proprietor of a business. It's right on the form and the IRS web site

[rpackelly]

"Don't miss the health insurance deduction if you are self employed". Just google on the IRS web site. Includes dental. Applies if you file a schedule C

[electric130]

Lots to think about with this.  First off I would want to know what my collections were for the last 6 months as well as a clear discussion of what percentage of this I would take home.  Would it be a straight 50 percent or would you set a base amount to cover all overhead.  Seems like most physicians are usually at 50-70 percent of their collections, if you are taking the risk of being an independent contractor that is what I would aim for.  I probably would sit down with employer and ask what type of number range they expect my "overhead"  to be.

 

Also keep in mind your collections are not what you bill.  We have a terrible collection rate, I think maybe 50% of what is billed.  That may be shocking if you don't know what your actual collections are before you make this move.

I can tell you from experience my collections are typically between 15-25k per month, just depending on if I take vacation and how busy I am.  I work 3, seven hour days, so full time should be a higher number than that.   So be prepared for a big variation, and like everyone above said less stability.  

I have actually considered asking for something of this nature, although I am in a large group, not sure how well it would be recieved.  My salary is right at about 50 percent of what I collect though and I feel like that is fair.  I am also W2 employee for my primary part time job and 1099 for another that I work at home.  

I agree, love the flexibility of being a 1099, but my 1099 income is just extra, not built into our budget and not money that we need.  I also love that I can open up a solo 401k that I choose, I am not crazy about the funds in my employer's 401k so I plan on maxing my solo 401k this year.

 

My W2 salary and my 1099 salary are not production based at all though, (except for a bonus, which is why I know my collections numbers)....so this puts a whole other dimension on your decision as well.

I also have my cme, licenses, malpractice  and vacation time through my W2 employer so I sort of have the best of both worlds right now.

 

I can see this situation being good for you if you are very productive and/or you are towards the tail end of your career and close to financial independence and have some flexibility to make less money but want more time off.  It also may work out really well if you negotiate a good percentage of your collections and you know your collections are high.  

Would be curious how this works out for you, I think it is great that your employer is giving you this option, will just be a matter of thinking through if it is worth it for you.  Keep us posted on what you decide, would be interested to see what you work out.

[Boatswain2PA]

Yes, you can now do individual health insurance premiums on a schedule C up to your net profit. You are not a 1099 employee, you are the sole proprietor of a business. It's right on the form and the IRS web site

 

 

"Don't miss the health insurance deduction if you are self employed". Just google on the IRS web site. Includes dental. Applies if you file a schedule C

I stand corrected. 

 

I cannot deduct my tricare premiums because it is subsidized by my former employer (military).  If you are paying the full premiums for your policy it looks like you can deduct this.

 

Thank you for the correction.  

[rev ronin]

Interestingly enough, my issue is going to be that I'm almost certainly going to put my family back on Samaritan Ministries' program, which I probably cannot deduct no matter what as it's not "insurance".

 

BUT, I do want to be able to pay myself $3000+/year in CME.  So I need to figure out if I need to incorporate to do that.

[Boatswain2PA]

You do not need to incorporate to do that.  But instead of "paying yourself" CME, you just deduct it as a business expense.  That also includes travel, hotel, and meals during your CME trip to Hawaii though.

I don't know the answer about premiums to Samaritan.  You may actually have to consult with a tax attorney for that one...

[Guest JMPA]

caution recommended, certain states this can be illegal do to "dependent practitioner" status does not allow for independent contractor status. another pitfall is when the pita pts are turfed by an attending trying to make his own life easier. all the work of 1099 status may not be worth the return, i would give it much thought

[Boatswain2PA]

caution recommended, certain states this can be illegal do to "dependent practitioner" status does not allow for independent contractor status.....

Do you have case law examples of this??

[UGoLong]

I was a sole proprietor before I became a PA. I enjoyed the freedom greatly. All of your expenses come right off the top; mileage, home computer, CME, etc.

 

One argument for incorporating has to do with liability however if you are selling your own advice, I was told that incorporation really wouldn't protect you.

 

You can also shelter up to 25 PCT of your net in a unit K, which is a 401-K for individuals.

 

Good luck, Rev!

 

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[UGoLong]

A 1099 doesn't make one an employee; it's an IRS requirement for payments to unincorporated parties. Sometimes your income is more or less, depending on whether you take an end of year check this year or next (your office can elect to close for the holidays and process payments next year).

 

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