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Independent Contractor/revenue split


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Does anyone have experience with being an independent contractor? I have an offer that seems very lucrative but I am wondering what the potential down sides are and also the impact on taxes and possible legal issues. Has anyone had any issues with getting audited as an independent contractor? Did you set up a LLC? Any advice/tips? I am working part time already so I am not concerned about losing benefits. Thanks in advance!!!

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There are several posts here about IC vs W2.

First, you HAVE to withhold federal and state income tax if you're 1099.  And remember, as a 1099 YOU have to pay BOTH halves of the social security tax (as a W2 your employer pays 7.5% and then withholds 7.5% from you) for the first $132,900 you make.  This effectively means that as a 1099 you start off by making 7.5% less (for the first $132,900) than a W-2 at the same wage.

Starting with 2018, thanks to President Trump, "Pass Through Businesses" (including independent contractors) who make <$157,500 individually (or $315,000 per couple) will get a 20% deduction in their taxable income.  This can be HUGE!  Figure you make $150K, so you pay 24% on anything over $82,500, so $16,200 in fed income tax (just on what you make over $82,500). This will deduct 30K from your taxable income, bringing the $150K down to $120K, so you will only pay $9,000 in federal income tax (on what you make over $82,500)....for a $7,200 tax savings!!!!

There is RARELY an actual benefit to starting an LLC for what we do.  An LLC stands for Limited LIABILITY Company....but you won't be limiting ANY liability in your medical practice, so won't be worth the extra couple thousand to properly set up, and the extra couple hundred to maintain an LLC.  A few caveats, IF you are making in the >300K neighborhood it may make sense to set up an LLC so you could then pay your spouse, and some other tax implications, but I don't know any PAs doing that.

RETIREMENT:  You can set up a SEP IRA and put up to $53K in PRE-TAX money into that IRA.  This is cheapest/easiest way to set up your retirement.  You should ALSO max out your ROTH, but that's post-tax money.  If you make >$189K (jointly) you will have additional limitations on how much you can put in your ROTH and may want to do other types of retirement accounts which allow a back-door ROTH.

And then there are the "other" expenses of a IC vs W2....PTO, disability, malpractice, CME, etc.  

Good luck, hope this helps.

Ventana....is this accurate?  I don't have any complicated business degrees or anything, feel free to doublecheck my math for me. (eyeroll)

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The first thing I would suggest is check the IRS 20 rules. That describes what is and isn't an independent contractor. There has been a lot of discussion about whether we meet those rules and, while I have worked as an IC off and on for many years, I'm not sure if push came to shove we would meet the criteria.

Several years ago I started a nurse agency. Small local business but it was going well. I had set it up in a very unique way to make sure my nurses were independent contractors. About 2.5 years in one of the nurses put in for unemployment and listed us as an employer. I replied we didn't employ her...she was an IC. About 6 weeks later some nice folks from the government showed up, stated all the nurses I had used for the last 2.5 years were actually employees and I owed back taxes, unemployment and SS payments plus interest and penalties. I was out of business and owed the government 300k. BTW you can't bankrupt against the government and they will come after the assets of the owners. They invited me to get a lawyer and take it to court...with a smile on their face.

Now you acting as an IC will probably never bring you any grief. It will fall on the employer. However it is an object lesson on whether or not you will meet the criteria if scrutinized.

After saying all of that...if you work as an IC you should expect 25-35% more in hourly pay because you bear all the expense and the employer gets a tax break by not having to make contributions on your behalf and pays you no benefits.

Good luck!

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Scott's story is horrific...but rare.  Bottom line is if he government wants to F&@$ you, then you are going to get F&@$ed.

There are thousands, and likely tens of thousands, of PAs who are ICs.  Is it legal?  Well, arguably, nobody goes through a day without violating some federal, state, or local law or regulation that could land them in deep water if the government comes after them.

I keep tight records, with good explanations of my income & expenses for my various businesses, and I pay a good accountant a lot of money to do my taxes and keep me on the right side of the IRS. That being said, I'm sure if (when) I'm audited they will find numerous things.  It will just depend on if they want to screw me or not.

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Liability for IC status falls almost totally on the employeer. 

 

It is expensive to employ yourself.  

If you bill Medicare you MUST own a max of 99%.  Some states say only medical professionals can own medical corps. 

Billing companies (if you are billing). Will take 4-10%

 

a CP might take another 5-10%

med mail 2500-7500+

 

expenses add up faster then income. 

 

I had had my own practice for a few years.  Had a few years with low 100’s income and big retirement SEP contributions.  But it was darn hard work 60 hrs every week. 

 

I now am a a state employee with a 3 day work week making more then I ever did in my own practice   (And getting vested in state pension)

 

 

but..... I kept my company just Incase and run a few tiny consulting jobs through it   

 

 

 

 

Being an IC might just work great.  Depends on the situation.  NOT for a newer PA or one that is not business motivated.  

 

 

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19 minutes ago, ventana said:

Liability for IC status falls almost totally on the employeer.

Well....except for all of those businesses expenses that would suddenly no longer be deductible if you were in SAS's position and the IRS flunky suddenly decided you were never an IC.
 

20 minutes ago, ventana said:

I now am a a state employee with a 3 day work week making more then I ever did in my own practice   (And getting vested in state pension)

All those fancy business degrees and you're a state employee.  Huh.

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On 1/25/2019 at 11:08 PM, Boatswain2PA said:

Well....except for all of those businesses expenses that would suddenly no longer be deductible if you were in SAS's position and the IRS flunky suddenly decided you were never an IC.
 

All those fancy business degrees and you're a state employee.  Huh.

Yup. Defined benefit plan.  Full bennies.  Paid very well Choice was easy.   And a 3 day work week.   

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Figured someone with fancy business degrees would, you know, be in BUSINESS,  not working for the guv'ment.

How is that defined benefit plan funded?  I never got a fancy business degree, but I think I've read about how a lot of state pension plans (or, defined benefit plans) have been underfunded for years and are going to go broke.

 

People with fancy business degrees must have thought those programs up though, so I'm sure you'll do fine.

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I hope the folks with the fancy business degrees aren't "leveraging" your defined benefit plan Ventana.

https://www.bostonglobe.com/business/2014/05/01/massachusetts-pension-plan-ranked-worst-nation-washington-think-tank/NmlY5TiLeDRPr2mFgGFccM/story.html

Seems to me that the defined benefit plans are much riskier than being debt free with money in the bank.  Worse yet, if you have a defined benefit pension from a state, and it goes bankrupt, you are not covered by the Pension Benefit Guarantee Corporation.

But then again, I don't have a fancy business degree like you do, so no need to listen to anything I say, right?

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On ‎1‎/‎24‎/‎2019 at 7:51 AM, sas5814 said:

The first thing I would suggest is check the IRS 20 rules. That describes what is and isn't an independent contractor. There has been a lot of discussion about whether we meet those rules and, while I have worked as an IC off and on for many years, I'm not sure if push came to shove we would meet the criteria.

Several years ago I started a nurse agency. Small local business but it was going well. I had set it up in a very unique way to make sure my nurses were independent contractors. About 2.5 years in one of the nurses put in for unemployment and listed us as an employer. I replied we didn't employ her...she was an IC. About 6 weeks later some nice folks from the government showed up, stated all the nurses I had used for the last 2.5 years were actually employees and I owed back taxes, unemployment and SS payments plus interest and penalties. I was out of business and owed the government 300k. BTW you can't bankrupt against the government and they will come after the assets of the owners. They invited me to get a lawyer and take it to court...with a smile on their face.

Now you acting as an IC will probably never bring you any grief. It will fall on the employer. However it is an object lesson on whether or not you will meet the criteria if scrutinized.

After saying all of that...if you work as an IC you should expect 25-35% more in hourly pay because you bear all the expense and the employer gets a tax break by not having to make contributions on your behalf and pays you no benefits.

Good luck!

Good.....Gawd.................  :-0 

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5 hours ago, MediMike said:

You guys are ridiculous.

Not me picking at this.  I am just wondering where it is going and what is fueling it.  I agree that some of the comments seem a bit over the top and I have PM boats as it seems to be a private matter. No need in filling up the posting boards.  

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14 minutes ago, ventana said:

He was the employeer.  

 

 

But the Op is asking about being a contractor.  If he filed as a contractor, he would be able to deduct multiple business expenses.

If the IRS later determined he was an employee instead, he would have to refile his past taxes and not have those deductions.

Edited by Boatswain2PA
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19 minutes ago, Boatswain2PA said:

But the Op is asking about being a contractor.  If he filed as a contractor, he would be able to deduct multiple business expenses.

If the IRS later determined he was an employee instead, he would have to refile his past taxes and not have those deductions.

But the financial risk of penalties and big fines as well as going backwards and adding interest (as SAS experienced) is shoulder almost exclusively by the employeer     There is minimal financial risk to the person claiming to be a 1099 whom the IRS later determined to be an employee.  The IRS goes after the company or person who was supposed to be the employeer (whom instead employees a 1099 set up to contract employees) and fines the crude right out of them.  

 

I have had 3 friends go through this process as 1099 and the IRS did nothing on the employee side.  I have been advice by my accountant and lawyer that it is an acceptable risk to take on the employee side, but not if I were to be the employeer due to the above.  

 

 

As things got got a little off track.  

This has been my experience.  

Higly risky to hire people as 1099 employees.  Best review the IRS rules on this and get formal legal and accounting opinions. 

Much less risky to be hired as a 1099 employee.  Biggest risk is to make sure that you are paid a high enough rate to cover your expenses. Also have to cover med mal,  workers comp if you want it, and all govt fees and taxes.  

 

 

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39 minutes ago, ventana said:

I have had 3 friends go through this process as 1099 and the IRS did nothing on the employee side.

Glad to heart this.  I would assume that much of this is determined by which IRS flunky who is working the case.

SAS - What happened to the nurses whom you contracted/employed when you went through this IRS hell?

 

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On 1/23/2019 at 9:51 PM, IntegrativePA said:

Does anyone have experience with being an independent contractor? I have an offer that seems very lucrative but I am wondering what the potential down sides are and also the impact on taxes and possible legal issues. Has anyone had any issues with getting audited as an independent contractor? Did you set up a LLC? Any advice/tips? I am working part time already so I am not concerned about losing benefits. Thanks in advance!!!

I was an IC for a while. It's not that complicated from your end, as the contractor. Save 35%, and no less, of your income. You will need it come tax time. Your rate should reflect this. I had a CPA do my taxes and there were no problems. 

Edited by BruceBanner
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13 hours ago, Boatswain2PA said:

Glad to heart this.  I would assume that much of this is determined by which IRS flunky who is working the case.

SAS - What happened to the nurses whom you contracted/employed when you went through this IRS hell?

 

The IRS told me it was non of my business when I asked if they were going to refund the self employment taxes to all those nurses. I never heard back from the nurses because we were out of business.

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