Joining a private practice as a 1099

[Sean]

Howdy, folks!

I am considering leaving my current position in a private group as a W-2 employee to join another practice.  Considering the new practice is appreciably smaller and doesn't offer a 401k, I  have been contemplating joining it as a 1099 rather than as an W-2 until I become a partner.  My thinking is that by coming in as a 1099 (i.e. being paid a negotiated percentage of collections instead of a base salary guarantee), I would be able to sock away a lot more in a solo 401k than nothing at all as a W-2 since there's no employer-sponsored 401k offered.  Even though I would be  paying my own benefits, I feel this option would still be worth it.

Now, I am aware that the IRS has rules as to who is really an independent contractor vs an employee. But, if I were to pay all of my own expenses, not take a base salary, etc. would this still be kosher enough to satisfy the IRS that I really am an independent contractor?

Any thoughts?

[jfoxcpacfp]

Possibly. The contract will be critical. Is the group on board with this option? They will be on the front line if your agreement is questioned. If you don't have a non-compete, use your own supplies, can set your own hours, etc., this may fly in the unlikely event of an audit. Of course, if either you or the group are audited; the IRS will be trying to prove that you contributed more than $5,500 to your backdoor Roth and deny you all of those deductions. It would be a nightmare to unwind. If the group provides an office, you won't be able to take the home office deduction and, therefore, the mileage deduction. Your nontaxable health insurance and other benefits would not be deductible as a sole proprietor but would (in a roundabout way) as an S-Corp, but you'd have to be an employee and deal with all of that filing and compliance. And the IRS would attempt to deny this in the event of an audit. In other words, the IRS would have a lot to gain if they were to prevail in the event of an audit.

If you decide to go forward with this, you should have your proposed contract carefully reviewed by both a CPA and an employment attorney.

Besides, are you sure you want to be a partner in a group that doesn't even offer a retirement plan?

[Seroma]

Maybe but who will be paying for your malpractice and health insurance? if they pay then it may be difficult to show the IRS that you are not an employee.

Also don't forget you will be responsible for all payroll taxes (employee and employer).

In the end you have to do the math and see if it's worth doing it or not.

[Sean]

All good points, Johanna.  Thanks!  I agree that the way the contract is written is very important.  The group is looking into it.

I see you wrote that I wouldn't be able to get a deduction for health insurance premiums or other benefits as a sole proprietor.  Why not, I wonder?  I thought a sole proprietor earning income as a 1099 (even if not incorporated as an S- or C-corp) can claim deductions on Sched C for any work-related expenses, e.g. health/disability/malpractice ins premiums, professional meeting expenses, half of payroll expenses, etc.  No?

I wouldn't be taking a home office deduction anyway as the group has an office.  I suppose a mileage deduction is doable IF I drove from one office to another, not if I drove from home to an office. I'm unsure what you mean by the IRS claiming I put in more than $5,500 via a backdoor Roth.  I'd be contributing to a non-Roth solo 401k.  I thought the backdoor Roth, which I do anyway by first contributing to a traditional IRA then converting it soon to a Roth account, was a separate issue.

Seroma.  As I'd mentioned above, I'd be paying malpractice/health ins along with all other expenses.

[Zaphod]

No one is going to come looking at your contract to make sure youre an employee vs an IC. Even if they did, its the employers issue not yours. Lets face it, IC is the most misused classification there is, its only gotten more difficult to actually be one. There are a lot of benefits and downsides to being an IC.

 

Otoh, if your employer doesnt offer a 401k I dont think it matters, you can still open one and contribute as if you were self employed. It can be hard to find the exact right scenario explanation but I recall something along these lines. If it isnt 100% true (meaning not the full 53k) I'd definitely go IC. Also, at a physicians income levels the differences in payroll taxes makes no distinction, there is a factor applied to your income to reduce it and then deductions for your part of the SE tax so its the same anyway.

You get all the deductions (including health insurance, etcc..) as a sole proprietor, there are no tax benefits beyond the somewhat sketchy and low return of dividends paid/salary for someone who is incorporated as opposed to a sole proprietor.

[LBKCLU]

Everything that has been stated previously is accurate. You will find these links to be very informative:

http://www.physicianspractice.com/blog/employees-vs-contractors-medical-practice-whats-name

http://www.rtacpa.com/blog/new-irs-independent-contractor-test.

 

 

[Sean]

Zaphod, you mentioned there are a lot of downsides to being an IC. Can you name a few?  I realize an IC receives no benefits from the employer, etc.  But when I do a rough calculation, a big plus seems to be the $53k annual solo 401k contribution and claiming various work-related deductions which a W-2 employee doesn't have access to.  That brings me to the other point you brought up, i.e. you said that even if the employer doesn't offer a 401k, I could still open one as if self-employed.  How?

[Zaphod]

As far as the 401k, the IRS wants people to have access, if your employer doesnt offer one they give an avenue for it, you'll have to research the specifics of course as the info is less common and hard to find.

Downsides are mostly everything you hear, taxes (both sides/paying them on time, etc..), no unemployment or workers comp coverage (this is why you have disability though), etc....However, once you take into account all the good, its a big win overall and most of the downsides are way overplayed. It gives you much more control of your finances, sure you'd lose out on any crazy benefits an employer might be offering, but youre not in a situation that has those considerations anyway.

The other huge benefit is a defined benefit plan/cash balance that really increases your tax advantaged space, though you're likely on the younger side of things to where you cant put so much away it really matters (due to how long you'd be until retirement). However, since these can now be had for low cost, they can be rolled over, and inflation increases total payout (and thus input levels) its still a decent consideration.

[jfoxcpacfp]

Sean Bean wrote:

All good points, Johanna.  Thanks!  I agree that the way the contract is written is very important.  The group is looking into it.

I see you wrote that I wouldn’t be able to get a deduction for health insurance premiums or other benefits as a sole proprietor.  Why not, I wonder?  I thought a sole proprietor earning income as a 1099 (even if not incorporated as an S- or C-corp) can claim deductions on Sched C for any work-related expenses, e.g. health/disability/malpractice ins premiums, professional meeting expenses, half of payroll expenses, etc.  No?

I wouldn’t be taking a home office deduction anyway as the group has an office.  I suppose a mileage deduction is doable IF I drove from one office to another, not if I drove from home to an office. I’m unsure what you mean by the IRS claiming I put in more than $5,500 via a backdoor Roth.  I’d be contributing to a non-Roth solo 401k.  I thought the backdoor Roth, which I do anyway by first contributing to a traditional IRA then converting it soon to a Roth account, was a separate issue.

Seroma.  As I’d mentioned above, I’d be paying malpractice/health ins along with all other expenses.

Click to expand...

I apologize, @Sean_Bean - I must have gotten caught in a time warp. Yes, you can deduct health insurance premiums, along with dental and qualifying long-term care insurance coverage for yourself, your spouse and your dependents, just not on schedule C. You take the deduction as an adjustment to gross income on page 1 of your 1040. The result is you cannot reduce your Medicare taxes (you'll already be maxed out on SS), but you'll reduce your income taxes. Mea culpa.

To comment on @Zaphod's response: If the group with whom you have a contract is audited, you can be sure your contract will be examined. Yes, as a SE worker, same as IC, you and your business can contribute up to $53k into a SOLO-k. You can do the same for your spouse if you hire her (legitimately) to work for you, such as in administrative work.