1099 vs W2 contract negotiations

[nanshahMD]

Hi All,

I’m negotiating for a part time position (2 days a week) at a private practice between being paid 35% collections as a W2 employee vs. 45% collections as a 1099 independent contractor and need advice on which is the better way to go?

W2 employee benefits include:

40% of malpractice

no 401K set up

No health insurance - have through my husband

No licensure or CME funding

 

vs 1099 - no benefits at all

 

Any advice? What else should I consider? Thank you

[spiritrider]

I would consider the 28% 1099 premium marginal even for a non-physician. You would then have to factor in the plus of being able to factor in the 1099 benefit of a one-participant 401k and the negative of paying the full malpractice cost.

Are you married, do you have someone else providing benefits, etc...?

Then there are tax reform issues to consider. For an employee, all itemized misc deductions go away. So no unreimbursed employee expenses vs. Schedule C expenses. It is still not clear how the new Section 199A qualified business income deduction is going to flush out.

A lot to consider. So I don't have an answer for you as much as more questions. I'm sure 1099 white coats can chime in.

[Medikit]

1099 benefit would be maxing out a solo 401k and being paid an additional 10% of collections. Since you already have health insurance I would lean towards 1099.

Your main W2 benefit is having your FICA and malpractice paid and potentially 401k matching.

 

Let's put some price tags on these things. I may make a few miscalculations (tried to use a FICA calculator for 2018) and more importantly wrong estimations but I just want to throw some numbers out there to get started so you can look at it yourself.

Let's assume you collect $500,000 (adjust as you see fit).

W2: FICA calculator: http://www.moneychimp.com/features/fica.htm

Salary: $175,000

2018 Employer half of FICA Social Security: $7979.5

2018 Employer half of FICA Medicare: $2343.5

4% 401k match: $7,000

40% Malpractice: ~$3,000 ? (I suggest getting a quote)

CME funding: $2000 (There should be some kind of maximum on this)

Adjusted Salary after W2 benefits: $197,323

1099 Salary $225,000

 

The clear winner here is 1099, even if I've grossly underestimated your malpractice.

 

Edit: I didn't see that you would be working just two days a week.

 

Let's assume your collections will be $250,000 instead and that you won't qualify for 401k matching as a part time employe. Again you make 10% more with 1099 income which would be $25,000. Without 401k matching your benefits will be ~$15,323, possibly more if your malpractice is particularly expensive. Seems to me that 1099 is still the better deal. Find out how much malpractice costs and try to estimate your what your collections might be. I don't see how the W2 will come out ahead unless your collections are below $170,500 and even then you will be able to contribute far more income to a solo 401k and deduct expenses making it unlikely for W2 to be a better deal.

[Ryan]

Assuming your income will be heavily saved, 1099 probably makes more sense with a SEP IRA and Solo-401k. To get more useful advice, you'll have to tell us details like your expected income and your husband's income, your spending and saving, etc.

[nanshahMD]

Thank you this was very helpful!

I won't do 401k through the practice as they do not have one set up and if I am part time won't have access.  My other job (3 days a week, salary $140,000, maxing retirement with $18,500 with matching) is at the VA so I will use their matching TSP plan.

The office manager estimated collections of approx $170 per person seen. Initially may be slow, but just to be conservative if I see 20 pt per day on a 2x/week schedule I should collect $325,000 for the year. Not counting surgical collections at this point.

45% of collections would be 146,000

35% of collections would be 113, 750

I don't understand fully the FICA calculations - so your help here is appreciated

Malpractice starts at $7,000 first year and will eventually be $12,000 at mature rate.

CME $2000

Licensure $2000

Health Insurance - though my husband

Would I be able to deduct driving expenses / cell phone?

1099 still works out to more, right?

[wolverine41]

Im not sure what specialty you are in but 35% of collections seems like a lowball offer for private practice.

That is saying that the other 65% is going to overhead + practice owner profits.  Have you tried to negotiate the collections percentage? 50% of collections is standard for a well run orthopedics private practice, but I'm sure every specialty has overhead that varies based on needs of practice.

[nanshahMD]

wolverine41 wrote:

Im not sure what specialty you are in but 35% of collections seems like a lowball offer for private practice.

That is saying that the other 65% is going to overhead + practice owner profits.  Have you tried to negotiate the collections percentage? 50% of collections is standard for a well run orthopedics private practice, but I’m sure every specialty has overhead that varies based on needs of practice.

Click to expand...

Ophthalmology has too much overhead! Point taken though, I've typically seen 40% of collections. That's why I was happy when I was offered 45% of collections, but then it came as a 1099 independent contractor.. and now I'm not clear on how that translates.

[Medikit]

nanshahMD wrote:

Thank you this was very helpful!

I won’t do 401k through the practice as they do not have one set up and if I am part time won’t have access.  My other job (3 days a week, salary $140,000, maxing retirement with $18,500 with matching) is at the VA so I will use their matching TSP plan.

The office manager estimated collections of approx $170 per person seen. Initially may be slow, but just to be conservative if I see 20 pt per day on a 2x/week schedule I should collect $325,000 for the year. Not counting surgical collections at this point.

45% of collections would be 146,000

35% of collections would be 113, 750

I don’t understand fully the FICA calculations – so your help here is appreciated

Malpractice starts at $7,000 first year and will eventually be $12,000 at mature rate.

CME $2000

Licensure $2000

Health Insurance – though my husband

Would I be able to deduct driving expenses / cell phone?

1099 still works out to more, right?

Click to expand...

FICA (The Federal Insurance Contributions Act) is social security and medicare payments. A W2 employee will pay their half and your employer will pay the other half. The maximum amount of income that can be taxed for social security for 2018 is $128,700 and the rate is 12.4% (6.2% for each). There is not a limit for medicare and in fact the tax increases at income of $200,000 from 2.9% to 4.7% (1.45% for each to 2.35% for each). Now as a 1099 employee you are responsible for both employee and employer contributions to your FICA tax and you can use the calculator above.

Before we get started I want to state a couple things:

1. I will mess up the math somewhere or forget something, what you really need is an accountant, but 1099 is the clear winner in my opinion

2. As a 1099 employee I strongly recommend that you hire an accountant to help you with taxes and your periodic estimated tax contributions (your employer will not be withholding taxes and you will need to pay those taxes at intervals throughout the year)

 

One interesting addendum for you is that you actually have additional W2 income from your other job  that is already above the maximum 1099. That means the bulk of your FICA has been already covered by you and your first employer. For Job #2 if they only pay you $113,750 they will be paying an extra $2133.

So to summarize your benefits:

FICA: $2133

CME: $2000 (Are you really going to use all of this every year?)

Licensure: $2000 (Is the VA already paying for this?)

Malpractice: $4000 (Actually $2800 year one but lets be conservative)

This adds up to $10,133 in benefits. This is nowhere near the $32,500 difference in income you would make excluding surgical collections.

I'm not sure about specific self employment deductions but I do know that you can have a separate solo 401k for you 1099 income and still max out your 401k contributions for your W2 employer. I suggest screening your tax accountants for someone who understands that process (many tax accountants surprisingly don't understand 401k rules), you can read about the rules in detail here: https://www.whitecoatinvestor.com/multiple-401k-rules/