Should I choose 1099 or W2?

[anondoc.00]

Help please! I'm recent anesthesiology grad working in an outpatient physician-owned group. I finished residency a few months late after having two kids during that time and then took a couple of months off to be with my kids and study for boards so I just last week got my first paycheck. It was my understanding that I was working as a 1099. I don't have a set schedule nor do I have an obligation to work any specific number of days or hours per week with the group. I receive no benefits other than malpractice and don't have access to the 401K. I am also working part-time for another outpatient group and will be doing some locums work in the spring, both 1099.

Looking at the IRS rules, it sounds like I meet criteria for an independent contractor but on my first paycheck they withheld taxes and told me they are paying me as a W2 employee. I guess the group got in trouble a number of years back for paying 1099 for people the IRS deemed employees so now they pay everyone as W2 employees. They are willing to switch me to 1099 but I'm not sure what the right choice is here. The pay rate is the same either way. Even paying me as a W2 they are not offering benefits (which is fine). My concern is that while I have some other 1099 work this is my primary source of income and if I am a W2 I will not have access to a solo 401K for this income. My husband and I are over the phase out limits for the section 199a deduction so that's not an issue. Is there anything else I'm not considering here? I think maybe W2 is still the right option because of the payroll tax but I hate to loose the tax-protected retirement space.

[GastroMastro]

They have no retirement option for w2? You can do a non deductible IRA. It’s not tax protected from the contribution but future growth is all tax protected until withdrawn. Not the worst thing.

unless they’re willing to pay you more as a 1099 which I doubt, if you are already above 199A phase out I personally would definitely stick with W2.

Plus it would look weird if you switched from w2 to 1099 mid year. In event of audit.

[spiritrider]

Nothing prevents you from being a self-employed individual when having primary W-2 employment. In fact, a substantial number of white coats with one-participant 401k plans do so from moonlighting 1099 income.

[jfoxcpacfp]

They have no retirement option for w2? You can do a non deductible IRA. It’s not tax protected from the contribution but future growth is all tax protected until withdrawn. Not the worst thing.

unless they’re willing to pay you more as a 1099 which I doubt, if you are already above 199A phase out I personally would definitely stick with W2.

Plus it would look weird if you switched from w2 to 1099 mid year. In event of audit.

Couple of minor corrections:

1. If you do not participate in another retirement plan (such as at W2), you qualify to contribute to a deductible TIRA. In your case, this is probably irrelevant, because you'll set up a solo-k based upon your 1099 work.
2. Should you contribute to a nondeductible TIRA, you should immediately convert to a Roth rather than leaving it to grow (this is the "backdoor Roth" that's discussed throughout the forum). That is the only way future growth will not be taxable. Not converting is the worst of both worlds - no tax deduction for the contribution and all growth taxable at your top marginal rate.

GastroMastro I'm sure you know all of that, but just clarifying for new readers.

[GasFIRE]

With the new Secure Act be sure to keep careful track of your hours. Part time workers are eligible for 401k if they work over 1000 hours during the year or 500 hours for 3 consecutive years. The group may not even be aware yet that Secure changed the eligibility rules.

[anondoc.00]

They have no retirement option for w2? You can do a non deductible IRA. It’s not tax protected from the contribution but future growth is all tax protected until withdrawn. Not the worst thing.

unless they’re willing to pay you more as a 1099 which I doubt, if you are already above 199A phase out I personally would definitely stick with W2.

Plus it would look weird if you switched from w2 to 1099 mid year. In event of audit.

They have a 401K but they are not willing to let me participate unless I am working full-time for them. Honestly I'm not sure the group is very well run from an accounting standpoint. They also tried to tell me they could only pay me as a 1099 if I was set up as an LLC. I have my own family-related reasons for working with this group so these issues don't bother me a ton.

No, they won't pay me more for 1099. They prefer to pay me as a W2 which doesn't make a lot of sense to me as it's more expensive for the group. I agree it would look weird if I switched. I have actually only worked there for about one month, just got my first paycheck and haven't cashed it until I sort this issue out.

[Peds]

doubt they will reissue you a check.
have you worked through the tax differences? w2....

[spiritrider]

With the new Secure Act be sure to keep careful track of your hours. Part time workers are eligible for 401k if they work over 1000 hours during the year or 500 hours for 3 consecutive years. The group may not even be aware yet that Secure changed the eligibility rules.

Just to clarify. The new 3 year 500 hour eligibility is not effective until 1/1/2021 and no years of service prior to that date are counted. So the earliest any employee could be an eligible participant under that new rule is 1/1/2024.

[GastroMastro]

Couple of minor corrections:

1. If you do not participate in another retirement plan (such as at W2), you qualify to contribute to a deductible TIRA. In your case, this is probably irrelevant, because you'll set up a solo-k based upon your 1099 work.
2. Should you contribute to a nondeductible TIRA, you should immediately convert to a Roth rather than leaving it to grow (this is the "backdoor Roth" that's discussed throughout the forum). That is the only way future growth will not be taxable. Not converting is the worst of both worlds - no tax deduction for the contribution and all growth taxable at your top marginal rate.

GastroMastro I'm sure you know all of that, but just clarifying for new readers.

Thank you. I still
have plenty to learn. Regarding #1, although she might qualify for a deductible TIRA by virtue of no qualifying plan at w2, since she is above the 199A phase out wouldn’t OP also NOT be able to deduct from the TIRA? I thought there were income limits on tIRA deductibility. That’s why I had said nondeductible. Please correct me if wrong

[jfoxcpacfp]

Thank you. I still
have plenty to learn. Regarding #1, although she might qualify for a deductible TIRA by virtue of no qualifying plan at w2, since she is above the 199A phase out wouldn’t OP also NOT be able to deduct from the TIRA? I thought there were income limits on tIRA deductibility. That’s why I had said nondeductible. Please correct me if wrong

Yes, it sounds strange, but if the taxpayer has earned income and does not participate in a retirement plan and spouse d/n participate in a retirement plan (I s/h included that in my response) then t.p.'s ability to make a deductible TIRA contribution is not limited by income. However, the OP will almost certainly set up a solo-k and will, thus, be limited to the nondeductible TIRA. I think we have exactly one client who is a W2 physician at a group or hospital with no retirement plan and can deduct his TIRA contributions - kind of rare!