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W2 to 1099 compensation model advice

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  • W2 to 1099 compensation model advice

    Area of Practice: CA

    Age: 33

    Marital Status: Single

    Years in Practice: 5

    Employment type: 9 MD, 3 OD

    Specialty: Optometry

    Today my employer announced that the practice no longer can afford to pay my benefits. He said that I would have to be compensated as an independent contractor, and take a pay cut.

    My current situation is 60k salary, 15% of collections on 240k, ultimately earning 100k.


    He states that as an employee, the practice pays 37% more, bringing the total compensation package to 137k for the year.

    The owner would like me to present a new compensation model.

    I was thinking along the lines of:


    60k salary, 27% of collections (240K) would bring me to 125k as 1099, resulting in a 12k total compensation loss.

    Do you have any advice with obtaining healthcare insurance?  Should I set up an LLC?

    I would also like to set up an solo 401k for myself.

    Thanks for the advice!


  • #2

    You will not be able to form an LLC in CA because you are a licensed professional. You must choose either a corporation or be a sole proprietor. I would recommend the sole proprietor route if you have adequate malpractice insurance.

    Before negotiating, I think you should list all of the benefits you will be losing and the additional cost to yourself (SE taxes). Will you be responsible for your own malpractice now, for example? What will it cost you?

    I also recommend calculating the benefits the change will bring. Can you set up a home office? (fyi, if the contractor provides an office for you, then you do not qualify to deduct a separate office at home). Will you be able to afford to contribute more to your solo-k than you are receiving into your plan now?

    Finally, and perhaps most important, if this is the only practice you are contracting with, what your employer is proposing is actually contrary to IRS and state regulations and your employer could be subject to taxes, penalties, and interest if you were to, for example, report him to the IRS or the CA EDD. You might suggest that he file an SS-8 before proceeding. 

    To be honest, CA is probably one of the last states where I, as an employer, would want to take on this risk.

    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Thanks for the advice everyone. An attractive benefit is the ability to open a solo 401k, as my current one has high fees.


      • #4

        The fees on the 401k are the least of your worries. Was there a 401k match that you will now have to fund yourself? Health insurance benefits? Calculate self-employment taxes.  And of course do you really meet the test of independent contractor? Probably more of a liability for your employer.