Taxes on W2 and 1099 Income

[EverLucky1]

So I figured my wife and I may need professional advice but I'm hoping someone can help me understand all this a bit better before we go there...

My wife gets paid as a W2 employee by her practice but each month she also receives 1099 income from the hospital she works at. The 1099 income from the hospital is a loan associated with her salary guarantee. The 1099 income must be surrendered to her practice each month so they can use that to pay her W2 income (WTF?!).

We discussed with them and this is the way the hospital/employer insists it must work. Each month the hospital pays her X as 1099 income. She writes a check for X to her practice. Her practice pays her Y on a W2. This seems utterly ridiculous to me but we already established that they won't change it.

I'm curious to see if...
1) Has anyone ever experienced this before?
2) The practice has told us that since the 1099 income is a loan, we shouldn't be taxed twice - as in since we're paying W2 taxes...we won't have to turn around and pay self employment taxes on the same 1099 income at the end of the year but the best they tell us when we ask more is "go talk to a CPA." Is that true?
3) Since we're in this situation anyway, can the 1099 income be used to start a solo 401k for retirement savings since for other unbeknownst reasons, she does not have access to a company retirement plan this year.

[jfoxcpacfp]

EverLucky1 wrote:

I’m curious to see if… 1) Has anyone ever experienced this before? 2) The practice has told us that since the 1099 income is a loan, we shouldn’t be taxed twice – as in since we’re paying W2 taxes…we won’t have to turn around and pay self employment taxes on the same 1099 income at the end of the year but the best they tell us when we ask more is “go talk to a CPA.” Is that true? 3) Since we’re in this situation anyway, can the 1099 income be used to start a solo 401k for retirement savings since for other unbeknownst reasons, she does not have access to a company retirement plan this year.

Click to expand...

I agree with you - it seems to me as if they have made this unnecessarily complicated. I hope this is not a foreshadow of things to come. And perhaps I am misconstruing the sequence of events. Who made the loan to whom? Is the hospital actually loaning $$ to the practice? I'll answer as best I can given my presumptions about this scenario.

1. Somewhat. I believe the secret technical term for this is "paper trail". However, I'm not sure why they put your wife in the middle. She didn't take out the loan, did she? It would have made more sense (in my pea brain) for the hospital to cut the check directly to the practice. This would associate the income and expense.


2. As such, your wife may get a 1099-MISC with no offsetting "reasonable and necessary" business expense. Again, this does not seem logical to me. You need to file a schedule C showing the income and then offset the income with the payment to the practice. This is called "nominee"-ing the income to the "real" recipient. BE SURE you get the practice's EIN so the IRS will be able to trace the receipt of the money by the practice. You will need to report it on her schedule C as "Nominee to #12-345678" along with the amount.


3. Because the income and expense will net out to zero, I'm sorry to tell you that she will not be able to contribute to a SOLO-401k. Might want to go with a taxable account along with a back-door Roth until she is eligible to participate.

Please let me know if there is more to this story.

[pulmdoc]

I have not run into the tax questions on this specific situation, but I can at least explain why the hospital/group would want to do things this way.

Under Stark law, income guarantee reimbursements must be passed through directly to the physician, i.e. there must be a clear paper trail that the physician group did not skim off money that was supposed to go to the employee doc. Cutting your wife a check satisfies this condition from the hospital's perspective.

Your wife's group is allowed to get money from the hospital to reimburse for legitimate overhead, licensure, CME, etc. However, they must have a clear paper trail of your wife's income to prove that she did not make too much to qualify for the guarantee. Therefore, I bet there is a clause in her contract that says that all income has to pass through them, otherwise they may not be able to get reimbursement from the hospital without running afoul of Stark.

What I don't know is how you and you wife should characterize the check written by her to the practice every month to avoid being taxed double. That should be something a CPA can help with.

[pulmdoc]

Complicated is exactly right, but necessary to comply with Stark and anti-kickback law. Hospitals cannot pay physicians directly to refer patients to them, but it is legal to recruit a physician to fill a need which may result in increased business to the hospital by offering an income guarantee. This comes in the form of a forgiveable loan made by the hospital to the physician to make sure the physician gets a guaranteed salary while they build their practice, with the requirement that the physician stay in the area for a period of time. If there is an existing group practice looking to expand, both the hospital and the group face steep penalties if they do not comply with Stark. The loan (guarantee) is technically to the physician, but the group also can receive money from the hospital as long as they meet the parameters set up.

[pulmdoc]

the reason the hospital does not cut a check to the practice is because if they do, and the practice fails its pass-through obligation to pay the physician the guarantee, the hospital is also liable under Stark. This can lead to huge fines and even exclusion from Medicare/Medicaid. Way too much liability in that circumstance for the hospital.

As a side note, Stark also mandates that income guarantee employees cannot have a restrictive covenant clause in their contract with the group practice. Many groups are unaware of this, or will try to put one in anyway. This is unenforceable. Non-solitication/non-recruitment clauses may be fair game, however. If your wife decides to leave the group, as long as she practices in the underserved geographical area (NOT a straightforward radius but rather collection of ZIP codes the hospital used to qualify for income guarantee in the first place) she is not obligated to pay back the guarantee.

[jfoxcpacfp]

Thanks, @pulmdoc, I appreciate the extremely useful education. While I have some basic familiarity with Stark laws, definitely not to this depth and will educate myself more. A couple of questions, if you don't mind:

• If the payments are a forgiveable loan, why are they reported on a 1099 at the time of payment rather than when forgiven?


• So the doctor has the contract with the practice and the practice has the contract with the hospital?

TIA!

[pulmdoc]

They will definately be listed on a 1099C when they are forgiven (usually 2-3 years subsequent to the guarantee period). I do not have direct experience with the payment process, but I'm not sure what alternative form would be, I assume 1099-MISC.

There are actually 3 practice agreements signed. One between the doctor and the hospital outlining the guarantee program, geographic restriction, forgiveness period, and repayment of the guarantee if the physician leaves. One between the doctor and the group outlining terms of employment. One between the group and the hospital outlining responsibilities in coordination, practice support for overhead, etc.

As you can see, it gets very complicated very fast, and it gets very easy for one or more parties to run afoul of the rules. I have very negative opinions of these arrangements for several reasons:

1) As the new hire, you are locked in for 3-4 years to stay where you are. Leave early, and you could be looking at a 6 figure lump sum repayment. Practices know this, which means you have 0 leverage in negotiations with them once you have signed on. They can and will take advantage.

2) One of the requirements to satisfy Stark is that the income guarantee is no better than the specialty median income for the area. So, by definition you aren't getting a good deal.

3) It's very easy to not understand the fine print and end up feeling screwed over. A friend of mine took an income guarantee agreement. One month in, the hospital "suggested" he start staffing their affiliated LTACH in addition to ICU/hospital rounding and his clinic. He did and was working 14 hour days. Then he realized that his net pay didn't go up, just the hospital's guarantee amount was reduced by the amount of his LTACH salary. So the hospital basically convinced him to give them free labor while his clinic practice was building up. Needless to say he is counting down until his forgiveness kicks in and he can leave.

[jfoxcpacfp]

Interesting and sooo helpful. Haven't run into this yet but will definitely be on the lookout in future contract reviews.

[pulmdoc]

In general, my advice to colleagues who are considering an income guarantee position is that it is only a potentially good deal if you are starting your own practice in an area that you want to relocate to regardless (eg. returning to your hometown to practice, making your vacation home your permanent one). For the reasons I listed in my previous post, joining an existing group is a good deal for them (eliminates expansion risk, captive employee) and a bad deal for you.

[EverLucky1]

Thank you jfoxcpacfp and pulmdoc. At least my wife and I feel like we understand this a little better. Overall she's very happy at the practice and I think this is one we're looking to stick with. I just wish there was a way we could make the most of the 1099 income to fund a solo 401k though I get the point that since it all passes through and the net income is 0...there's no room to fund the account. I guess the next step will be to find a CPA for tax time.

[Woodland]

I know this is a few years old at this point but I find myself in a similar situation. I'm curious what the solution was for making sure you were not taxed twice on the W2 and the 1099... I have had the hardest time finding information on this