1099 v. W2 - cost differential?

Provided by:  Jennifer Kirschenbaum, Esq.

March 21, 2017

Question:

Jennifer, 

I have an opportunity to be a 1099 contractor. I have traditionally been a w2 employee at my current employer.

All things being equal (type of practice, seeing patients and doing procedures) which is preferable? What expenses would traditionally fall under the contractor vs the employer?

How much extra income would one need to make to traditionally cover what is included as a w2 employee?

Thanks in advance, 
Dr. C

Answer: 

This is a tough question to answer because everyone's circumstances are going to be a bit different - current salary, earning potential, accountant, potential write offs, proposed corporate structure, not to mention autonomy and level of control over your job duties.  

The latter considerations actually dictate whether a 1099 classification is appropriate.  Being a 1099 v. a W2 has very little with who wants to pay which taxes - and a lot to do with whether you actually qualify as independent - are they your patients?  do you dictate how care is given?  Are you using your materials? Do you have control over your schedule?  These types of factors will be considered if the designation is every reviewed by the IRS or another authority. 

However, whether the classification would be appropriate really isn't the question, right?  You want to know what you can save, write off, and benefit from the 1099?  Well, that's really going to depend.  You are inheriting certain tax responsibilities from the employer by cutting to the 1099 from the W2, and also saving the employer money.  So, with it all being the same to the employer, how much do they have to offer as extra compensation to make it worth your while?  That's really for an accountant to answer - but the range I've heard quoted is around 15-25% uptick.  The major reason is FICA (Federal Insurance Contributions Act) - Social Security Tax at 6.2% and the Medicare Tax at 1.45% - with a cap on both at $117k. If you earn more than $200,000, you will also be taxed an additional 0.9% Medicare surtax. For More FICA info. 

So, where did we land?  Don't just sign on the dotted line thinking you are so close to the freedom of autonomy!  Make sure to run the numbers, confirm the classification is proper and you aren't just joining an employer looking to cut a corner or two.  Its likely you may qualify as independent, and that you can now find some of those work related deductions your friends have  been bragging about!  

A final thought - just because you are switching to independent doesn't change most provisions you will likely find in your contract.  Make sure to have your new 1099 contract reviewed carefully before signing.  The same non competes, and potentially more harmful provisions now that you are independent may be embedded in the proposed Agreement.