Perhaps the best of both worlds is to get some of your income as an employee and some of your income as an independent contractor. But that rule of thumb is worth about what you paid for it as there is so much variation out there. If one is obviously dramatically superior to the other, you're done (or at least can use that in ongoing negotiations.) If not, then choose the job based on other factors.Īs a general rule, for a physician with an income near the median physician income in the $200-225K range, I would estimate that a typical independent contractor job ought to pay about 10% more in order to be equal to the typical employee job. If the employer-offered retirement plan is crappy, you can also assign a dollar figure to the ability to choose your own.Then take what you would be paid as an independent contractor and subtract the value of the deduction on everything you could deduct that you would not be able to deduct as an employee. Then add in an amount equal to the non-deductible portion of the employer's half of your payroll taxes.įor Social Security, that is 6.2% * (1- your marginal tax rate) * $118,000.įor Medicare, that is 1.45% * (1- your marginal tax rate) * your entire salary + 0.9% * (1- your marginal tax rate) * (your salary – $200K or $250K if married). and any premium assistance on your insurance policies such as malpractice, health, disability, and life.So, if you find yourself comparing an employee job to an independent contractor job, and you like both equally but are unsure which one pays more, it is best to try to do an apples to apples comparison.įirst, take the employee job's salary and add to it the value of any benefits that you actually think are valuable. Choosing Your Own Benefitsīest of all, you get to choose your health insurance plan, your HSA, your 401(k), and if desired, your personal defined benefit plan. She also gets to deduct her health insurance premiums, HSA contributions, and retirement plan contributions, which are all above the line deductions. Work-related expenses that go on Schedule C are far better than those that go on Schedule A because there is no floor. Her work-related expenses are 100% deductible on Schedule C. Upsides of Being an Independent Contractor Tax Deductions Since she is just one person, she gets no benefits from an economy of scale when it comes to benefits (including malpractice insurance.) If she wants group disability or life insurance, she will need to get it from her specialty society. She also gets no benefits except what she is willing to purchase for herself.
So she must pay both halves of the payroll taxes, although the employer half is tax-deductible. Her taxes are a bit more complex because she is both the employee and the employer. Downsides of Self-Employment More Complex TaxesĪn independent contractor is paid on a 1099 Form. Same with other employer-offered insurance. If your health insurance is crappy, you're welcome to go buy a plan on the open market, but if the employer is paying the premiums, it's usually a take it or leave it situation. If the maximum contribution is low, or there is no match, or the expenses are high, or the investment options are bad, well, you're stuck with it. The second downside is that you are stuck with whatever benefits (especially retirement plans) your employer sees fit to offer you. For a physician earning (technically your Adjusted Gross Income, or Form 1040 line 38) $200K a year, that means the first $4K of unreimbursed business expenses are not deductible at all. These have to be deducted on Schedule A and are subject to a floor of 2% of your income. The first is that it is harder to deduct unreimbursed business expenses. There are two significant downsides of being an employee. To the right family, these sorts of benefits can be very valuable. Her employer may also offer some sweet benefits like a 401(k) with or without a match, some portion of the premiums on health insurance, and maybe even some portion of the premiums on a group disability or life insurance policy. Her employer pays the employer half of payroll taxes (Social Security on the first $118K of earnings, and Medicare taxes on all earnings.) Employee Benefits Simplified TaxesĪn employee is paid on a W-2 Form. There are a few significant benefits of an employee job. Physician Wellness and Financial Literacy Conference – Park City.Continuing Financial Education – Las Vegas.Financial Wellness and Burnout Prevention for Medical Professionals.
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