1099 vs. W-2 Physicians: Differences, Pros and Cons

The 1099 vs. W-2 tax classification designates someone as an independent contractor or employee in the workplace. A W-2 physician typically receives a salary and benefits and works on a consistent schedule as an employee of a healthcare organization. A 1099 physician is considered an independent contractor, providing services to various medical institutions on a contractual basis. They are usually paid at the end of a shift or upon invoice submission. 

There are pros and cons to each type of designation. You can work as both an employee and a contractor, especially if you're in private practice or have side hustles such as providing chart reviews, consulting, or locum tenens work. Here are the key differences to be aware of.

Working as a W-2 physician

W-2 physicians are generally full-time employees, typically working for hospitals (non-profit or for-profit) or private practices. This typically means you have a stable income and benefits package, with health insurance coverage, vision, dental, a retirement plan, paid time off, and more. As employees, W-2 physicians are more likely to have a structured work environment with set schedules.

Pros of working as a W-2 physician

1. Job security and stability

You can expect regular paychecks and job security as a W-2 physician employee, and you typically follow a schedule set by your employer. There's no need to separately track expenses or tax obligations. 

2. Benefits package

One major advantage of being a W-2 employee is access to a benefits package. As a physician, this typically means your employer covers the cost of your malpractice insurance, licensing, DEA licensing, credentialing, privileging, and continuing medical education (CME).

You can also participate in an employer-sponsored retirement plan and may receive an employer match. Some non-profit hospitals, such as the University of California, even offer voluntary 403(b) and 457(b) plans that potentially add up to an additional $46,000-$61,000 before accounting for employer contributions.  

3. Simpler taxes

The simplest part of being a W-2 physician is that your taxes are deducted upfront from your paycheck. You're only responsible for paying the employee portion of Social Security and Medicare (FICA) tax, which is not the case with independent contractors. 

Cons of working as a W-2 physician

1. Reduced flexibility 

As an employee, you have limited control over your schedule and hours. In fact, IRS guidelines on who qualifies as an independent contractor versus a W-2 employee center on this aspect. Broadly speaking, your employer controls or has the right to control what work you do and how you do the job. 

2. Reduced potential income compared to 1099 counterparts

Contractors typically earn more per project or hours worked compared with W-2 employees, and they have more freedom to work for multiple employers. Theoretically, this means they don't have a ceiling on their earning potential. As an employee, you're typically not allowed to work for competing employers or have limited ability to do so given your schedule. 

However, this earning potential may balance itself out because contractors have more tax obligations and limited access to benefits, which make up a significant part of the overall employee compensation package. 

3. Limited tax deductions

Contractors can take advantage of more tax deductions that regular employees cannot, including for business-related expenses. 1099 physicians often are able to deduct travel, insurance premiums, CME costs, and more.

4. Fewer retirement plan options 

Employer-sponsored retirement plans are worth participating in, but you typically don't have as much flexibility to choose what types of retirement accounts to invest in and you may have fewer investment options to choose from. Self-employed physicians have more freedom of choice. They may be able to set up a SEP IRA, a Solo 401(k), a cash balance plan, and more, depending on the structure of their business. 

Working as a 1099 physician

The terms 1099 physician, independent contractor, and self-employed all refer to the same thing: you work for multiple employers on your own schedule and have additional tax responsibilities, such as calculating and filing your own taxes.

Pros of working as a 1099 physician

1. Increased flexibility and autonomy

The biggest advantage of working as a 1099 physician is the ability to set your own schedule and working hours. In contrast to a W-2 employee, the IRS guidelines for independent contractors say that "an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." Whether you're a physician in private practice or moonlighting as a medical writer or expert witness, you have the autonomy to choose how and when the work is done.

2. Potential for higher earnings

Contractors typically charge more per hour or on a project basis. Your earning limit depends on the workload you take on. Unlike an employee, you don't pay taxes upfront, so your earnings are higher. (Ideally, contractors should regularly set aside money to pay taxes on a quarterly basis). You can also be a W-2 employee and work as a 1099 contractor to supplement your job, provided your employer doesn't place any restrictions on this type of work.

3. Tax deductions 

Depending on the type of entity structure you choose for your business, self-employed individuals can take advantage of tax deductions for ordinary and necessary business expenses. This may include health insurance premiums, liability insurance, CME-related expenses, business travel, utility bills, and more. The primary different entity structures are:

• A sole proprietorship (the simplest business structure for an individual)  

  
  

• Limited liability corporation (LLC)

  
  

• Limited liability partnership (LLP, a common choice for private practices)

  
  

• S corporation. (An LLC can also be structured as an S corp)

The type of structure you choose determines how you will be taxed. Selecting the right entity structure is an important decision that you should thoughtfully consider along with input from a tax specialist.  

4. Creating a custom benefits plan

As your own boss, you can design a benefits plan that suits your financial goals. You are free to choose from a variety of insurance and retirement plans instead of opting for what an employer offers. You have the option to open special retirement accounts, such as a SEP IRA or a solo 401(k). 

Cons of working as a 1099 physician

1.  Managing benefits and retirement plans

Having the freedom to design your own benefits plan is great, but you need to be self-motivated to manage costs and stay on top of your finances. As an independent contractor, you may also have to pay for health insurance, malpractice, liability, and tail insurance on your own, although you can claim some of those costs as tax deductions. 

Earned can help you manage and invest your assets so you can enjoy as much financial stability as possible. Earned can also help you craft a custom financial plan, evaluate tax planning and insurance options, and make the most of your work as an employee and independent contractor. 

2. Increased responsibility for managing taxes 

There's no doubt working as an employee is simpler from a tax perspective. Taxes are deducted upfront from your paycheck. When you're self-employed, the onus is on you to pay both the employee and employer portion of payroll taxes such as Medicare and Social Security. You also have to set up quarterly estimated tax payments. 

If you have employees (including your spouse) or structure your business as an S corp, you have to pay payroll taxes for yourself and your employees. And you need to keep careful track of business expenses to claim them as tax deductions.

Key Differences Between 1099 and W-2 Physicians

1. Setup and operational costs 

There are a number of steps and costs involved in setting up your own business, which is essentially what working as a 1099 contractor means. At a minimum, you'll need to file for a federal Employer Identification Number (EIN) and get your business registered in your state. You can use online registered agent services to file the necessary paperwork for a fee. Once you're set-up, you need to pay annual fees and franchise taxes to keep your business in operation. In some states, such as California, that can be as high as $800 a year.

To keep track of your books, take advantage of deductions, and file taxes correctly, you will also need to consult with an accountant or tax professional. You could do this yourself, but as a practicing physician, that may not be realistic.

2. Legal and contractual considerations

As a 1099 physician, it's up to you to pay attention to the details while signing a contract. Some items to note in any contract are: 

• When and how you will be paid?

  
  

• Who covers the cost of insurance premiums and CME?

  
  

• Continuity of care requirements? 

  
  

• What kind of termination provision is in the contract? 

  
  

• What are the terms of any non-disparagement, non-solicitation, and non-compete agreements in the contract?

3. Cash flow and financial planning

Contracting doesn't give you the stable cash flow that a regular paycheck does. Running your own business requires careful planning because your cash flow can be irregular and you need to budget for quarterly tax obligations. You also have to pay for insurance and contribute to retirement savings.

The best of both worlds

If you're able to, working as both an employee and independent contractor can allow you to have the best of both worlds. 

• You can enjoy employer-sponsored benefits and your employer can pay their portion of your FICA taxes. 

  
  

• At the same time, you can deduct expenses like insurance premiums, licensing fees, and others that are used in both your full-time and part-time jobs (provided your employer doesn't already cover them). 

  
  

• You can also still contribute to a tax-advantaged retirement plan outside of your employer-sponsored plan, which allows more of your earnings to grow. 

  
  

Earned can help you manage and invest your assets so you can enjoy as much financial stability as possible. Earned can also help you craft a custom financial plan, evaluate tax planning and insurance options, and make the most of your work as an employee and independent contractor. Contact our team today to learn more.