Independent Contractor Status Benefits

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Independent Contractor Status Benefits
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Take Advantage of Independent Contractor Status Benefits

One of the many factors in choosing a clinical career path includes evaluating whether employment or independent contractor status is right for you.  In addition to gaining control of your schedule, independent contractor status benefits are immense. ApolloMD suggests that you seek the guidance of an accountant or financial planner to determine the best strategy for you, but some of the most notable benefits of working as an independent contractor include:

Greater Control of Your Benefits and Finances

As an employee, someone selects your retirement plan, health insurance and other benefits. One of the main independent contractor status benefits is the control you hold over your level of retirement funding, your insurance deductible, life insurance plan, continuing medical education and other benefits. You pay for only what you want or need, and do not have to worry about the effects others will have on your plan.

Purchase Additional Benefits with Pre-Tax Dollars

When you purchase additional benefits as an employee, you must use post-tax dollars, which means the benefits actually cost you 72% more. As an independent contractor, you enjoy the benefit of purchasing the exact benefit plans you want using pre-tax dollars.

How does that work exactly? As an employee, you must first pay federal, state and Medicare taxes (approximately 41.8% of your pre-tax money in most states at the top of your tax bracket). You are then able to purchase additional benefits not covered by the employer. However, for every $1.00 you spend, 41.8% would first have to be paid in taxes, leaving you with only 58.2 cents on every dollar to spend on the benefit. The same concept also applies to health care expenditures that are not covered by your insurance plan, (deductibles, co-pays, medications or procedures not completely covered by your health care plan, etc.).  Additional health care costs above what is covered by your health care plan are typically not deductible on your federal tax return unless these health care expenditures exceed 7.5% of your gross income.

Maximize retirement savings

As someone else’s employee, the amount of money that you can save in a pre-tax retirement plan will be decided for you. Many physician employers provide their employees with 401K or modified 401K plans, such that the working physician can put away $30-35,000 per year, or less. As an independent contractor, you can put away far more pre-tax money by utilizing a defined benefit plan, which typically allows you to put away $70-100,000+ per year pre-tax, by the time you reach the age of 35. As an alternative, you can use a combination profit sharing – 401K plan and can currently put away $52,000 pre-tax per year. Additionally, you can incorporate and fund the cash value of life insurance plans, paying tax on only a portion of the money going into the plan, have the money grow post-tax inside the life insurance plan, and concurrently acquire life insurance.  The cash equity of the life insurance plan becomes an after tax asset which then serves to lower your tax bracket in retirement, so that the money in your pre-tax retirement accounts (401K, profit sharing, defined benefit plan, etc.) will go further in retirement.

As an employee, if you are not able to put enough money away in pre-tax retirement plans to meet your retirement goals, you will have to try to save the additional money you need for retirement in after tax savings, on which you will be required to pay any short-term capital gains and/or interest at the top of your current tax bracket (approximately 38.9%, depending on your state of residence), substantially reducing the cumulative gains of these savings.

Compare hourly compensation

Employers will almost uniformly overestimate the value of the benefits they provide employees, so when comparing compensation of working as an independent contractor versus a staff physician, first figure out how much each benefit is worth on a yearly basis, then divide by the number of hours you will be working per year to get the hourly value of each benefit, then add the value of that hourly benefit to the hourly employee compensation rate. So, as an example, if an employer provides health care insurance and an equivalent health care plan could be obtained for $600 per month ($7,200 per year), and you plan to work 1,800 hours per year, the hourly value of this health care benefit is $4.00 per hour.

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