Independent Contractor Physician – LLC or S. Corp?
Independent Contractor Physician –
LLC or S. Corp?
A quick guide to getting started
As a physician, there are several practice opportunities with different employment statuses available during the job search, with two of the most common being an employee (W2) or an independent contractor (1099). The operations of both are very different and there is no “better” option. Employment status is dependent on what is best for the individual.
For those who thoroughly researched and made the decision to work as an independent contractor, that’s great! Making the change from working under an employed model to working as an independent contractor can be a difficult and sometimes scary decision, but it doesn’t have to be. Two of the most common questions for those starting as independent contractor physicians are “Do I establish an LLC or S. Corp?” and “How do I get started?”
Every individual’s situation is different. Teaming up with our trusted partner and financial advisor, Benjamin Yin, we’ve answered these common questions. Let this guide serve as a basic overview of your options and steps to take when getting started. Remember, you should always consult with a professional to determine what best fits your needs.
The IRS defines the terms as:
Corp: corporations that choose to pass corporate income, deductions, credits and losses through the corporation’s shareholders for federal tax purposes. Shareholders of the S. Corp report flow-through of losses and income on personal tax returns and are assessed at individual income tax rates which allows for S. Corps to avoid double taxation on corporate income.
LLC: a business entity created by state statute with regulations differing from state to state. LLCs may have more than one owner, which are referred to as members. The number of members differ with most states not restricting the type of owners allowed. There is no maximum number of members and most states also permit single-member LLCs. Number of members determines if the IRS treats the LLC as a corporation, partnership or part of the owner’s tax return.
These definitions are long, unclear and not very helpful for most just starting out as an independent contractor. Depending on who you talk to, some may suggest an LLC and others will suggest an S. Corp. Both are correct, to an extent.
After reading the definitions, you may have noticed when establishing an LLC there is a catch, or in reality, a choice for you to make. As an independent contractor physician (ICP), you have the option to establish an LLC that is taxed as an S. Corp. This is what we most commonly see among the physicians in our group for a few reasons. One of the primary reasons is the complexity and higher costs to establish an S. Corp.
With an LLC taxed as an S. Corp, any income generated will “pass through” to your personal form 1040, which is why S. Corps are sometimes referred to as a pass-through entity. As an ICP, the role of your LLC is not asset protection. The role of your LLC is the ability to save on self-employment taxes.
How does it work? As an ICP associated with a national group, the group pays your LLC, then the LLC pays you via W-2 as an employee of the LLC. Self-employment tax is only paid from what is taken on the W-2 portion of the overall income (both the employer and the employee portion), thus saving you a substantial amount of money each year.
Every state is different. In states that do not have a state income tax, such as Tennessee and Florida, creating an LLC taxed as an S. Corp is not a “no brainer” like it is in other states due to the distributions from your LLC incurring an excise tax to make up for the lack of state income tax. Other states require a Professional LLC, or PLLC. Some states, such as Virginia, require the state medical board to be involved. Thorough research on your individual state requirements, as well as consulting with a financial advisor and CPA, will help to establish what is best fit for you.
Before you establish your LLC, or PLLC in some states, we recommend for you to:
1.Establish a relationship with a trusted team of partners, specifically a financial advisor and CPA.
Yes, we’ve mentioned this relationship multiple times already but it is extremely important. If you haven’t done so already, run, don’t walk, pick up the phone or whatever you have to do to get this relationship established with someone you trust.
Can you establish the business entity on your own through an online service? Yes. However, that is not recommended. In the long run, it will cost more money and more time.
Once the business is established, there are a few practical steps you should take to get started.
2. Open a business bank account, or two.
Select the bank you wish to do business with and check the requirements needed to open a business account. In most cases, you need the Federal Employer Identification Number (EIN) of the LLC and the articles of incorporation. It is recommended to open two accounts for most. One account will receive the money from the group and the other can be used as a tax “escrow” account. As an ICP, income taxes (federal/state) for your LLC are filed quarterly and having the second account used as escrow will help track the significant quarterly tax payouts and ensure the money is available, if used properly. Taxes from your W-2 income should be automatically withheld by your CPA/payroll company.
3. Get a business credit card.
This is a personal card dedicated to business. Every expense related to doing business as an ICP should be charged to this card. As an ICP there are a number of things you can write off on your taxes. To do so, you will need a record of these expenses. We suggest using an app such as Expensify to keep track of your expenses, receipts, etc.
4. Meet with your CPA to determine how payroll will work.
You are your own employee, so because of taxes the LLC (you) will pay yourself (W-2) much less. The lowest the you can pay yourself, the better but the IRS requires it to be reasonable compensation. Self-employment tax is 15.3% on wages up to $128,400 and 2.9% additional on wages more than $128,400. Your CPA will help determine what amount you should be paying yourself. An IRS W-9 form will also need to be completed. As an ICP with a national group, this form tells the group to pay your LLC, or business.
While there are more steps to getting started, this covers the most basic things you should do when establishing a business as an ICP. At ApolloMD, we work with and refer our physicians to trusted partner Benjamin Yin, MBA, Co-Founder and Principal of Generational Financial Partners. Ben works with a large number of independent contractor physicians and provides customized plans to help them prepare, protect and prosper based on the individual’s goals and needs.
Schedule a free a 15-minute free session with Ben to discuss independent contractor status as a physician and how to get started.
Disclaimer: Described in this blog post are some examples and steps commonly followed by physicians. These scenarios are merely examples common across the industry. Before establishing a business, or determining what employment status is best for you, we recommend obtaining the guidance of a trusted, experienced financial advisor/planner and an experienced, knowledgeable CPA.