Employee vs. Independent Contractor – Determining What Status Is Best For You
- September 18, 2017
- ByYogin Patel
Over the last several years, an increasing number of hospitals are contracting with physician service groups to provide coverage for their emergency departments versus employing physicians on their own. This has led to a number of questions from providers on which employment status is better – employed or independent contractor (IC)?
The truth is, there isn’t one model that is “better” than the other in general terms. It depends on what is best for you. Some providers are more comfortable with the employed model because benefits are provided for them. On the other side, there are those that are more comfortable with the IC model and taking complete control over their finances and benefits. There are pros and cons to both models, so be sure to compare them equally when determining the best fit for you.
Let this blog post serve as a guide for comparing the two different options. We’ve broken it down to the basics, the benefits and the incentives. Keep in mind there are a lot of variables that factor into each and you should research them thoroughly. You may be surprised which one is the best fit for you.
The first part of knowing what will be your best employment fit is knowing the difference between the two models. As defined by the IRS, 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.
An employee is defined as one that performs services that can be controlled by an employer (what will be done and how it will be done). Those considered employees are not subject to self-employment tax, but may be subject to FICA.
The earnings of a person working as an IC are subject to Self-Employment Tax; you pay the combined employer and employee amount. For 2017, it is 12.4% Social Security tax on up to $127,200 of your net earnings and 2.9% Medicare tax on your entire net earnings. If your income is more than $200,000, or $250,000 for married couples filing jointly, you must pay 0.9% more in Medicare taxes.
Those considered employees are not subject to self-employment tax but may be subject to the Federal Insurance Contributions Act (FICA). Both you and your employer pay 6.2% Social Security tax on up to $127,200 of your earnings and a 1.45% Medicare tax on all earnings.
Self-employed persons will take a deduction for the 6.2% employer’s share of Social Security along with 1.45% employer’s share of Medicare as an above-the-line deduction.
The Federal Insurance Contributions Act (FICA) is how your self-employment taxes are collected. As an employee, all tax payments are withheld and filed by your employer. As an IC, you will file quarterly estimates based on last year’s tax return or current year’s estimated income.
Business expenses are the cost of carrying on a trade or business and are usually deductible if the business operates to make a profit. As an independent contractor, all business expenses are fully deductible. If employed, business expenses are deductible on excess over 2% of adjusted gross income. A list of deductible expenses and the process of deductibles is supplied on the IRS website.
Federal Tax Rate
Knowing your tax bracket can have a huge impact on your finances. In order to figure out what bracket you fall under, look at last year’s tax return and calculate out your effective tax rate. A number of online calculators will do this for you.
Hours and Compensation
Whether an independent contractor or an employee, you will need to still take your hours and compensation rates into account. Several questions to explore include:
- Are you compensated hourly or on a base rate schedule?
- If a base rate, establish what the average annual compensation is focusing on just wages (no benefits, insurance, etc.)
- If hourly you will need to ask what the minimum number of hours needed to be considered a full-time employee and if you will be able to increase hours as needed
- Is it a flat rate regardless of how hard you work?
- Is there opportunity to increase your base rate by working harder?
- How are more efficient physicians incentivized in your model?
When comparing IC income to employee income, employers will almost uniformly overestimate the value of the benefits that are being provided by their companies. An easy way to compare the hourly compensation rates of an IC compensation package to employee compensation packages would be to 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.
For example, if an employer provides healthcare insurance and an equivalent healthcare plan could be obtained for $600 per month ($7,200 per year), and you plan to work 1800 hours per year, the hourly value of this healthcare benefit is $4.00 per hour.
Malpractice/Tail Insurance is especially important to focus on when discovering what job is best for you. Several questions you should consider when comparing include:
- What types of policies are in place (claims made vs. occurrence based)?
- What is the group’s malpractice history like?
- How do they defend their physicians?
- Have recent cases gone to trial or settled?
Often, what pulls providers toward the employed model is the feeling of getting the “entire package.” In some cases, this results in a lower wage because of the employer overvaluing the cost of the package. This is not always true, but is worth comparing what an employer would include versus what it would cost to pay for it yourself.
An employer’s benefit package may not include everything you need adding additional expenses to your wallet, so be sure to thoroughly research what is offered. You may be surprised that there is not much of a difference.
CME, Retirement, Long Term & Short Term Disability and Life Insurance are all other packages to price out.
Another big benefit to consider is the 401K or Retirement Plan options. While as an employed person, you can get your own retirement account, it comes at an extra expense to you if one is offered through your employer. Use the graph below to compare the difference in retirement plans for employees and ICs.
Finally, make sure you know and understand all of the factors surrounding any incentives and productivity bonuses. At-risk bonuses are challenging to predict as they are highly variable and can hinge on factors beyond your control. Get a sense of what the average payout per physician is at each facility for these bonuses and ask specific questions on what levels are needed to achieve bonuses.
Described in this document are some of the many advantages of being paid as an independent contractor (IC) versus being paid as an employee. The scenarios provided in this document regarding tax saving and retirement planning strategies are neither recommendations nor suggestions, but are merely examples of how in specific cases it can be very advantageous for a physician to be paid as an IC instead of as an employee. We recommend that before employing any of the tax savings and/or retirement planning strategies discussed that each provider obtains the guidance and advice of an experienced financial planner and a knowledgeable accountant to make sure that each specific strategy most effectively meets each physician’s individual needs.