Independent Contractor

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I realize that this is premature for me, but the latest issue of EM Resident had a bit in there regarding independent contractor options/corporation options. Although informative I thought it still was a little vague as to just "how" much or little these will affect one's tax/income situation.
I know that everyone has a different situation, and it is impossible to make an accurate blanket statement, but are there any EPs out on the forum that are utilizing these modalities? Or EPs that carefully weighed the option of indep. contracting and went with a traditional track?

I would love to hear the pros and cons from some docs who have gone this route, and if possible, give us an idea of the financial impact (good or bad) that it brings.
I guess my money question would be: Would it be a smart strategy to go this route in the beginging of private practice to accumulate some extra $$ and settle down into a more traditional and/or academic environment? Or, are the finacial benifits really not that great after all the costs have been taken into account?

Thanks!

 

[docB]

The pro of being an IC is that you get the max amt of cash on your bottom line. You have opportunities to self incorporate and save $$ on taxes by writing off stuff that you just pay for as a W2 employee like car expenses, meals at work, home office expenses and so on.

The con is that you have to really know what you are doing or have a good accountant that you trust to make it worth while. If you screw it up the IRS will haunt you forever. The costs of incorporating , paying the CPAs and lawyers as so on mean that you will probably not see the benefits for a few years and you have to be in a position to really take advantage to come out ahead.

You also need to be young and healthy or else you will not be able to buy your own health, life and disability insurance which you'll be on your own for as an IC,

You also have to work out your own retirement savings as an IC.

 

[southerndoc]

To resurface this thread, is anyone here self-incorporated? What kind of tax advantages do you see? Does it offer an immunity shield for various physicians assets from medical malpractice lawsuits? Is there a reduction in reimbursement for claims submitted (as a corporation v. individual)? Is it really worthwhile to self-incorporate?

 

[docB]

To resurface this thread, is anyone here self-incorporated? What kind of tax advantages do you see? Does it offer an immunity shield for various physicians assets from medical malpractice lawsuits? Is there a reduction in reimbursement for claims submitted (as a corporation v. individual)? Is it really worthwhile to self-incorporate?

I'm going through it right now. My situation is a little odd since I'm actually a W2 employee, not an IC, but with some of the extra stuff I do as an IC (EMS, consulting, etc.) it should work out. At least that's what my lawyer and accountant tell me. I'll let you know this time next year. If I've dropped out of sight because the IRS tossed me in jail then it didn't go well.

 

[southerndoc]

Ha, that's hilarious! Hopefully you don't get tossed into jail.

As for another question, do most IC's go with SEP-IRA's or Individual 401(k)'s? I'm trying to decide now.

 

[EM Junkie]

Do you have to self-incorporate?

I started moonlighting in 2007, so my wages for that work will be as an IC. Can I claim business expenses without going through the process of self incorporating? Stuff like my medical licensing fees easily go into several thousand dollars of "business expenses".

-EM Junkie

 

[spyderdoc]

Actually, I initially did incorporate, but had such a hard time with it. It is very compiicated. You need to setup a payroll system, more tax forms, etc. Since my wife gets our benefits through her job, I felt that the cost and hassle of being incorporatted outweighed any benefit. I dissolved my corp and just work as IC and 10-99...Life is so much more simple for me...I think if I needed benefits, then staying incorporated would have made more sense....

 

[waterski232002]

If your primary job is as an employee for a group, but you also moonlight as an IC.... then it seems like you'd get the best of both worlds. You get all the benefits, retirement, health/life/disability insurance from your primary job as an employee. On the other hand, you can tax deduct your car, gas, office supplies/furniture, pda, computer, cell phone, etc due to your secondary IC status. Then again, if you have a considerable amount of tax deductions (over $100,000 per year), IC is probably the best. These are just some basic examples using rough figures....

Option #1 as full time employee
Full time employee (164 hr/mo) @ $130/hr
Salary: $256,000
Benefits: Retirement contributions, health/life/disability insurance, CME paid by company
Overhead costs: Car, gas, office supplies, computer, etc = $45,000
Deductions: None

Gross Annual Income: $256,000
Net Annual Income: $256,000
Annual take home income after taxes (33% bracket): $171,000
Annual take home income after taxes - overhead costs: $126,000

Total Package worth = $126,000 + company paid retirement/benefits + overhead costs

Option #2 as full time IC
Full Time IC (164 hrs/mo)
Salary: hourly wage of $155/hr = $305,000
Benefits: None
Self paid insurance costs: annual health/life/disability insurance = $10,000
Self paid retirement costs: retirement = $45,000 per year max
Overhead costs: car, gas, office supplies, computer = $45,000
Deductions: overhead costs $45,000 + retirement $45,000 = $90,000

Gross Annual Income: $305,000
Net Annual Income: $215,000
Total Take Home Income after taxes (33% tax bracket): $144,000

Total Package worth = $144,000 + self paid benefits/retirement + overhead costs


Option #3 as full time employee & part time IC
Primary Job as full time employee (140 hrs/mo) @ $130/hr
Salary: $220,000 per year
Benefits: Retirement contributions, health/life/disability insurance, CME reimbursment paid by company
Overhead costs: None
Dedcutions: None
Annual take home income after taxes (33% tax bracket): $147,000

Secondary Job as part time IC (24 hrs/mo)
Salary: hourly wage of $155/hr = $45,000
Benefits: None
Overhead costs: Car, gas, office supplies, comp = $45,000
Deductions: Car, car maintenance, gas, office supplies/furniture, computer equip = $45,000
Annual take home income after taxes (33% tax bracket): $45,000

Gross Annual Income: $265,000
Net Annual Income: $220,000
Total Take home Income after taxes (33% tax bracket): $147,000

Total Package worth = $147,000 + company paid benefits/retirement + overhead costs

Feel free to criticize and comment... I realize there will be a ton of variablility depending on jobs, areas of country, specifics of a group plan, cost of medical insurance/disability etc based on personal/family dynamics.

 

[southerndoc]

I'll be an IC, and I won't have any overhead costs totalling $45,000. My billing is paid for by the company I am contracted with.

These are the figures I have (actual quotes for me, a single 33 year old):

Retirement: $47,000 (SEP-IRA limit)
Disability Insurance: $4,500
Life Insurance: $10,000
Health Insurance: $2400

Keep in mind that the retirement contributions of an employee are often limited to $15,000 worth of 401(k) contributions unless your company offers a pension as well. You, however, won't be contributing a large amount of that since they will match what you contribute (or even put in more than what you contribute).

As I mentioned in another thread, an independent contractor is not for those that have many health problems, those needing family health insurance, etc.

 

[jazz]

i think independent contractors have to pay malpractice insurance, no?

 

[waterski232002]

Are there any tax deductions for the cost of life/health/disability insurance? Do you really need life insurance if you're single?

 

[txterp98]

That's a little deceiving on the 401K contribution limits for an employee of $15,000.

For 2007, the max contribution an employee could personally make was $15,500. The combined maximum for 2007, though, between employer and employee was $45,000.

In my case last year based on revenue generated, my employer contributed $33750. As a result, I only contributed $11,250. I didn't have to maximize my personal contribution because my employer maximized theirs. This isn't a pension plan; it's the employer match (and then some) to my 401K. Since I'm fully vested, if I leave my company, the entire sum of the 401K goes with me to my next job (though I have no plans to leave!)

The question about the necessity of life insurance for a single person is a good one as well. Though you likely don't need it, you might want to consider if it's worth locking in the lowest possible rates on term insurance early. Also, some people choose to have their families listed as their beneficiaries if something were to unfortunately happen. As a result, you woudn't leave the financial burden of a funeral to loved ones and it would help pay off any potential outstanding debt you may have (credit cards, private loans, etc).

And if you haven't already, start maximizing your own-occupation personal disability insurance now while you're still in residency.

 

[southerndoc]

txterp, interesting. Obviously I was misinformed about 401(k) contributions. I was under the impression that the max was $15,000 (or whatever it is for this year), including employer match.

jazz, some IC's do pay their own malpractice insurance. However, a lot of places (including where I am going) pay it for you.

 

[docB]

jazz, some IC's do pay their own malpractice insurance. However, a lot of places (including where I am going) pay it for you.

True. This fact speaks to the importance of making sure you search out all the costs, such as the various types of insurance you'll need, and get quotes for the area and your personal situation so you can compare apples to apples.

For example a job where they don't pay your malpractice will need to pay you tens of thousands more a year to be similar to one that does.

 

[Jeff698]

For 2007, the max contribution an employee could personally make was $15,500. The combined maximum for 2007, though, between employer and employee was $45,000.

Pardon the silly question, but this 45K limit applies only to 401K, correct? Can you still get a deduction for a contribution to an IRA?

Take care,
Jeff

 

[txterp98]

Nahhh, Jeff, not a silly question at all. Here's what I pretty much figured out for 2007 (based on a lot of reading and discussion with my CPA):

1) Couldn't contribute to a Roth IRA based on my income (must have an adjusted gross income less than $99,000 if single or $156,000 if married)

2) Couldn't qualify for a deduction for a Traditional IRA based on my involvement with an employer-sponsored 401k (there's an IRS table, but basically it boiled down to modified adjusted gross income greater than $62,000 as a single filer takes away your right to a deduction; if married, a modified adjusted gross income greater than $103,000 takes away the right to the deduction)

3) Anybody has the right to contribute to a Traditional IRA, but because of our income, we cannot deduct it. Last year, the Traditional IRA contribution limit was $4,000; this year it is $5,000. (Assuming you are age 49 or lower). Though this is a nondeductible Traditional IRA contribution, because of a tax law change scheduled for 2010 and beyond, we will be allowed to convert this Traditional IRA to a Roth IRA (currently if your modified adjusted gross income is greater than $100,000, you are not eligible for this conversion; in 2010, this modified AGI limit is being eliminated). It is a personal decision whether making nondeductible IRA contributions makes sense and then doing the Roth conversion. It's a whole separate thread if we discuss this (and probably best done at the Financial forum)

So, basically to sum it up, based on your expected income as an attending physician, you won't be able to deduct any of this if you are hired on somewhere as an employee with an employer-sponsored 401k.

Oh yeah, insult to injury, once your modified AGI is greater than $65,000 if single or greater than $135,000 if married, you can no longer deduct the interest on qualified student loans.

Hope some of this helps.

 

[EctopicFetus]

Another question. So beyond the 401k thing, there is also the SEP Keough.

I know a group in town where they are putting away almost 50K per yr tax deferred.

Anyone know how this works?

 

[waterski232002]

Technically, a "SEP-IRA" and a "Keogh" account are different things; but, they function very similarly. I just started reading about this...

The way I understand it, A "SEP-IRA" is for an independent contractor or anyone else who is self employed to contribute retirement money on a pretax basis up to $45,000 per year (2008). These were created by the government for people who are self employed b/c they are not able to contribute to a 401k or 403b retirement accounts which are only offered to employees of larger companies or non-profit organizations respectively.

A "Keogh" plan can take many forms, and the one I believe you're referring to is called a "Defined-contribution Keogh Plan". These are for high income earners like physicians who are employees or partners in a company. You must be vested in the company for a set number of years (sometimes 2,3,4,or 5) before you earn the right to full annual contributions (also $45,000 per year) which is directly taken out of your paycheck and placed into your Keogh account on a pretax basis.

It's my understanding that these are the high end pension plans that are harder to come by... they are much better than 401k or 403b plans b/c you can contribute much more to them annually. Most companies switched to 401k or 403b accounts b/c lay people see $$$ when they hear the company will "match" the first $5,000 dollars they place into the account. The advantage, is that you get some free money with a company who matches a 401k plan. The problem is that the max is only $15,500 per year instead of $45,000 in a Defined-contribution keogh plan.

Can someone who's more financial savvy than me confirm or refute this?

 

[southerndoc]

The SEP-IRA is an easier to administer plan that allows one to contribute up to $45,000/year (I believe it's $47,000 for 2008). It is for those who want a plan that features less paperwork, or for those who might have employees in the future. If you have a SEP-IRA and hire employees, then you MUST provide equal SEP-IRA benefits to them (whatever percentage of your salary you invest, you must contribute the same percentage of your employees' salaries to their SEP-IRA's).

An Individual or Self 401(k) is part of the Keogh plans. It has much more administrative paperwork and is more rigid to administer. It is not for someone who might have potential employees because as soon as you get an employee, you must cancel the 401(k). It allows for higher contributions for a given salary when compared to the SEP-IRA, and it also has the benefit of being able to borrow against the 401(k) if you need it for whatever reason (buying a house, medical, etc.). The Self 401(k) has so much administration involved that many brokers charge extra for them and also many more do not offer them.

The contributions limits are confusing when one looks at the differences. You can Google them to find out the limits and see which is better for you. If you're making >$225,000 per year, then the contribution amounts are about the same.

You can deduct a significant amount of your SEP-IRA and Self 401(k) contributions from your taxes.

Finally, anyone who makes above the cutoff for contributing to a Roth IRA really shouldn't be investing in a Roth IRA anyhow. It is likely a physician will have a higher salary (and thus tax rate) while working than in retirement. It is better to deduct the taxes while in a higher tax bracket and pay taxes on disbursements than to pay higher taxes now and have disbursements tax free. Even if you amass millions in a Roth IRA, it is unlikely that you will take out on an annual basis more than what you made as a physician.

 

[zinjanthropus]

Only about 10% of my total gross income is related to IC income. For those of you that do a Schedule C but have a relatively low IC mix overall, do you still deduct things like cellphone bill, vehicle mileage (only to your IC site?), home office, etc? Any thoughts on this topic are welcome as I would like to not get audited! Thanks.

 

[Old_Mil]

Only about 10% of my total gross income is related to IC income. For those of you that do a Schedule C but have a relatively low IC mix overall, do you still deduct things like cellphone bill, vehicle mileage (only to your IC site?), home office, etc? Any thoughts on this topic are welcome as I would like to not get audited! Thanks.

I'd like to see some answers to this latest question as well for people who are doing a mix of IC and W2 work...

 

[docB]

I'd like to see some answers to this latest question as well for people who are doing a mix of IC and W2 work...

Let preface with the obligatory "I am not an accountant." I am in your situation and I have an accountant. You should get one too.

I too make only about 10% of my income as an IC. I do deduct things like cell phone, home office, travel for meetings, meals, etc.

I can justify this because in addition to working as an IC EP I also get IC money as an EMS medical director and for consulting work. Any diversification you can do makes it more solid.

My goal is to come up with deductions that equal my IC income. If I do that I come out ahead on the whole deal.

 

[pratik7]

I am an IC who has incorporated. I just finished my list of deduction. They include things like internet, cellphone, all my insurance , miles driven to work/bank/cpa ect, computers , office furniture, stamps/pens, trips for cme, licensing fee and boards. Im not sure how much you can deduct if you arent incorporated but I have deducted about 35k worth of stuff in the 6 months since I graduated which is about 15-20k in real money

 

[valkener]

Excuse me if I'm wrong, but in the near future wouldn't it be smarter to stay right below the 250k cutoff for a higher tax rate, and getting benefits instead.

 

[ERDude]

Excuse me if I'm wrong, but in the near future wouldn't it be smarter to stay right below the 250k cutoff for a higher tax rate, and getting benefits instead.

You're wrong. That's not how taxes work. Everybody pays the same amount of taxes on income within that bracket (eg. everybody gets taxed at 10% on their first $8700 of income regardless of whether they make 15k/yr or 500k/yr).

 

[docB]

Excuse me if I'm wrong, but in the near future wouldn't it be smarter to stay right below the 250k cutoff for a higher tax rate, and getting benefits instead.

The specific cutoff isn't as important. But in general it will likely be better for groups to shift money from payroll to benefits.