W2 vs 1099

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onconc

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*** X-posted from the main IM subspecialties page ***

For the same income; and relatively low expenses, is it better to be on W2 or 1099

Income : 1M
Annual expenses : 200k

Let's say your total annual expenses including everything (car lease, mortgage, kids tuition, underwear, shaving cream , absolutely everything) is $200k. So 200k becomes the upper limit of what you can possibly deduct.

1099 route
-------------
With 1m, and taking these 200k deductions, taxable income becomes 800k. So 800k gets taxed at personal income tax rates. When I plug it into Federal Income Tax Calculator (2022-2023)
for Los Angeles, I get my final take home pay at $485k; which is purely savings, since I have already accounted for all my expenses

Net annual amount going into savings : $485k

W2 route
------------
Entire 1m gets taxed at personal income tax rates.
When I plug it into
Federal Income Tax Calculator (2022-2023)
for Los Angeles, I get my final take home pay at $584k. But from this amount, I need to deduct my expenses of $200k which are paid with post tax money and no tax deductions.

Net annual amount going into savings : $384k


------------

So net difference in savings per year is about $100k (difference between $485k and $384k). Actual difference in real life is probably going to be much less since not all of my $200k expenses are tax deductible. A more realistic deduction would be for $50k perhaps.

Am I missing anything ?
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onconc said:
*** X-posted from the main IM subspecialties page ***

For the same income; and relatively low expenses, is it better to be on W2 or 1099

Income : 1M
Annual expenses : 200k

Let's say your total annual expenses including everything (car lease, mortgage, kids tuition, underwear, shaving cream , absolutely everything) is $200k. So 200k becomes the upper limit of what you can possibly deduct.

1099 route
-------------
With 1m, and taking these 200k deductions, taxable income becomes 800k. So 800k gets taxed at personal income tax rates. When I plug it into Federal Income Tax Calculator (2022-2023)
for Los Angeles, I get my final take home pay at $485k; which is purely savings, since I have already accounted for all my expenses

Net annual amount going into savings : $485k

W2 route
------------
Entire 1m gets taxed at personal income tax rates.
When I plug it into
Federal Income Tax Calculator (2022-2023)
for Los Angeles, I get my final take home pay at $584k. But from this amount, I need to deduct my expenses of $200k which are paid with post tax money and no tax deductions.

Net annual amount going into savings : $384k


------------

So net difference in savings per year is about $100k (difference between $485k and $384k). Actual difference in real life is probably going to be much less since not all of my $200k expenses are tax deductible. A more realistic deduction would be for $50k perhaps.

Am I missing anything ?
Click to expand...

is that 1 million of W2 already effect in all of the benefits such as 401K match, also to cost of insurance as compared to 1099 payment which offers nothing except 1 million?
 
HemOncCheng said:
is that 1 million of W2 already effect in all of the benefits such as 401K match, also to cost of insurance as compared to 1099 payment which offers nothing except 1 million?
Click to expand...

No it doesn’t. Good point. I guess that brings down the difference between w2 and 1099 even further
 
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I actually was thinking about this too. Have you thought about the feasibility of this in terms of whether it can be a common practice for hem/onc jobs? I know it is very common if you are a hospitalist and work on another gig in addition to your 7 on 7 off schedule.
 
HemOncCheng said:
I actually was thinking about this too. Have you thought about the feasibility of this in terms of whether it can be a common practice for hem/onc jobs? I know it is very common if you are a hospitalist and work on another gig in addition to your 7 on 7 off schedule.
Click to expand...

No it is not common. But recently a close friend HemOnc Locum Tenens did this. And she said she will only do 1099. I tried to understand her point of view w.r.t the mathematics of it. And the mathematics didn't make it sound as if 1099 is going to be a game changer. I mean perhaps a difference of say 10-20 k net on a 1M income. Not a big deal especially considering that the amount of paperwork is going to be non-trivial. Not to mention that the chances of audit go up significantly with lots of deductions. So my conclusion is that either W2 or 1099 is not going to be very different for a person with low expenses. Maybe if you have a ton of expenses, it may make sense. Say you are leasing a rolls Royce and a yacht as your commute vehicle , lol :)
 
One situation in which this could make a lot of sense is if you buy real estate aggressively, especially with real estate professional status, and can depreciate against your income tax burden. Some physicians end up paying no income tax at all this way, but it's an approach best left to those with really good grasps of the RE market. Put another way, if you didn't know about this, you're not ready to do it.
 
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Ubba said:
One situation in which this could make a lot of sense is if you buy real estate aggressively, especially with real estate professional status, and can depreciate against your income tax burden. Some physicians end up paying no income tax at all this way, but it's an approach best left to those with really good grasps of the RE market. Put another way, if you didn't know about this, you're not ready to do it.
Click to expand...

as far as I know, you can deduct real estate depreciation etc only against real estate income; not against income from physician job. For example, if you earn 500k from physician salary; and 100k from real estate rental income; and you have say 150k of real estate deductions -- then you can deduct those 150k only against the 100k rental income; and not against the 500k physician salary.

So essentially, your entire real estate venture becomes a second job. And your time as a physician is best spent being a physician. Your return on investment on the hours you put in to real estate is not worth it.
 
onconc said:
as far as I know, you can deduct real estate depreciation etc only against real estate income; not against income from physician job. For example, if you earn 500k from physician salary; and 100k from real estate rental income; and you have say 150k of real estate deductions -- then you can deduct those 150k only against the 100k rental income; and not against the 500k physician salary.

So essentially, your entire real estate venture becomes a second job. And your time as a physician is best spent being a physician. Your return on investment on the hours you put in to real estate is not worth it.
Click to expand...
There's a way around this with Real Estate Professional Status (REPS) as the other poster mentioned, but this isn't possible for a full time physician because you have to spend >50% of your working time doing qualifying work related to real estate. This is possible, however, if your spouse meets the qualification (which is more complicated than what I've described) and you file taxes jointly. It's a loophole that takes a lot of planning and coordination, though.
 
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solidonc2020 said:
There's a way around this with Real Estate Professional Status (REPS) as the other poster mentioned, but this isn't possible for a full time physician because you have to spend >50% of your working time doing qualifying work related to real estate. This is possible, however, if your spouse meets the qualification (which is more complicated than what I've described) and you file taxes jointly. It's a loophole that takes a lot of planning and coordination, though.
Click to expand...

Thanks for the info.
 
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onconc said:
No it is not common. But recently a close friend HemOnc Locum Tenens did this. And she said she will only do 1099. I tried to understand her point of view w.r.t the mathematics of it. And the mathematics didn't make it sound as if 1099 is going to be a game changer. I mean perhaps a difference of say 10-20 k net on a 1M income. Not a big deal especially considering that the amount of paperwork is going to be non-trivial. Not to mention that the chances of audit go up significantly with lots of deductions. So my conclusion is that either W2 or 1099 is not going to be very different for a person with low expenses. Maybe if you have a ton of expenses, it may make sense. Say you are leasing a rolls Royce and a yacht as your commute vehicle , lol :)
Click to expand...
maybe it makes sense to ask her about specific tax details she is in so that I can figure out whether you can replicate the situation.
 
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