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The pros and cons of both types of employment is an issue that every physician struggles with at some point during his or her medical career. For tax purposes, the major difference between both types of employment is an independent contractor is self-employed and paid via a 1099 tax form, versus an employee who is paid on a W-2 tax form. There are pros and cons to each type of employment and one is not necessarily better than the other.
FEATURES OF 1099 INDEPENDENT CONTRACTORS
An independent contractor should be paid more. While this sounds like an upside on the surface, this increase in salary is solely to offset the fact that independent contractors do not receive benefits while working. This increase in pay is designed to cover the loss of benefits and the additional payroll taxes. The difference between after-taxes and after-benefits are present, but unlikely to be extremely high.
Additional items can be deducted from your taxes. Some of these deductions can be quite significant, while others are nearly meaningless. For example, when it comes to payroll, the employer portion of payroll is tax-deductible. For comparison, on a standard $300K income, an additional $4,300 can be saved in taxes. In addition to this, you can also deduct anything that is reasonable business cost, such as gas mileage while commuting, CME costs, scrub costs, accountant fees, etc. On that same standard $300K income, there is potential for an additional $1,000-$2,000 in savings per year in taxes.*
*Numbers stated above are for examples only and should not be taken into consideration when seeking employment.
There are no offered benefits for independent contractors. Being that independent contractors are not bound by contract to a specific company or organization, they do not receive benefits. They are considered independent workers and have the leisure to commit short periods of times to various different organizations, thus meaning the worker is liable for purchasing their own insurance.
Tools and resources for the job are not provided to the worker. It is up to the independent contractor to purchase his/her own equipment he/she deems necessary to perform the job if the equipment is not already provided. While this is a con for the independent worker because this is a loss of personal dollars, this is a pro for the employer. Additional temporary work can be done without the loss of additional dollars. Physician employers should keep in mind that independent contractors are not allowed to perform the primary work of the practice.
FEATURES OF W-2 EMPLOYEES
Employees are typically offered benefits while on the job. In contrast to being an independent contractor, employees do receive company-offered benefits. This includes various types of insurances, vacation days, paid time off, etc, all at no cost to the employee. Legality issues often arise from this feature. Employers cannot deem a hired worker as an independent contractor to avoid providing the worker with benefits.
Federal laws are behind employees. A majority of federal laws that pertain to prohibiting discrimination in the work force only apply to W-2 employees. This does mean that independent contractors normally do not have legal backing in these issues. By law, employees also have a required minimum wage that employers have to abide by, while independent contractors do not have to be paid a specific amount.
Fixed pay. Employees are paid on either a fixed or an hourly, daily, or monthly basis. This loosely guarantees a flow of income to the worker. This differs from independent contractors, who are paid in lump sums for projects.