As a physician, there will likely come a time when you need to secure a new position with a hospital, a health care group, or a privately-owned medical practice. All are opportunities in which to practice your specialty, earn a commensurate salary, and provide care for patients.
But not all positions are the same.
While it’s common to be hired as a full-time employee, there’s also a possibility that you’ll be presented with the option to work as an independent contractor.
And those are two very different things.
Before you sign your next physician contract, make sure you know the difference between working as an employee and working as an independent contractor. There are pros and cons to each, so you’ll need to weigh your options to determine which scenario is right for you.
Looking for a new position or getting ready to sign a new contract?
Here’s everything you need to know about being an independent contractor vs. being a W-2 employee.
There are many differences between employed physicians and independent contractors. But what defines your role is who you will be working for.
Employees work directly for the company that hires them. When you receive a paycheck, federal and state taxes are withheld for the government. When you file your income taxes in April, you may receive a refund if taxes were withheld in excess of the amount you owe.
Independent contractors work for themselves. Taxes are not withheld by the hospital or health group. The employer is not obligated to withhold an independent contractor’s Social Security tax, FICA, Medicare tax, or federal and state income taxes. They are not required to make payments to Unemployment or Workers Compensation, either. You’ll receive your gross pay and be responsible for making quarterly tax payments throughout the year.
If you’ve never worked as an independent contractor before, there are a variety of benefits you may not be aware of.
From your insurance options and tax benefits to a greater sense of freedom, freelancing is an attractive option for many physicians.
As an independent contractor, when you work, where you work, and how much you work are all at your discretion.
Your contract may still include specific expectations, such as how many patients you need to see each month. But generally speaking, you’ll have much more freedom than a physician who is a direct employee.
You’ll have the ability to decide where you work. You won’t have to relocate or work in a new location unless you want to.
You’ll also have the option to work locum tenens or take on per diem work at other hospitals or practices. As an independent contractor, the employer has virtually no control over what you do outside the hours you work for them. This allows you the opportunity to take on a second or third job if you choose.
In general, independent contractors have much greater control of their situation. Technically, you will be self-employed, so you’ll have much more freedom to make your own decisions.
Employees are limited to the 401k and insurance plans set by their employer. As an employee, you don’t get to choose your health insurance provider or disability insurance provider. Your employer will automatically assign you to whatever provider they use.
Independent contractors can choose any insurance provider they want.
You can also choose your disability insurance policy. Many employers provide physicians with a limited amount of disability insurance. Independent contractors do not receive this benefit.
But sometimes, forgoing employer-sponsored disability insurance is a better option.
Because there are different types of disability insurance, and employer-provided policies are often limited.
The whole point of having disability insurance is to protect your assets and sustain your financial security. Financial experts encourage physicians to take out their own disability insurance policies or, at the very least, a supplemental plan.
As an independent contractor, you can select a comprehensive disability insurance policy that provides the protection you need.
Related: Your Full Guide to Disability Insurance for Physicians
Independent contractors are responsible for paying their own taxes. When you’re not an employee, taxes are not withheld.
Instead, you’ll receive your gross pay and have to make quarterly tax payments to the IRS and your state government. A general rule of thumb is to set aside one-third of your gross income. This may seem like a lot, but it aligns with regular payroll taxes. Also, remember that you can deduct business expenses, which reduces your taxable income.
What makes this a benefit is that you can hold your income in a high-interest account until it’s time to make those quarterly payments. Just make sure you don’t hold it past the three-month mark. Failure to make quarterly payments will result in a penalty at the end of the year.
Independent contractors also have the freedom to establish an S-Corp, form an LLC, or work in a sole proprietorship. These various legal structures refer to how you want to create your “company” and pay your taxes.
A sole proprietorship means that you are the one and only owner of your business. You can be held personally responsible for the business’s actions. With a sole proprietorship, you still pay your taxes on your personal return. You and your business are one and the same.
An LLC is a way for a small business to enjoy the same protections as a corporation and the tax benefits of a partnership. The LLC is still the same entity as its partners, but the company’s profits and losses are passed through to the LLC owners. When you file your taxes, you’ll need to report the income and expenses of your business on your personal returns.
Form an S-Corp if you want to protect yourself from personal liability. Unlike an LLC, when you file taxes, you’ll only have to pay taxes on the share of wages you earned (as opposed to the entire earnings of the business as a whole).
How you establish your company will directly affect how you pay your taxes.
Depending on how you structure your business, you may also be able to take advantage of the pass-through income deduction. As part of the Tax Cut and Jobs Act, physicians earning less than $157,500 per year may deduct 20% of their pass-through income from their taxable income.
Working as an independent contractor has some drawbacks as well.
But, depending on how you navigate them, they can actually be beneficial.
As an independent contractor, don’t expect to be called to the table to make policy, change policy, or establish new protocols. Those decisions are usually reserved for direct employees.
However, if your goal is to focus on patient care rather than administration, this may work in your favor. You won’t have a say in any major decisions, but for some physicians, that may be a good thing.
Independent contractors do not receive benefits. You won’t have employer-sponsored life insurance, health insurance, or a retirement plan. You also won’t get any paid vacation days or paid sick days.
However, not receiving these benefits puts the ball strictly in your court.
You’ll be able to make your own choices as to which insurance provider you want to use and how to handle retirement planning. You also won’t have to worry about scheduling vacation or taking a day off here or there.
Related: How to Become a Physician Consultant [3 Essential Steps]
Would you prefer to be a traditional employee that works directly for your hospital or health group?
Some physicians prefer the employee-employer relationship, and there are several reasons why:
Your employer will provide you with all of the medical equipment and tools needed to do your job. If your employer does NOT provide something, that’s on them. As an employee, you shouldn’t be expected to purchase products on your own. If there is something special you need, make sure to ask before signing a contract with them otherwise you might be stuck paying for it on your own.
Independent contractors may have to incur the expense of purchasing supplies or equipment that they need to do their job. But they can deduct those purchases from their taxes as business expenses.
Paid vacation days. Health insurance. Life insurance. Paid time off. Traditional employees receive a host of benefits that independent contractors do not.
Anyone who gets a W-2 already knows that taxes are withheld from every paycheck.
You won’t have to worry about setting money aside to make tax payments like independent contractors do. You’ll also have a better chance of getting a refund at the end of the year when you file if you withhold at the full level.
Independent contractors have to withhold their own taxes and make payments throughout the year. However, contractors can earn interest on that money prior to making IRS payments, which can be beneficial to their bottom line.
Being an employee comes with a certain level of security and stability that working as an independent contractor does not.
Granted, any physician can be terminated as an employee if they break the rules or don’t abide by specific regulations. But if your employer decides to downsize, they may let their independent physicians go before they lay off existing employees. The other risk of employment surfaces when there are mergers or acquisitions. Often times we find that employees are force-fed new agreements they have to sign and either physician agrees to the terms or is terminated. We even see this happen on a regular basis at highly ranked academic institutions.
Working as an employee has its benefits, but it has its drawbacks as well. Before you sign your next physician contract, weigh these options carefully to determine which employment option is better for you.
Employees are under the direct control of the employer. You won’t be able to turn down work that you don’t want to do. You won’t be able to pick your own insurance providers. You won’t be able to deviate from the rules or regulations that all employees are bound to.
Your contract may include a clause that prohibits you from working in any other practice or hospital. If you want the freedom to work a second job or do locum tenens work, you may not be able to do so.
Ask yourself one question:
Is the perceived stability of being an employee worth giving up the freedoms that come with working as an independent contractor?
Related: Understanding Your Physician Contractor Agreement
Your physician employment agreement will stipulate whether you will be hired as an employee or an independent contractor. Before you sign that contract and make an employment commitment, hire a contract review specialist.
A contract review specialist will ensure that the contract includes everything it should. They’ll also make sure that it doesn’t include too many restrictions. A thorough review of your contract is the best way to ensure that you’re getting a fair deal.
Physician contracts are often lengthy and complicated. Hiring an expert to review it for you is the only way to protect your interests. Whether you intend to work as an employee or an independent contractor, this is something that every physician should do during contract negotiation.
There are many differences between working as an employee vs. working as an independent contractor.
Before you sign your next contract, take some time to understand the differences between the two. Independent contractors have more control and more freedom. Employees tend to have fewer business responsibilities and get to file less complicated taxes.
Weigh your options carefully to determine which scenario is more in line with your needs and your personal preferences.
And always consult with a contract review specialist before signing your name on the dotted line. A contract review specialist won’t just look at what’s in the contract — they’ll also look at what’s missing.
Having a thorough, concise contract that spells everything out is the only way to protect yourself. It’s also the only way to ensure you’re getting the best possible deal.
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