Navigating your financial life as a W2 may have been easy so far, but switching over to being a 1099 Doctor can be a big change. More and more jobs are being offered only as a 1099 contractor vs W2. Whether you are a Physician, Dentist, or Optometrist facing the 1099 option, we will provide everything you need to maximize your income. In this article we will go through the changes you will expect by being paid as a 100% 1099 contractor rather than a w2 doctor.
Note: If you are a W2 Physician with side locum income, this article may offer some insight. But it is not the best as your situation is much different than a physician that is 100% 1099.
1099 vs W2: 5 Areas to Focus On
1. Differences between a 1099 vs W2
2. How Taxes work for a 1099 Contractor
3. Tax Deductions for 1099 Contractor
- Don’t miss out on the 20% Qualified Business Income Tax Deduction
4. Estimated Tax Payments for a 1099 Contractor
5. Steps to take as a 1099
1. W2 vs 1099: What’s the Difference?
There are a handful of changes that go along with being a 1099 vs W2. There are potential tax and legal ramifications for not classifying an employee correctly, so you should make sure you do your homework prior to just making the decision as an employer to ensure your new hire can be classified as a contractor..
As a 1099 you should have more autonomy than a W2. A W2 is an employee that reports to their employer. Whereas a 1099 is their own employer and are contracted for certain jobs with much of the control placed on the 1099 contractor.
- Multiple Jobs
As a 1099 you can seek multiple contract positions and they can all pay into the same 1099 business that you have. Whereas a W2 you may have non-compete or lack the ability to earn income outside of the W2 position.
- Tax Responsibilities
As a W2 your taxes have been fairly straight forward. Your employer did payroll where you were paid every two weeks and they withheld/ remitted taxes on your behalf. Your employer likely also provided various benefits for you to choose from with them providing some health insurance cost as well as a potential retirement match. You got paid on a straight forward pay schedule and at year end they handed you a one page W2 which may even made it super simple to file your taxes on your own.
That will all change now that you are a 1099 contractor. You get 100% of your check. You are now both the employee and employer, so all of the responsibilities fall to you.
This is the biggest downside of being a 1099---you have to figure out and pay in estimated tax payments, how to select and provide your own benefits and also navigate your way through the business and tax options to maximize your income.
That may sound like all bad news, but there is good news. There are a whole lot of tax deductions that just opened up to you. The more tax deductions available to you the less you potentially pay in taxes.
2. W2 vs 1099: How Taxes Work as a 1099 Contractor
In general there are 3 main taxes you will pay.
- Payroll Taxes
- Federal Taxes
- State Taxes- if you are in a state that has a state tax. We are in Florida, so no state income taxes here to worry about.
- Payroll Taxes
Payroll taxes are paid based on your net self employment income or salary (if you are an S-Corp). They include Social Security and Medicare Taxes which is roughly 15.3% subject to caps.
Typically as a W2 employee you and your employer would pay 50% each. If your payroll taxes equaled 15.3% of your salary and you made $100,000 your employer would pay $7,650 and you would pay $7,650. Again you are now the employer and employee so you have to pay both sides totaling $15,300.
Tip: If you are comparing between 2 positions with 1 being a W2 and the other a 1099 you should try and negotiate a higher pay amount as a 1099 since you will be paying both sides of payroll taxes and have to get your own benefits. More on this below.
Social Security 12.4% Capped at $137,700
Medicare 2.9% Not Capped
Additional Med tax .9% Earnings over $200,000 (single) and $250,000(married filing jointly)
- Federal Taxes
You are already paying this and will continue whether you are a W2 or 1099. The big difference is you only pay federal taxes on your net self employment income (after business expenses) as a 1099. So if you are a physician who has been earning $250k as W2 then you are paying federal taxes on $250k less limited deductions such as retirement savings, pre-tax health insurance and potentially other cafeteria plan options (if offered) .
Now that you are a 1099 or business owner, you get to write off expenses against that $250k that you incur to earn that income on top of the same ones you get as a W2.
- State Taxes
This is pretty much the same as federal in the sense that you will pay state taxes on your net self employment income (after business expenses).
3. W2 vs 1099: Tax Deductions for a 1099 contractor
Writing off tax deductions is why being a 1099 contractor can be much more advantageous than being a W2. When you hear people who own a business say don’t worry it’s a write off. All of those same write offs have now been opened up to you.
As a 1099 contractor you are entitled to write off or take a tax deduction for any expense that is both ordinary and necessary for you to earn your income.
- Business Entity:
One of the biggest choices is what type of entity you should set up. The 2 biggest business entity options are typically being taxed as a LLC sole proprietor or LLC S-Corp. Deciding between the two does have varying tax implications.
Note: LLC’s are state elections and not recognized by the IRS. So for IRS purposes whether you choose to be an Inc (S-Corp) or an LLC taxed as an S-Corp. In general the IRS will see you the same way---an S-Corp. Your state is another story and since there are too many states to go through, then you need to review your state rules. Some states have minimum taxes depending on your entity, so don’t make the mistake of just grabbing the S-Corp option just because you read it online.
- Home Office
As a physician you likely will have a place that you go to be a clinician but not a place to “manage” your 1099 business where you conduct your admin duties. Then a home office is definitely a tax deduction you don’t want to miss out on. This allows you to write off a piece of your personal home that you are paying for anyway. You will take your home office size and divide that by your total living square feet to get your expense percentage.
- Vehicle Expenses
When you get in your car and drive from your home to your physical location that you are clinician in, whether that is in a hospital or private practice your drive is a commute. A commute is not deductible.
But if you get up and do some admin work at your home office then get in your car and go to the hospital or practice now you are driving from office to office, which makes it tax deductible. If you do the same after being a clinician all day and head back to your home office that drive is also deductible. That could equal to $1,000’s per year in tax savings by making sure you are meeting those rules and taking advantage of a home office vehicle combo plan.
- CME and or CME Travel
- Business Meals
- Office Supplies
- Hiring your Kids or Spouse
- Business Travel
Here is a thought. What if you hired a CPA in Florida and you came down and visited him for business planning / tax planning. Now all of sudden going to see your CPA in Florida could offer some potential tax benefits. If that sounds like a good idea, give us a call.
- Medical Malpractice
You may or not have to pay this we have seen it both ways. But if you do then it is a tax deduction.
- Cell Phone
- Ipad or Computers
- Retirement Plans
- Qualified Business Income
This is a bit technical, but depending on your net income you may be able to write off up to 20% of your net self employment income or 20% of your S-Corp profit. Wait what?! Yes it’s true and that’s just for being a business owner or 1099 contractor. Let's say you earn $300,000 and you are an S-Corp. Your salary is $150k and your profit is $150k. You could get a $30,000 tax deduction on your profit. This is one of the biggest tax deductions available right now. As a physician there are phase out limits depending on your income. So if you make $750,000 then you will be phased out of this deduction.
4. W2 vs 1099: Estimated Tax Payments for a 1099 Contractor
How do estimated taxes work when you are a 1099 contractor? We find that this is a bit confusing, more so for a first time 1099 contractor.
One of the aspects of taxes you need to know is the federal government wants you to pay in taxes as you earn the money rather than wait until you file your taxes. If you don't pay quarterly estimated taxes or meet the safe harbor test then you could be penalized.
2 Options to Pay Estimated Taxes and Avoid Underpayment Penalties
1. Pay in 90% of your Current Year Taxes
Calculate what you will owe in taxes this year and break the payment up quarterly. Pay 4 estimated tax payments and you will avoid an underpayment penalty.
For a 1099 contractor for the most part your income may be somewhat predictable and with some planning so is your expenses. With predictable income and expenses so should your estimated taxes. As long as you do this planning then there shouldn’t be any major surprises.
2. Safe Harbor
Don’t want to do any calculations, then you can take the safe harbor. Pull out your prior year tax return. Go to line 24 (total taxes) and write down that number. If you make over $150k then multiply that tax number by 110% and divide by 4. Let’s say your taxes in 2020 were $40,000 with income over $150k. As long as you pay in 110% of your 2020 taxes or (100% * $40,000) $44,000 / 4 payments = $11,000 per quarter then even if you owe $60,000 in taxes you won't have an underpayment penalty and you can make up the difference when you file by April 15th.
Estimated Tax payments due dates
- April 15th
- June 15th
- September 15th
- January 15th of the following year
Tip: One of the biggest mistakes we see first time 1099 contractors is not really understanding how much they have to withhold or pay in taxes including payroll taxes. No one is withholding anything for you, so you get 100% of your check. If you don’t plan and save for those taxes, then a tax bill will be waiting for you. We have seen people owe over $50,000 in taxes and have spent all of their money. Don’t make that mistake and make sure you have a plan.
Where to make estimated tax payments?
- IRS Direct Pay
- IRS Vendors- Debit or Credit Card
- Pay1040.com- we generally recommend using pay1040. They make it pretty easy and as long as you use a personal debit card, then the cost is only $2.58.
5. 8 Steps New 1099 Contractors Should Take
- Get a Plan- some people don’t want to spend the money to plan. We have found that people only really look at the cost rather than the benefit. Who do you want? A CPA that charges $10,000 but saves you $20,000 in taxes or a CPA that charges you $1,000 and saves you $5,000 in taxes?
- Choose a Business Entity
- Get an EIN
- Open a Business Bank Account
- Get an Accounting Program to Track your Business Expenses
- Quickbooks Self-Employed
- Outsource your Bookkeeping to Us
- Pay Estimated Tax Payments
- Know Your Tax Deductions
- Figure out your benefits
- Health Insurance
- Retirement Plan
There are big differences between whether you should be a W2 employee or a 1099 contractor. Sometimes you really don’t have a choice and the only option is a 1099 position. Hopefully the above has helped you understand what being a 1099 will entail. If you are looking for a CPA to help navigate your 1099 position, call us today.