Most doctors are going to receive their income through one of two means: (1) employment income, or (2) self-employment income. Which category you fall under has its own pros and and cons. Given a certain job situation, it’s also rare that you would get to choose between the two. Nonetheless, it’s important to understand what the circumstances of each and what to look out for in either one.
In this article, we’ll go over the structure of each and then highlight the critical considerations for doctors.
The most common means to receive income is through employment income. This means that you are employed by a medical group, hospital, or an organization. You are paid biweekly, and you receive a W2 form the following year to file your taxes from. Business owners who are technically self-employed but file taxes as an S-corporation also receive W2 forms (from theirselves) but that is a slightly more complicated arrangement that we will not discuss here.
As an employee, you are protected under certain state and federal employment rules (We’ll discuss some red flags later). This means that you are entitled to:
- Set hours (as defined by your contract).
- Standard Human Resources benefits provided by the employer which may include: health insurance options, group disability coverage, retirement benefits often with employer matching.
- Consistent income.
The structure of being an employee is pretty standard. We were all employees during residency and most accredited fellowships. The take-home message of being an employee is that it provides income stability.
We’ll look over the independent contractor structure and discuss some salient points of each.
Independent contractor Income
The alternative form of income is working as an independent contractor (IC). This means that you are technically working for yourself, but you are providing clinical services to a hospital or medical group. Technically the hiring party does not have to provide a written contract to IC’s, but essentially all physicians working as IC’s will have a contract to sign to clearly define what the physician’s role will be. A few critical aspects of working as IC’s for physicians include the following:
IC’s can have a wide range of when they get paid for their work. It could be two weeks, a month, or (rarely) even longer. How it is arranged typically depends on the efficiency of the hiring party’s (let’s say hospital, in this example) cash flow. Doctors in a fee-for-service model are compensated through federal or commercial insurance plans, which has a slight lag time for payments. If the hospital has a lousy billing department, they may have rejected claims and resubmission lag time to get paid for your work.
How large the hospital or medical group often determines how long they can float payments. Think about it. If a hospital has multiple income streams from different doctors, specialties, and services, it may be more likely (but definitely not always) have a larger buffer to float payments. If you are an Emergency Room physician contracting through an urgent care center with only two other providers, you need to realize that you are one of three potential income streams keeping the center afloat.
How is this important for you as an IC doctor?
If the urgent care center goes bankrupt, what happens? The short answer is that they don’t have to pay you (the IC) anything, even if your contract stipulates payment for services. The rules are different if you are an employee. Given that physician income potentially deals with big numbers, you could be short a six figure sum as an IC.
The second point of IC income is that the hiring party isn’t obligated to pay you on time, even if they stated that they would pay you biweekly on your contract. This aspect of IC emphasizes how important due diligence is if you are considering an IC job. It doesn’t matter if the hospital has hired IC’s for the last decade without issues. You have to understand what could happen.
Most of the wealth in our country is built by those who are self employed. This absolutely true even for physicians working as IC’s. The two highlights of from a tax perspective include:
- Above the line deductions for business expenses. This means that expenses can be considered a direct reduction of your income, resulting in a dollar-per-dollar reduction in taxes. You cannot do this as an employee. However, this aspect is one of the most-often abused in the tax system, and realize that there is a higher level of audit risk as a self-employed individual. From a purely financial standpoint, just because you can reduce your tax burden doesn’t mean you should spend more to reduce your income.
- Ability to contribute to SEP-IRA or Individual 401k retirement plans. Most employed physicians are only going to be able to contribute up to the employee contribution ($19,500 in 2021 for those under age 50) to their retirement accounts. Not so for IC’s. As an IC you are the employee and employer, so you can technically contribute up to the maximum $58,000. If you are an IC for multiple high income streams you can have separate 401k’s to contribute as an employer.
This is huge if there is stable work as an IC. You can certainly build up your retirement accounts significantly faster than as an employee.
Expenses as an IC Physician
The fact that you are not an employee also means that you are obligated to front your own expenses. For a physician, this may mean paying for your own malpractice, disability, and health insurance. Malpractice insurance can run up to a six-figure annual cost for some specialties. Health insurance can be significant if the spouse doesn’t have an employer providing coverage and if there are children to be covered.
Self-employment also means that as the employee and employer, you have to pay both portions of income tax to the man. If you have questions about this, post in the comments below.
What’s the take-away for expenses as an IC physician?
Make sure you understand your situation and you probably need to be paid at at a higher rate than if you were working as an employee.
Pick your poison: employee or contractor
As I mentioned before, it doesn’t matter which income structure you like more if you like the location or working conditions of a potential job. Some specialties like emergency medicine or other shift-work specialties are more likely to have IC opportunities. In a way, you could argue that employees essentially exchange stability for earning potential but that is certainly not always the case. In the end, which income modality that you opt for is going to be contingent upon your specialty, career needs, and the opportunities that arise.
Which one is better? Both, of course!
List your specialty and income arrangement in the comments below!
Note that none of the content discussed in this article construes medical or legal advice. The content is only to be used for entertainment purposes only. If you have medical or legal questions pertaining to your job, please consult a licensed professional in the topic of concern.