There are a number of important distictions between W-2 and 1099 physician jobs. Most of these aren’t unique to physicians; however, since both types of work are so common in our profession, it’s especially important for doctors to understand the differences.
The distinction between W2 and 1099 physician income
How much should I earn for a chart review job?
What’s the average pay for a physician consultant?
I receive questions like these regularly and I commonly see them in the physician social media groups that I’m a part of. The right answers are never a specific number or even a range of numbers that apply to all doctors. To be accurate and helpful, the answer must include more information about the type of work.
Whether it’s a main job or a side gig, doctors are either W-2 employees or 1099 workers.
A W-2 employee is a worker who receives a regular wage from an employer who withholds payroll taxes throughout the year. Independent contractors, on the other hand, are self-employed and responsible for paying their own taxes on the amount reported by the payer on a 1099-MISC form.
The difference between these types of work is more than just a formality. Here are the ways in which they differ, and why it matters for physicians and other high-earning professionals.
Key difference #1: Your relationship with the employer
In the eyes of the IRS, the difference between a W-2 and 1099 physician or any other worker is the relationship between the parties.
I’ve listed this key difference as #1 — before any key differences related salary and taxes — because it really sets the stage for all financially-related factors.
A business has the right to control and direct the work of a W-2 employee. On the other hand, a business can’t direct what a 1099 contractor does and how they do it; rather, the business can only tell a 1099 worker what the result of the work must be.
Physicians doing clinical work, by necessity, tend to have less flexibility in how, where, and when their work is performed. As a result, the relationship between an employer an a clinically practicing physician often looks very similar regardless of whether the doctor is a W-2 employee or 1099 contractor. Nonetheless, it’s important to be aware of the behavioral and financial control that a company will be able to have over your work.
For physicians with non-clinical side hustles, such as medical writing, consulting, expert witness work, and chart review, the differences become more apparent and more important. If you’re hired as an independent contractor, it should be up to you when, where, how, and with what methodology you perform the work.
Moreover, when working as a 1099 contractor, a business has no right to restrict any other work that you engage in. Generally speaking, you’re free to work as a contractor for other companies during the same time period, even doing largely similar types of work.
Key difference #2: Expected compensation and take-home pay
You should expect a higher compensation for 1099 work than for W-2 work.
This is true for independent contractor jobs that are hourly as well as those with a per-project type of compensation.
Payment for physician independent contracts should be higher for a few reasons. As a 1099 worker, you’re responsible for paying the full amount for FICA taxes (see key difference #3 below) and for health insurance and other “benefits” (see key difference #5 below).
You are also very likely to encounter more expenses as a 1099 physicians than a W-2 employee. These expenses might include equipment needed to do the work or fees incurred along the way. As an example, the employer of a full-time employed physician will provide a computer, whereas a 1099 physician needs to supply his or her own computer in most cases.
The estimates I’ve seen of how much more that a 1099 worker should earn compared to a W-2 employee range from 15% more to 50% more.
It’s not possible to say exactly how much more a 1099 physicians should make than a full-time physician employee. Every situation is different. There are some free online tools available to calculate how much you should earn as a 1099 worker, based on your regular full-time salary. However, these offer a ballpark number at best.
Key difference #3: Taxes
Physicians must pay tax on any income that is reported on a 1099-MISC. This includes income tax and FICA tax (comprised of Medicare and Social Security tax).
Whereas income tax is generally withheld from your paycheck with a W-2 job, as a 1099 worker you need to estimate and pay income taxes yourself.
For a W-2 employee, FICA tax is paid partly by the employer and partly by the employee (coming directly out of the paycheck). Independent contractors, on the other hand, are responsible for the entire amount.
Taxes get complicated for physicians — especially for those earning income from multiple sources. If you’re self-employed or make a significant amount of income through 1099 work, you should definitely consult with a tax advisor to ensure you’re paying all necessary taxes as well as saving in taxes where appropriate.
Key difference #4: Deductions
Taxes are one key difference, and tax deductions are another.
In most cases, your employer will directly cover or fully reimburse all work-related expenses that you incur as a W-2 physician. If they don’t, though, such as expenses are generally not reimbursable.
Self-employed taxpayers can deduct necessary and ordinary business expenses.
For physicians, necessary and ordinary expenses can really add up, including things like medical license fees, CME, and malpractice insurance premiums. As a result, it’s important to know who will be paying for these expenses and – if it’s you – whether they can be considered tax deductions.
Key difference #5: Benefits
A typical full-time W-2 employee receives an array of valuable benefits. Health insurance, disability insurance, retirement plans, paid time off, CME allotment, and student loan repayment plans can make up a sizeable percentage of a physician’s overall compensation plan. Other perks like discounts, catered meals, and gym memberships are a cherry on top.
Many 1099 workers are not eligible for any of these benefits. The financial impact of this can be substantial.
Key difference #6: Your protections and rights as a worker
Your position as a W-2 employee comes with a lot of legal protections. For instance, you can’t be terminated for certain reasons. You qualify for unemployment benefits, maternity leave, and the Family and Medical Leave Act. Your workplace must be safe.
You’re on your own as an independent contractor.
Most 1099 is short-term to begin with. For long-term relationships, however, a business can decide they no longer need a 1099 physician and terminate the relationship at any time (barring terms of any contract that exists between the parties).
I have personally experienced losing 1099 work very suddenly, without explanation from the company that I’d been working for. It is jarring. A 1099 physician needs to be financially and mentally prepared for this.
Key difference #7: Ownership of your work products
Physicians develop ideas, documents, systems, processes, and prototypes that reflect a lot of brain power, expertise, and effort. These are valuable money-makers and intellectual property. Who ones these? That depends.
In most cases, the employer of a W-2 worker owns these work products. The company hiring an independent contractor as “work for hire” also owns these work products. In other situations, though, physicians retain ownership of certain products of 1099 work.
It’s vital for any physician doing consulting work as a side gig to pay attention to whether they’ll retain ownership of work products. If you have a great idea, it may be important to you to be able to use that idea in the future, turn it into a business, or patent it.
Key difference #8: Your support system
As a W2 employee, your employer must supply you with everything you need to do the job they’ve hired you for.
Personnel is a biggie. You’ll have a team, if needed, to assist you with your work. This probably includes nurses and front office staff in a clinical setting. It might be writers, researchers, and sales staff in a nonclinical setting. Depending on the company size, you’ll have staff supporting you from other departments, such as IT and marketing.
The support from an employer also includes equipment and supplies, such as a computer, phone, copy machine, and medical supplies. (Though its common in the profession of medicine to own a few of your own tools, such as a stethoscope.)
Conversely, as a 1099 worker, this support might be covered by the company you’re working for. In most cases, however, you’re responsible for hiring any support staff that you need. And you act as your own HR, IT, marketing, operations, and production departments.
Whether you’re a W-2 or a 1099 physician, consider the big picture
Both types of work arrangements have advantages and disadvantages. Many of these depend on your personal situation and the proposed relationship between you and the hiring company. As such, you need to be sure you’re considering more than just a salary or hourly consulting fee when you’re considering taking a new job.
Think about the big picture:
- What are your overarching goals in working with the company?
- How will your income taxes will be affected?
- What expenses will you incur?
- Under what circumstances your work with the company will come to an end?
All of these factors are important to consider before you accept an offer or sign an independent contractor agreement.