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25% of Doctors Are Working As Contractors
In my last post, I covered how work opportunities for doctors to work as independent contractors are growing and are fueled by the rise of location-independent jobs.
It is estimated that 25% of doctors are performing working as independent contractors, and thus ¼ of you are receiving 1099 income. This is not because you are a workaholic, but rather it is because the physician labor market is changing.
I spoke to a cardiology fellow recently about helping him form a professional micro-corporation as a foundation for his career. He told me his initial work plans included:
“ I plan to do remote work-reading cardiology imaging + a 0.9 FTE contractor-employment lite position with a large corporate employer—OR do the remote reading of cardiology images + a locums job. In either case, I plan to move closer to my family on the East Coast.”
What I find revealing about this is that he represents the new normal for younger doctors—their work is split among stackable options that all fuel a preferred lifestyle, and that often include some form of location-independent work. I have written about this in a prior blog post, but this is what the future looks like for most young working doctors:
A Resolve To Demand Systemic Change
One of the things that I especially liked about our conversation was his resolve, which was inspired by my new book, that he would not sign up to be a traditional employee.
Instead empowered by his own small business power, he would demand that any employer who was interested in his professional services must be willing to employ him as a contractor via an employment lite agreement.
The bottom line is that as a new attending physician—an employment lite contract rather than a traditional employment contract was a litmus test for any employer who wanted his services—if they wanted him, they would have to be willing to form a PSA contract with him through his professional micro-corporation.
In essence, he was signaling to corporate employers that a new modern physician labor model was now in play, and he was expecting to follow this path in which he controlled and defined the type of worker that he was—an employee or a contractor.
Start A Movement
I believe every doctor in America has this same power at their disposal because of your built-in small business powers, and the time has come to begin a systemic movement of change that is directed and demanded by our tribe to take back control of our professional lives.
It all begins with starting your own professional micro-corporation, and I believe if every medical resident or fellow in America did this—it would form the foundation of a national movement within the physician labor space.
If employers want our services, they must do it on our terms, not theirs.
I hope my content and this cardiology fellow’s story inspire the same action in you. You should demand and expect that those who employ not force you to sign up as a traditional employee, but instead afford you the professional option of traditional employment or employment lite. I would recommend you choose the latter because of how it preserves your professional autonomy and helps you live your best professional life!
Location Independent Jobs
With the emergence of technology, you are now able to work remotely and provide your services in a more efficient manner, regardless of where your home is. These is known as location-independent jobs, and it has become an increasingly popular way for our tribe to practice our profession without having to be tied down to a specific physical space. You are no longer limited to doing work within your geographic location.
Location-independent jobs allow you to have more control over your work and schedule. You can work flexibly from anywhere in the world at any time that is convenient for you & your family. You also benefit from having access to more patients since you can offer your services online to any paying customer without geographical boundaries. Additionally, this type of work allows you to have control over your career options as they are no longer tied to one particular job or employer.
Most of your location-independent work will be performed as an independent contractor.
Which means you are independent—autonomous and free to work when and where you want.
Independent contracting means that you are a business and will be engaging in a business to business agreements with companies that want to use your professional services. I recommend that you create a professional micro-corporation for this purpose, but acting as a sole proprietor is another business and tax code option.
This blog post will walk you through the basics of which business structure will be best for you.
When you sign up to do independent contracting or 1099 work, you will be asked to complete an IRS form W-9 that informs your employer and the federal government what type of business entity you are and what type of tax entity you are.
Form W-9
Form W-9 technically is a tax form, but it is also a business declaration form. This is how the IRS tracks who will be responsible for the taxes for the income. The form communicates to the government that the employer is not removing your taxes and paying them (like they do for W-2 employees) but instead, the designee in this form will be responsible to pay the taxes—on a quarterly basis.
The default mode for most doctors who complete this form is to check the box that you are an individual/sole proprietor and use your personal social security number as your tax identification number. Your muscle memory from completing your IRS Form W-4 as a traditional employee will unconsciously guide your hand—because you have never been taught how to view yourself as a business. From your residency and fellowship training, all the way through your work as an attending physician-most of you have only been exposed to working as an employee.
I know from my past personal experience, that your business illiteracy will cause you to freeze when completing this form, and have some uncertainty with the myriad of business and tax choices found on it.
If you aren’t prepared, you will default to selecting your business structure being designated as a sole proprietor, and providing your social security number.
Working as a sole proprietor is still significantly better than receiving the same income as a W-2 worker, but for a number of reasons, as a physician, it may not be your best business and tax choice as this image illustrates.
What Business & Tax Entity Structure Is Best For Physician Contractors?
This is the launching point for where I want to take things this week. I want to answer the question about which is the best-combined business and tax entity structure for doctors who work as independent contractors. Is it as a sole proprietor or some other professional micro-corporation?
My goal is to inform you about your options, then inspire you to take action. I want you to choose to proactively manage your medical life, and determine what is best for you.
This is a much better plan than passively hitting the default button as an uninformed professional.
If you have an accountant, I encourage you to discuss things with him/her. However, understanding the “why” of their answer is very important. Besides, it’s really your decision to make, and their job is to counsel or guide you. Only you know what your present and future personal & professional goals are—thus asking your accountant to read your mind, and look into the crystal ball won’t always result in the best answer for YOU.
My Recommendation
Let me start out by stating that a single-member professional micro-corporation taxed as an S-Corp will be your best option to flow your medical contracting work through—this will be true for the majority of you. There are a number of physician-specific reasons for this—but asset protection, tax strategies, & larger retirement funds are just a few to mention. I will unpack these as we proceed through this post and next week’s blog post.
If you don’t have the time to keep reading, you now have the answer to the question of what business structure is best for you as an independent contracting physician.
I encourage you to go ahead and take the next step by forming your professional micro-corporation for your independent contracting work. You can sign up for 45 minutes of free business coaching with me at SimpliMD to discuss this further and get a free price quote. My agency works exclusively with doctors to efficiently and effectively set up and operate professional micro-corporations. It’s our area of expertise. You can schedule a meeting at the following link.https://calendly.com/drinc/45min.
However, I invite you to keep reading to discover why this is your best option. That is because there are multiple business structure options, and based on your individual situation, sometimes other options can be a better fit.
Your Bifurcated Business Decision: TIN
So let’s first break things down by looking at the most common decision tree for organizing your independent contracting work. This is found in Part 1 of the Form W-9 and is entitled Tax Payer Identification Number (TIN).
Counter-intuitively this designation is not at the top of the W-9 form, it’s at the bottom. This is the IRS’s numerical code for tracking who will be responsible to pay for the income taxes. It will either be an individual (you) or a business (you-incorporated). You get to decide.
You Are A Business
When you do work as an independent contractor, you are now declaring that you are an individual business.
So it’s time to start acting like a business person—and proactively organize your business for your maximum benefit.
Now as a business person, your bifurcated business and taxpayer identification number (TIN) choice is between two general tax categories—your social security number or your employer identification number (EIN)—each one has its own tax code built around it.
Here is the general overview of these two options:
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You work as a business organized under your social security number- meaning you will have the choice of designating yourself as a sole proprietor or as a special corporation called a single-member LLC.
-Functionally this means you will have one unified checking account where all your income arrives—and those dollars will be used for paying your quarterly taxes and business expenses, as well as your personal living expenses. You will self-determine your salary (which is used to calculate your quarterly taxes). Each expense needs to be tracked as personal or business. You will have a single tax return to complete that incorporates your business expenses into it.
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Work as a business organized under an Employer Identification Number (EIN)—meaning you are a corporation. Choosing which corporate structure is best for you is a highly individualized process that includes your professional and personal financial structure and how that interfaces with the most tax-advantaged corporate structure/tax codes.
-Functionally this means you have separate checking accounts-one for you personally and one for the business. The money must be kept separate. Your income will flow into the corporation, and you will be paid a self-determined salary as a W-2 paycheck from your corporation (aka self-employment). Business and personal expenses are siloed, and you will have two tax returns to manage-both an individual and a corporate tax return.
Now let’s take a little time to take a deeper dive and explore this bifurcated choice.
Business Options Tied To Your Social Security #
Sole Proprietors & Single Member LLCs have sections of the tax coded separately dedicated to each of them. Although the income shows up on your individual tax form, the tax code allows you to account for your business expenses through each of these entities. It is all integrated into one tax filing under your individual social security number. No extra corporate tax return to complete. Thus many consider this “easier” or simpler choice to make. There certainly are many advantages to either option in this space—so let’s briefly look at each.
What is a Sole Proprietorship?
This represents the default mode as an independent contractor for most of you—where you are commonly advised by your tax professional who hits the impersonal default button. It’s the lowest expense and the least complex option for you.
A sole proprietorship is the simplest form of business entity. It is an unincorporated business owned and operated by a single individual. Legally, there is no distinction between the business and the owner. This means that the owner is personally liable for all of the business’s debts and obligations.
One of the advantages of a sole proprietorship is its simplicity. There is no need to file any paperwork to create a sole proprietorship. The business owner can simply start doing business under their own name or a fictitious name (also known as a “doing business as” or DBA name). This makes it easy and inexpensive to start this type of business.
However, one of the disadvantages of a sole proprietorship is its lack of liability protection. As mentioned, the owner is personally liable for all of the business’s debts and obligations. This means that if the business is sued or incurs a large debt, the owner’s personal assets may be at risk. That is a big deal for high-net-worth individuals like doctors.
With a sole proprietorship, you also don’t need a business checking account, as other business structures are required to have. You can simply conduct all your finances through your personal checking account. This co-mingling of dollars for sole proprietors is considered normal.
You will note that Form W-9 also has single member LLC listed in the same box as sole proprietor-and the thus the taxes both flow through your personal social security number.
This can be a little confusing since it is a corporation, so let me explain a little more about this business entity option.
What is a Single Member LLC?
A single-member LLC (SMLLC) is a type of limited liability company (LLC) that has only one owner. This type of business structure provides the same personal asset protection as a traditional LLC but with fewer formalities and paperwork requirements. By forming an SMLLC, the business owner can have their assets shielded from any legal action taken against their business. Additionally, SMLLCs offer tax advantages such as pass-through taxation. With all these benefits, it’s no wonder why single-member LLCs are becoming increasingly popular for small businesses.
This is a special version of an LLC corporate structure that the IRS considers a “disregarded corporate entity”. In general, this means it does not need a separate EIN like other corporations. Its business expenses can be deducted, it does not have to file corporate taxes, and its dollars can be co-mingled with the individual owner’s bank-checking account.
Which One Is Best For You?
So now you know there are two basic business and tax options for operating your business through your own social security number in a single bank account. Each has its strengths and weaknesses-so let’s take a look at them in a side-by-side comparison.
I am using single-member PLLC/LLC and PC loosely as similar corporate entities that contrast with sole proprietors.
Next week, I will drill down into each of these different types of professional micro-corporations because they aren’t precisely the same— it is a separate subject that merits its own post.
General Comparison Between Sole Proprietor or Professional Micro-Corporation
There are numerous reasons that small business people all over the country choose to operate their micro-business as a sole proprietors—it is the wise choice for many. But your high income, riskier business activity (malpractice claims), and high net worth separate you from the typical sole proprietor. Take a look at this comparison chart:
I believe the greatest distinction here for these two options is asset protection. Your individual high net worth should be protected—and malpractice insurance alone is not adequate. Check out the White Coat Investor’s blog post on asset protection to take a deeper dive.
Asset Protection Priority for Doctors
A single-member professional micro-corporation such as a single-member LLC provides liability protection for the owner, meaning that their personal assets are shielded from any legal claims against the business. This is an attractive option for those who want to protect their personal assets while still enjoying the benefits of a corporate structure. Notably for physicians, this does not replace the need for personal malpractice insurance.
On the other hand, being a sole proprietor means that the business is not a separate legal entity from the owner. The owner is personally liable for any legal claims against the business. This means that their personal assets are at risk if the business is sued. However, a sole proprietorship is relatively easy to set up and maintain. There are no separate tax returns to file, and the owner has complete control over the business.
I was speaking to a cardiologist recently about his transition from 25 years of employment into doing locums as an independent contractor. As I spoke to him about the advantages/disadvantages of a sole proprietor vs a professional micro-corporation we covered asset protection. Two things that jumped out to me in the conversation that I think are common mindsets for many of you here:
When I asked him what his net worth was, he said “I don’t know, I’ll have to ask my accountant”
And when spoke about physicians being at risk for exposure of their personal assets—especially as a sole proprietor, he said “That’s what my medical malpractice would cover”.
These are two common mindsets that many of you have about your assets. You only vaguely know what they are their total net value—and you only vaguely understand if they are protected. In essence, you believe that the combination of malpractice insurance and your high income will protect you and lead to a secure retirement. These are both wrong assumptions as recent Medscape surveys indicate 25% of physicians in their 60s have a net worth of less than a million dollars, and among my tribe of family doctors—only 25% have a net worth of $2 million or more. You’ll need $3-5 million in retirement to support your physician lifestyle.
One of the issues here for this cardiologist involves his naive understanding of the exposure that he has as a medical provider with a 25-year career’s worth of assets. He is the proverbial “rich doctor” and that alone invites others to try to take a bite out of his assets—which includes “above the policy malpractice judgments.” His business illiteracy after 25 years as an employee, also makes him unaware that as an independent contractor, he is now working as an individual business—-and his profile as a doctor makes his assets vulnerable through his business.
Asset protection alone is a resounding reason that every physician doing independent contracting work should form a professional micro-corporation for their business structure rather than a sole proprietorship.
Summary of Which Is Better: Single Member LLC versus Sole Proprietor
The primary disadvantage of a single-member LLC compared to a sole proprietor is that it costs to form the LLC and it costs/time to maintain it. However, there are several advantages that outweigh these small costs in comparison to a sole proprietorship—especially for doctors. Here are some key advantages:
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Limited Liability: One of the main advantages of an LLC is that it offers limited liability protection. As a doctor, this means that your personal assets are generally protected from business liabilities and debts incurred by the LLC. In contrast, as a sole proprietor, there is no legal separation between you and your business, so your personal assets may be at risk in case of lawsuits or financial obligations.
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Tax Flexibility: A single-member LLC provides tax flexibility. By default, the IRS treats a single-member LLC as a “disregarded entity,” which means that the LLC’s income and expenses are reported on your personal tax return (Form 1040). This allows you to enjoy the same simplicity of filing taxes as a sole proprietor while still benefiting from limited liability protection. However, if you prefer, you can also elect to be taxed as a corporation, which may offer additional tax planning opportunities.
While these advantages make a single-member LLC an attractive option, it’s important to consult with a qualified attorney or tax professional who can provide personalized advice based on your specific circumstances and local regulations.
SimpliMD is prepared to help you with this, as they are equipped with a team of accounting and legal professionals who have specialized qualifications in tax services, and who focus specifically on physicians and their professional lives.
If you need some support on how you should best organize your business and tax structure for your independent contracting work, you can reach out to me for a free 45-minute business coaching session from SimpliMD. This $500 value will cost you nothing and will help determine if you would benefit from taking the next step with our team to form your professional micro-corporation.
You can schedule it at this link.https://calendly.com/drinc/45min.
Summary
One of the things I love about doctors is that our tribe can quickly absorb complex information, swim through the details, and rapidly reach a “best practice” application of the information. You do this magnificently with patients every day.
The paucity of business education in your professional journey places you in a vulnerable position of just not knowing a whole lot about this stuff. When that is the case—you will default to “safe mode” and likely choose the cheapest, least complex option-meaning you will blindly choose to be a sole proprietor.
Here is the truth about this subject, you don’t know what you don’t know.
So, let’s walk things back and fully inform yourself about all of your options. You now have the basic framework for distinguishing between choosing your business structure under your individual social security number—either as a sole proprietor or incorporating. It favors incorporating for you.
Next week, we take a deeper dive into the gambit of options for incorporating—which extend beyond the single-member LLC that I have touched on in this post.
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