Financial implications of contractor work for doctors

Most doctors coming out of training have only experienced work as an employee.  As residents and fellows, doctors are employees of a hospital or university.  You receive a paycheck every few weeks, and at the beginning of a new calendar year your employer sends you a W2 form delineating your income.  We use the W2 form to help file our annual taxes. Easy peasy.

Contract work is a different ballgame.  Some companies or hospitals will opt to hire out contract physicians to cover certain lines of services.  It may be temporary or intermittent services for a set amount of time.  For the hospital, it is an easier way to deal with finding help without actually having to hire someone.  It also sounds great as a doctor, since you work for yourself as a contractor, not the hospital.  Some of us might have even gotten a taste of this line of work through moonlighting during our training.  I remember that one of my classmates moonlighted in the emergency room during residency.  He was paid $60 a hour, and received a check for $600 after finishing a ten-hour shift.  No withheld taxes.  As a resident, it was essentially free money.

But there are financial implications of being an independent contractor when you are in full-time medical practice.  Let’s look at some of the considerations:

Employer taxes

We all have to pay into Uncle Sam’s system.  Employers have to contribute to Social Security and Medicare taxes.  For 2018, that roughly amounts to 7.65% for incomes up to $200,000.  The employee also pays an equivalent amount out of his paycheck as well.

Independent contractors work for themselves, so they have to pay the employer portion of Social Security and Medicare taxes as well.  This amount does not get taken out of the independent contractor’s paystub, the physician will need to allocate out this amount to pay Uncle Sam directly.

Personal taxes

If you work for yourself you also have to estimate and allocate the amount to pay quarterly.  Most doctors are likely to have a federal and state tax bill in the six-figure range—by not handling prepayments properly you can end up footing a huge penalty.  You will have to pay more attention to your bookkeeping as an independent contractor.

Benefits

Most large employers offer retirement plans like 401k/403b’s as well as basically disability and life insurance for its employees.  These benefits do not come for free.  As employees, we might not be able to perceive that there is a cost to offering these benefits.  Those of us who operate our own practices will understand that health insurance consumes a sizable chunk of our income especially if our families are under our plans.  Remember those patients who signed up Silver, Bronze, or Platinum Health Exchange plans? Their deductibles where through the roof, and yet their plans basically didn’t cover a cent of their surgeries while forcing you (the physician) to send these patients to collections.  Just remember that you just might be that person too when you have to foot the entire health bill for your family.

Malpractice insurance 

Malpractice is often covered for employed doctors.  Hospital systems and multi specialty groups have enough doctors to negotiate better premiums for its doctors.  As an independent contractor, you alone are responsible for your coverage.  Some specialties like obstetrics, neurosurgery, and vascular surgery that perform higher risk surgeries will incur a greater out of pocket cost than for internal medicine.  If you perform contract work, be prepared to pay for your own coverage.

As an independent contractor, you might have to consider insuring all of your employees, including the guy behind the fence…

Variable compensation

As an independent contractor, your pay might be dependent upon volume or surgeries that you perform.  That volume might vary from season to season.  You income may not likely be stable.  You will have situations where your income might far exceed that of what you could otherwise make as an employee.  Be prepared to deal with the rollercoaster of income, however.

The perks of contract work 

Despite the additional legwork that you have to be conscientious of with being an independent contractor, there are also financial perks, namely certain tax advantages.  Commuting between two offices? Dedicating part of your home to your business? There are certain tax strategies in being your own boss to reduce your tax burden.

Are you a points collector? Given that many of the listed expenses are big ticket items, you might be able to leverage a few percentage points back or business class airline tickets.

Conclusion

This list only brushes up on some of the salient points of being an independent contractor. There are doctors who have made a career out of it.  It is a viable career option if you are able to find the right fit—you might just come out ahead.

Do you work as an independent contractor? What specialty do you belong in?

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