Question

My new employer wants to make me a “1099.” What do I need to know as I transition away from being a true employee?

Answer

First, let’s make sure we understand the terminology. Emergency physicians are typically “paid on” one of three types of tax forms: W-2, K-1, or 1099. Those who receive a W-2 at the end of the year are employees, those paid on a K-1 are partners, and those paid on a 1099 are independent contractors. Thus, there is no such thing as a “1099 employee.” If you’re given a 1099 at the end of the year, you’re not an employee; you’re in business for yourself. You’re self-employed. You are the employer and your business contracts with the hospital or other business for your personal services. As the employer, you are now responsible for things your employer would have provided if you were an employee.

The first question a self-employed physician should ask themselves is what kind of business structure they should use. The simplest is “sole proprietorship,” which is what you have if you don’t deliberately form something else. While best practice is to get an Employer Identification Number (EIN), which can be obtained online in 30 seconds for free here, you are allowed to just use your Social Security number when you fill out a W-9 for the “employer.” Some emergency physicians consider forming a limited liability company (LLC) or a corporation, thinking this will somehow reduce their malpractice risk. In reality, malpractice is always personal, and a business shell won’t protect you. The main reason some physicians form an LLC or, more rarely, a corporation is to make an “S election” and designate some of their earnings as “distributions” rather than salary to save some money on Medicare taxes. The additional hassle and expense must be weighed against the tax savings. For the most part, your business expense deductions are the same with any type of structure.

Perhaps the biggest change for a physician “going 1099” is the need to withhold and pay your own taxes. Employers are required to withhold a certain amount in federal, payroll, and sometimes state taxes from your paycheck and send that money to the government on your behalf. Without an employer, you are now responsible for doing this. The way it is done by sole proprietorships is to send in a check with IRS Form 1040-ES (or pay online at https://www.eftps.gov/) with “quarterly estimated payments” on April 15, June 15, September 15, and January 15 for the previous quarter. Note that there are only two months between April 15 and June 15. The biggest financial error a new independent contractor can make is to not set money aside to pay this tax bill each quarter. A typical emergency physician will likely find this amount to be between 20 and 30 percent of their income, although it may be higher or lower. Calculating this amount is challenging and often involves a little guess work. If you underpay by a little, there will be a penalty when you file your taxes on April 15, but it isn’t too bad. It is essentially equal to the interest the money you should have paid to the government earned in the meantime in a money market fund.