In 2017, it was usually recommended to be a W-2 dentist. However, the 2018 Tax Cut and Job Acts no longer allows W-2 employees to claim tax deductions for “unreimbursed employee expenses”. For an associate dentist, this would mainly include C.E courses, dental equipment, professional organization dues, lab fees and malpractice insurance.
Now that, all of this has changed, being a 1099 contractor is usually more advantageous from a tax perspective, keeping all other variables the same.
The most commonly recommended structure is an LLC with the “S” corporation selection. Working with a CPA and attorney to help set this up is always prudent. This step is essential in being a 1099 contractor.
What are the Steps to Analyze financially a 1099 vs W-2
First, you will need to analyze if your compensation structure will change or will it be the same production percentage as before. You will need to run forecasts of your income. If the Income will be the same for both. (You are collecting 35% of collections in both scenarios) You will then need to look at your expenses that qualify for deductions.
Expenses that Qualify for Deductions
As previously stated above, you must factor in all the potential deductions you qualify for, and account for the extra FICA tax you must pay. In 2019 you will be paying 7.65% for you plus an additional 7.65% for you as an employer. Compare this with a W-2 employee and they are only responsible for just 7.65%. The 2018 Tax Cut and Jobs Act authorized a new tax deduction available to 1099 independent contractor, but not W2 employees (more specifically this new tax deduction is available to the pass-through entity (“S” Corp in most cases). This new tax deduction is called the Qualified Business Income (QBI) deduction. This tax deduction allows qualified businesses to reduce their taxable income by up to 20%.
However, one caveat should be noted that the QBI can be phase out for the healthcare related industry. As your income approaches $207,500 as a single flier or $415,000 if married this can add complexity to this tax deduction and the overall benefit. Fortunately, most of the time these income ranges are not hit.
Another deduction that is often overlooked is with ERISA retirement plans. A solo 401(k) can be used where you could put $19,000 into the plan through salary deferrals and then another 25 percent of what your salary is as a match for a total of $56,000, this is the maximum you could defer. If you were part of your employer’s plan you could defer the $19,000 but you couldn’t do the 25 percent match.
After Tax Income
At the end of the analysis, you will want to figure what your after-tax income will be in both examples. If you are single, this becomes an easy calculation. If you are married or own multiple businesses this will add to the complexity.
Identifying the optimal tax/financial strategy, can be challenging. Your individual facts and circumstances must be analyzed to optimize your personal finances.