The average graduating resident has little understanding of what the employment status “independent contractor” means. Most see it as a less-than-permanent position that doesn't provide job security or benefits. They're right about the benefits, but the rest is urban legend.
Joe Danna, MD, is the president of Illinois's Emergency Care & Health Organization (Echo), a contract management group that has been staffing EDs for nearly 30 years. All group physicians are independent contractors, and would fight rather than switch. “I started out as an independent contractor in 1981 in Chicago,” Dr. Danna said. “I liked the independence to create the benefit plan that was best for me and my family. It may be nice when the company gives it to you, but it's nicer when you can craft your own.”
His biggest concern, however, was disability insurance, something he said no employer can ever provide enough of considering the risks of infectious disease, violence, and stress in emergency medicine. Echo accountant Dan Anderson agreed, noting that emergency physicians should pay disability premiums themselves because having a corporation pay them makes them taxable income. Employers who hire physicians as independent contractors are expected to provide malpractice coverage at no cost to the physicians. It is the only benefit they are legally permitted to provide, but that doesn't interfere with bonuses, incentive income, or partnership shares.
Mr. Anderson said the primary advantage of being an independent contractor is flexibility — the ability to choose one's own financial path and tax position. Among the options available to independent contractors are a personal service corporation (federal form 1120), a Sub-S corporation (federal form 120S), an unincorporated self-employed-individual/SEP (federal form 1040 with schedule C expenses), and a single-member limited liability corporation (federal form 1040 with schedule C expenses).
As a W-2 employee, unreimbursed employee business expenses on Schedule A are subject to a two percent limitation of adjusted gross income. By choosing any of these tax positions, expenses are deductible dollar for dollar, Mr. Anderson said.
Wayne Gallops, DO, an Echo physician who has been an independent contractor for nearly 20 years, said the biggest misconception about the status is that it is not a secure position. “I believe it's the opposite,” he said. “Contracts for independent contractors read the same as those for employees, and they require strong cause for termination so you'd have to screw up big time to lose your job.”
He noted that he can set his own hours within the parameters of the group's needs, scaling them down without penalty. “Essentially I've aligned my interests with those of my group and the administration of the hospital, and the trickle-down result is patient satisfaction, streamlined and completed documentation, and strong risk management,” Dr. Gallops said. “We function as a democratic group, particularly in terms of how we practice medicine and have for the past 18 years I've been here. To make the most of being an independent contractor, I think you need to have a good accountant, a good investment counselor, and a good grasp of what your needs are.”
Mr. Anderson stressed that having flexibility in benefits trumps an employee package that is considered income. “As an independent contractor, you can shop and get only the benefits you need and deduct the premiums,” he said. “As your needs change, you have the ability to change your benefits to match them. As an incorporated independent contractor, you can have a medical expense reimbursement plan that covers everything not covered by insurance, including the insurance premiums.”
Dr. Danna agreed, noting that he preferred to get his income in cash when he first came out of residency so he could pay off medical school debt. “At that time in my career, I didn't need life insurance and that sort of thing. I needed cash to pay off my loans. As an independent contractor, I had the flexibility to use the money I earned the way I needed to.”
After paying off his loans, he created a portfolio that included life insurance and disability by working with a broker. “Because I am incorporated, I can buy in pre-tax dollars all the life insurance and other investments I need for me and my family, and in doing so, decrease my taxable income. As an independent contractor, you have the ability to maximize your investment potential that you don't have as an employee because you choose what you need; you don't settle for what they give you,” Dr. Danna said.
Jill Hastings, JD, a principal with Pension Strategies in Phoenix, designs pension plans for firms and individuals. She has worked with a number of independent contractors through Affilion in Tempe, and agreed that independent contractors have greater flexibility. “You are self-employed, so instead of being at the whim of your employer, you have control because you are the employer,” she said. “These pensions and retirement plans provide huge tax benefits to independent contractors as well, so they provide not only for the future but by making annual contributions. It pays off immediately.”
Ms. Hastings said it is important, however, for independent contractors to take responsibility for getting these opportunities rolling, but not all do. “Independent contractors don't need to know everything there is to know about investing to participate; there are lots of professionals who can help, direct, and advise them to get started,” she said.
Mr. Anderson, Echo's accountant, said being an independent contractor doesn't preclude an emergency physician from being a group partner either. “Just about any group partnership structure can accommodate an independent contractor,” he said. “That's why so many emergency physicians are independent contractors. It keeps the group overhead low, and allows partners to make financial choices for themselves.”
Recent graduates and experienced emergency physicians alike looking at a position that offers independent contractor status need not be leery. Experts say the job is secure and the advantages are numerous, from higher up-front salaries to the tax, pension, and retirement benefits. Many groups who use independent contractor status are now providing professional assistance to new physicians for establishing the best tax position for them and making the most of the advantages. This assistance is provided for free until the physician can arrange for his own accounting and financial representation.
The key word for independent contractors is flexibility. It has been my experience over the past 18 years that it's not always easy to convince a physician to try independent contractor status, but it's nearly impossible to get an independent contractor to change back to an employee once they have.
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