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Finance Corner

Independent Contractor Vs. Employee: What is the Best Option for Me?

By Alex Moore, D.M.D.

This past year as I was graduating from residency, I was considering multiple employment options.  It was my first “real job” and I had a lot of questions and spent plenty of time Googling looking for the answers. The more I spent searching, the more conflicting answers that I found, which left me just as confused as when I started.  Fortunately, around the same time I was filing my taxes, so I hired a dental-specific accountant/attorney who was able to answer all of the questions that I had. Megan Mathers is my personal accountant and she agreed to be interviewed for this edition of The Finance Corner.  This Q&A consists of many of the questions that I had throughout my process and I hope that you find it beneficial.

Dr. Alex Moore: I have two job offers: one where I am considered an independent contractor, and one where I am considered an employee, but my roles and responsibilities are the same. How can I be considered both?

Megan Mathers: There are several pieces of “evidence” that different government bodies (e.g. IRS, state unemployment agencies) use to determine whether someone is an employee or independent contractor for tax and unemployment purposes. While each body has their own “tests” to determine employment status, there are some key components. The most significant component is the degree of control that an “employer” has over the person providing services. While your roles may be similar, there may be some key differences. Ask yourself, “Does the employer control my hours or do I? Do they control how I interact with my patients? Do they provide me with employee type benefits like a retirement plan?”

Even when all things are equal, it is generally up to an employer to make the distinction between whether they treat a service provider as an employee or independent contractor.  I advise asking the employer whether they treat all associates in the same manner (i.e. all similarly situated dentists are treated as either employees OR independent contractors).  It is key that the employer does not give YOU as the associate the CHOICE to be classified as one or the other.  The other component to make sure you have in place is a contract (either employment or independent contractor).  If your status is ever questioned, the more support the employer has to substantiate their decision, the better.

Dr. Moore: What additional taxes or costs will I be responsible for as an independent contractor?

Mathers: As an independent contractor, you are treated as a “sole proprietor” of your own business. If you do not create a corporation, you simply file an extra form on your personal tax return claiming your business income and business expenses. As a sole proprietor, you are responsible for self-employment taxes. Self-employment taxes are very basically 15.3% of your net income from business. The 15.3% is made up of Social Security and Medicare taxes. As an employee, you pay only 7.65% in Social Security and Medicare taxes, as your employer covers the remaining 7.65%. This might seem like a big difference, but there is a big benefit of being an independent contractor: you can deduct eligible business expenses to offset your gross income (e.g. continuing education, malpractice insurance, health insurance, auto expenses). This lowers the net amount that you pay in income and self-employment taxes.

If you are an independent contractor and you decide to incorporate and elect “S status” with the IRS, you can save some of the self-employment taxes you are responsible for if you hadn’t incorporated and elected S status. This is because you are treated for tax purposes as an employee of your corporation.  As such, you are still allowed to deduct business expenses, but you also pay yourself a “wage” just like if you were an employee elsewhere. You can also take “shareholder distributions” out of the corporation. These are similar to a dividend, but are only subject to personal income tax (not self-employment taxes). This can be a difficult concept to understand, but the key is to remember to ask your tax advisor whether you can save self employment taxes by becoming an S corporation.

Dr. Moore: What tax benefits do I get as an independent contractor compared to an employee?

Mathers: As mentioned above, you can deduct all of your qualified business expenses as an independent contractor. This includes but is not limited to supplies, continuing education, malpractice insurance, health insurance, and auto expenses. As an employee, you cannot take a tax deduction for unreimbursed business expenses – you simply have to use after tax money for anything you pay for out of pocket. You also save some self-employment taxes as discussed above.

Dr. Moore: What benefits does being considered an employee provide?

Mathers: A key benefit of being an employee is access to the practice’s retirement plan and health insurance plans. Many practices offer access to a 401(k) or similar retirement plan and many also offer an employer “match” where they contribute to your retirement account for you on TOP of what you contribute yourself. Some employers provide health insurance coverage or partial premium payment for employees as well, which is not generally offered to independent contractors.

Another benefit, especially for young dentists, is that it is simple to be an employee. You don’t have any extra tax returns to file- only your personal tax return. Your employer covers your Social Security and Medicare tax matches. There is much less of a learning curve as an employee versus independent contractor.

Dr. Moore: I am interested in saving for retirement as much as possible. What are my different options as an independent contractor compared to an employee? How much can I save in tax deferred accounts?

Mathers: As an independent contractor, you can set up any kind of retirement plan you would like, as outlined below. As an employee, you will have access to only the retirement plan that your employer chooses, if they have one. Regardless of employment retirement plans, you can also ALWAYS contribute up to $6,000 per year (for 2019) into a personal traditional IRA as well.

Dr. Moore: The options for retirement plans as an independent contractor are generally as follows, as defined by the IRS:

Mathers: Before we get into the different options, it is important to note that the maximum amount that you can contribute to a defined contribution retirement plan sponsored by an employer for 2019 is $56,000. This includes both wage deferral funds and employer contribution funds. The employer contribution piece is dependent on your “wage” that you are paid from your S corp, but cannot exceed 25% of your gross wage.

SIMPLE IRA: A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. A SIMPLE IRA allows you to defer up to $13,000 from wages each year AND the employer contributes 3% of eligible wages to the plan.

SEP IRA: A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA). This plan is ideal for independent contractors with no other employees because it is simple to set up yourself online. Once you add other employees to the mix, it becomes less ideal because the employer must contribute the same percentage to EACH employees account as they do to their own account as the business owners. To be able to contribute the maximum $56,000 in 2019 to a SEP IRA, one must pay themselves a wage from their S corporation of $224,000.

401(k)/Profit Sharing Plan: A 401(k) plan or solo 401(k) plan, which many people have heard of, is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage. This type of plan is more complicated than the previous plans discussed mostly because there is a lengthier documentation process and once funds in the plan reach $250,000, there is also a mandatory annual filing requirement with IRS. However, this is the ideal plan for a practice owner with many employees, as it offers the opportunity to put the most funds into retirement (i.e. more than a SIMPLE IRA allows). To maximize the contribution to a 401(k) for a single owner S corporation, an employee will defer $19,000 of their wages in 2019 and contribute $37,000 in employer contributions. To achieve this, the dentist owner will need to pay themselves a wage of $148,000. For a solo owner dentist, this plan can also be simple to set up, as a solo 401(k) can be set up easily with Fidelity, Vanguard and many other institutions.

Also key to point out is that if you choose the 401(k) route, you can still do a backdoor Roth contribution without additional tax implications. If you have traditional or SEP IRA funds, because of the way the IRS treats backdoor Roth contributions, there are additional tax implications that must be considered with your tax advisor. This is not the case if you only have 401(k) funds.

Dr. Moore:
If I am an independent contractor, do I have to set up a corporation and hire a company to do my payroll? Is that a difficult process?

Mathers: As mentioned above, you do not HAVE to set up a corporation. For liability and tax purposes, we generally look at a few things to decide whether it will be beneficial to incorporate. First, we consider whether there is enough income to make it worthwhile. Because you will have accounting and payroll fees with a corporation, we want to consider whether you will save more in taxes by incorporating than you are paying in fees. In addition, very generally, corporations are not the subject of IRS audit as much as someone who does not incorporate because the reporting requirements for corporations are greater. We also consider whether you will be in a geographical area for a while. We normally do not want to incorporate you if there’s a good chance you will move within a year because there’s initial fees to incorporate as well.

If you do incorporate, you will need to have a payroll service to process payroll, as you will be an “employee” of your corporation even though you are an independent contractor for your “employer.” Most accountants either provide payroll services or have good relationships with payroll specialist firms that can easily get you set up on payroll. There is a learning curve in the first year, but it gets much easier after that. Most accountants now also have access to payroll service accounts for their clients, so there is immediate access to your payroll reporting.

Dr. Moore: Is there anything else I should be considering regarding this decision?

Mathers: Be sure to ask a lot of questions! Make sure that you have a contract with your employer and that your contracts are reviewed by a dental specific CPA or attorney, as they truly will understand the industry and the ins and outs better than anyone else. Ensure that your employer knows that you will hold them accountable and that contracts are complete. Make sure that the employer is consistent with their classification of associates as employees or independent contractors. Do not be afraid to ask your employer for expense reimbursement for costs that you incur as a result of working for them. The worst they can say is no. Also consider any Non-compete/Non-Solicitation agreement in any contract that you sign as employee OR independent contractor. Be cognizant of what is typical for the area where you live.

Dr. Moore: Should I put all of my extra income each month toward student loan repayment and retirement plans?

Mathers: While “discretionary” income can be allocated in many different ways, there is one place where we would like to see recent graduates allocating funds. Retirement plans and student loan payments are a GREAT place to allocate additional funds, but we also want to make sure that you have an “emergency fund” as well. While paying back student loans and starting to contribute to retirement plans, allocate some income each month toward building up a LIQUID account (like a high-yield savings or checking account, money mark account etc) that will eventually have three months of FIXED living expenses in it. The reason for three months is that most disability policies have a 90-day waiting period before they begin to pay out. The emergency fund would get you through paying for rent, loan repayment, food, etc. (things that are necessary to get by) until your disability policy would begin paying if you were unable to work. Once you have this emergency fund built up, more of your discretionary income can be put toward loan repayments and retirement plans.

I really hope that you found this as beneficial as I did when I was going through my job search. No matter who you decide to use for accounting, I would highly recommend someone who has a focus and expertise in dentistry. If you have an interest and would like to get in contact with Megan Mathers, her contact information is listed below:

Megan C. Mathers, JD /
Mathers Law & Tax Services /

930 N. York Rd. Suite 200
Hinsdale, IL 60521
E: /
T: 312-339-8658 /
F: 630-413-4577

Dr. Alex C. Moore is a member of the AAE’s Resident and New Practitioner Committee. He can be reached at