One of my older mentors when I was finishing training whispered into my ear “utilize the power of the 1099 when you get out of school.”
At the time I did not really understand what he meant, but in my first few years of practice and being overwhelmed with income tax obligations it finally made sense. That’s what that old crazy ER doctor was getting at. Be a 1099 as much as humanly possible. The tax advantages are NUMEROUS.
Every single one of us has been a standard W2 employee at one point or another. That means that your employer automatically deducts federal income tax, social security tax, and Medicare tax from your paycheck each time. God forbid you live in a state that has state income tax as well…
If you have received bonuses you understand the gut wrenching feeling when you see 40% of it essentially fade away like a fart in the wind.
These things are not fun… These things are not FREEDOM. They are demoralizing, unmotivating and will be the BIGGEST EXPENSE OF YOUR LIFE.
Forget your mortgage or car payment. The biggest expense of your life will be taxes.
You need to focus on minimizing your tax bill as much as you legally can. We will not be discussing tax evasion. That is illegal.
The best way to do this is to be a 1099 contracted employee if you decide to work for others. So, what does this mean exactly?
If you are a 1099 employee, you have no taxes withdrawn from your paycheck. You are responsible at the end of the year to pay your taxes. Some of you might be thinking “well your tax bill at the end of the year is going to majorly suck!” and you would be correct thinking that.
I want you to think about it another way though. Instead, think to yourself “how can I lower the amount I have to pay back to Uncle Sam at the end of the year?”
The way you do this is have your 1099 checks made out to your personal limited liability company or LLC. You are not personally being paid; your LLC is being paid!
This business is responsible for covering all expenses that are necessary to operate it; which is you going out and doing contract work. You also should make it a legitimate business where you provide another service on the side as well. You could open a travel agency and see a couple clients a month. It literally can be whatever you want.
You need a vehicle, right? You also need gas and insurance. Plus, a cell phone. All these bills are legitimate business expenses therefore are paid for with TAX FREE DOLLARS.
The savings at the end of the year are HUGE. We are talking thousands of dollars saved.
Want to save for retirement? A self-directed IRA or 401k paid for by your company can result in significant retirement savings. The maximum contribution to a self-directed 401k is $56,000 a year compared to $18,500 for the W2 employee! This also lowers your taxable income.
These are the main advantages of being a 1099 employee vs a W2 employee. Therefore, it is paramount you negotiate being a 1099 during your initial hiring process.
Additionally, the savings to employers are huge. They no longer need to pay you benefits or payroll taxes. It really is a win win situation.
If you continue to work for someone try your best to negotiate it as a 1099 contractor. In my opinion, the best risk mitigating strategy for a nurse practitioner is to have a part time 1099 position and 2-3 side businesses. You can legally save tens of thousands in taxes every year not to mention the personal freedom that comes with this.