Working as a 1099 Independent Contractor OD: What You Need to Know

By Adam Cmejla, CFP®, CMFC®

Jan. 17, 2018

The question of whether or not to compensate an OD in a practice as an employee of the practice (via W-2 wages) or an “independent contractor” (via 1099 payments) is a hotly debated issue. Whether you are the owner of the practice, or the associate coming into the practice to work, understanding the fine details will dictate which classification status works best for you.

Two important notes: First, this article is not meant to be taken as individual business or tax advice. For specific advice on your personal situation, consult your tax advisor. Second, this article is not meant to opine on whether one is “better” or “worse,” but, rather, to discuss planning opportunities and challenges to those ODs that choose to align with a practice as a 1099 independent contractor.

Benefits of 1099 for Employed OD
Being brought into a practice as a 1099 independent contractor (IC) has certain benefits that are either not available, or limited, to W-2 employees.

One of the benefits that you have as an IC is the ability to deduct all job-related expenses that are directly relevant to your job duties. Examples of this would be your professional liability insurance premiums, equipment that you purchased outright, your lab coat (but not professional/business attire), or continuing education expenses (including travel expenses for CE).

As a W-2 employee, you are able to deduct job-related expenses, but there are limitations and requirements that must be met to realize the benefit. First, you must itemize deductions on your tax return (Schedule A). Second, you can only deduct the amount that exceeds 2 percent of your AGI (Adjusted Gross Income) floor. In addition, if you pay the Alternative Minimum Tax (AMT), you are not able to deduct your expenses.

EDITOR’S NOTE: For the IRS’s explanation of the Alternative Minimum Tax, CLICK HERE.

Another benefit is a greater selection of retirement plan savings options. As a W-2 employee, you are generally limited to the retirement plan that is provided by the employer (such as a 401(k) or SIMPLE IRA). If there is no retirement plan offered, you can contribute (and deduct the contributions) to a Traditional IRA, but the limits are $5,500 per year ($6,500 per year if you are over 50). This is a limiting factor in being able to save in tax-advantaged accounts for retirement.

If you are an IC, you have various retirement planning strategies available to you. One of the most common plan to consider is the SEP IRA. The contribution limits in a SEP IRA is the lesser of 25 percent net income or $55,000 (2018 limits).

An Individual 401(k) (also sometimes called a UniK or SoloK) allows the IC to wear two hats as it relates to contributing to the plan: one as the employee of her business and other as the business owner. This could allow someone to make tax-deferred (and thereby tax deductible) contributions as the employee of their business in the amount of $18,500 (2018 limits), as well as additional contributions up to 25 percent of net income in the business.

Drawbacks of 1099 Contractor Status
One drawback to being an IC is the inability to participate in group benefits at the practice. If the practice owner offers group health, disability, or life insurance, you will not be able to participate. In addition, if the practice owner has a retirement plan with an employer match (like a 401(k) or SIMPLE IRA), you are not eligible to participate, and therefore, would not be eligible for the match.

However, the likely biggest drawback from being brought into a practice as a 1099 IC is going to be the additional tax burden that you’ll absorb. By definition, this is what is commonly referred to as the “self-employment tax.”

A 1099 contractor is paid 100 percent of earnings earned without any tax withheld. Therefore, it is the IC’s responsibility to plan accordingly for the upcoming tax liability that will be due when filing their return.

While federal and state taxes are paid equally whether one is classified as a W-2 or 1099 IC, the difference lies in who pays what part of the Social Security and Medicare taxes. Social Security tax is assessed at a rate of 12.4 percent on the first $128,700. Medicare taxes have no earnings limit, and is another 2.9 percent on all of your income. If your AGI is >$200,000 as a single filer or >$250,000 as a joint filer, you’ll also pay an additional 0.9 percent Medicare “surtax” as part of the current tax law.

Add this all up and we see that total Social Security and Medicare tax is 15.3 percent on the first $128,700 in 2018. The difference comes in who pays what out of these numbers.

As a W-2 employee, your employer pays half of that amount (7.65 percent) and you pay the other half. However, as a 1099 IC, you are your own employer, and therefore, are responsible for paying the full amount. Hence, the other 7.65 percent that your employer would otherwise pay is paid by you, which is where the term “self-employment tax” is derived.

All other benefits excluded, you can now see part of the financial benefits to the practice owner and financial challenges to the associate in classifying someone as a 1099 IC instead of a W-2 employee.

The Importance of Tax Planning
It’s important to remember that the practice you’re working in as a 1099 IC will not (and cannot) withhold any taxes (federal, state, local, SS, or Medicare) on a per pay period basis. If you don’t understand the full implications of your earnings and the taxes associated with them, you could find yourself with a significant tax bill to pay come tax filing time and without ample funds to satisfy the amount due. To compound this even further, the IRS will ask you to make estimated tax payments on a quarterly basis in the years following that you work as an IC, so you’ll not only have the entire tax bill due from the previous year, but also the first quarterly estimate for the current tax year due at the same time.

While digging yourself out of this tax hole is possible, it certainly isn’t the ideal scenario, and can be even harder to accomplish if you’ve already become accustomed to a higher-than-you-should-have lifestyle.

This is just one example of why prudent planning and aligning yourself with a good team of quality advisers can save you time, money and stress.

EDITOR’S NOTE:  For the IRS reference on Independent Contractors, CLICK HERE


Adam Cmejla, CFP®, CMFC® is a Certified Financial Planner Practitioner and Founder of Integrated Planning & Wealth Management, LLC, a financial planning & investment management firm. The company is focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and deliver kindness and compassion to every relationship they’re privileged to serve. To contact:  (317) 706-4748,, or visit

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