Structuring anesthesia services continues to be a popular topic among CRNAs. Let's compare W-2 employment to being a 1099 contractor.

Note: This topic starts the rabbit hole that never seems to end. This blog post is an overview of employment options. The nuances of 1099 contract work, establishing an LLC, and maximizing tax efficiencies go beyond the scope of this blog but will appear in a post soon.

W-2

We start here because most CRNAs are W-2 employees working for a company. The W-2 part refers to the IRS tax form filed by the employer.

W-2 Advantages

It’s easy to be a W-2 employee. Just fill out a W-4 (which is the employee version of the W-2) and start working. A W-4 dictates your tax withholding. So that form declaring your dependents, yep…that’s a W-4. Really no other paperwork or setup. Don’t worry about quarterly or annual taxes. The employER handles it for you.

If you are a recent graduate, your focus may be on giving safe anesthesia and not business structure. I’m not saying new graduates shouldn’t become independent contractors. I’m saying being an employee doesn’t consume time outside of showing up for work.

Income Stream

Having a regular income is convenient. Structure is comforting when loan and mortgage payments are due every month. A regular income makes financial planning easier because there are no peaks and valleys.

No change in income because you went on vacation. Predictability – tough to beat.

Benefits

When folks ask how much more they need to make as a 1099 contractor, this is the section they are referring to. Benefits vary, but here are the considerations--

The employER often sets up health insurance, malpractice insurance, retirement plans, PTO, and sick leave. Other common offerings include dental, vision, short-term disability, long-term disability, maternity leave, and life insurance.

The employER also pays half of your FICA taxes which look like this:

Assuming a $200,000 annual gross income, the employER covers $10,000 in social security taxes and another $3,000 in Medicare taxes.

Other Monetary Perks

Retention bonus, profit sharing and stock options are also possible, with profit sharing being the most common in the CRNA world. Ask the crew how much this amounts to. Both W-2 and 1099 employees can negotiate sign-on and relocation bonuses.

Want to see how I successfully negotiated my contract? Here it is.

Insurance Rates

Most employERs offer a plan that employees can purchase as mentioned above. Typically, the premiums and deductibles are pretty reasonable because a healthcare organization has the bargaining power of thousands of employees.

Some employERs cover health insurance entirely. This is a major perk, so expect a lower salary. Buying health insurance on the open market is ridiculously expensive, so don’t overlook the importance of figuring these costs into your analysis.

Retirement packages

These vary, but the pension has given way to the 401(k). It is common for employERs to match a percentage of the employee’s contribution -- usually 3-6% of gross earnings. You may be limited to a certain brokerage with limited investment options. But it’s a way to invest pretax income, lower gross income, and receive an instant return on investment. Figure another $10,000.

I have an employER match of 3% through Fidelity. They offer Target Date Funds, which are adequate.

Be sure to run the numbers to calculate the value of the benefits. I’ll link a spreadsheet to calculate the overall value of an offer.

Legal Protection

EmployERs must adhere to guidelines such as anti-discrimination laws and unemployment statutes. Lots of HR and legal jargon that is over my head. I just want to give anesthesia.

Disadvantages of W-2 Employment

Because you work for someone else, they run your schedule. Sure, there is a contract outlining your role and responsibilities, but you are still under at least a few overlords.

Best case scenario, you fall under med staff. Worst case, you look up to find the Director of Nursing as big brother. Orwell was on to something.

Irrelevant rant: DoNs are a lot like auditing surveyors. I have a tough time respecting their micromanagement because they don’t understand anesthesia. End rant.

Unemployment

It’s not typical to be out of work without notice, but it can happen. This comes down to your contract and whether you are in an “employER friendly” state. Mind your Ps and Qs and you should be alright.

Providing a notice of 90 days prior to your departure is typical and understandable, so I don’t consider this a drawback. With 1099 work, you just don’t renew the contract.

Retirement

Employee 401(k) contributions for 2023 are capped at $22,500. This increases to $30,000 at age 50 and up. This is great, but your employER doesn’t typically max their half.

Total 2023 contribution limit for combined employee and employER is $66,000. Catch-up contributions increase this to $73,500.

That $10,000 match we discussed earlier adds to the $22,500 bringing your total to $32,500ish. That’s half of the maximum. 1099 folks don’t leave that on the table.  

In short…

The drawbacks align with the advantages of being an independent contractor. As a W-2 employee, you sacrifice flexibility for security. You sacrifice earning potential for convenience. There are not as many tax advantages as being an independent contractor. Enough said…On to 1099 content.

What does it mean to be a 1099 independent contractor?

1099 contractors are self-employed. They contract to provide a service. 1099 refers to the 1099-MISC tax form filed to the IRS to report income from services rendered.

Typically, 1099 contractors establish a limited liability company or LLC to separate personal and business assets. An LLC acts as a “pass through entity” meaning the LLC does not directly pay taxes on the income. The LLC filters your anesthesia income and sends it where it needs to go.

So where does the money go?

Set aside a tax account. Since there are no tax withholdings on the income, you need to be disciplined and set aside a good chunk of what hits the account. Like half. Taxes can be paid monthly, quarterly, or annually.

Typically, CRNAs (and sometimes their spouse) “work” for the LLC and collect a salary. This is taxed as personal income. Money also finds its way into retirement accounts. Some income goes towards business expenses. No such thing as “write offs,” they are business expenses.

Good news is…your expenses decrease your gross income, which decreases your tax burden. Bad news is…expenses still cost money.

Higher Pay

The jobs typically pay more. Cash heavy because you don’t get all of the perks of being a W-2 employee. Assume you need to make 20-30% more than your W-2 counterparts to break even.

The locum community can really milk this via stipends for travel, housing, food, and malpractice.

Business Expenses

I bet half of the inquiries through the “Contact Us” page are the questions about business expenses.

As a rule, anything you need to perform anesthesia services is a business expense. Vehicle (usually milage), housing, food, travel, licensure, home office, phone, malpractice, CMEs, etc.

The cowboys flying the planes -- I’d bet they are all 1099 contractors using their planes more than 50% of the time for business. I’d also bet their plane is in a separate LLC, as is every other “risky asset” such as real estate or side-businesses.

The list goes on to include nuanced things like the Augusta rule and depreciation structure, but that needs to be in a separate 1099 post. Or better yet, handled by a CPA. Which is also deductible.

The objective is to minimize your effective tax rate meaning your dollars work for you instead of going to Uncle Sam.

A CPA is invaluable as they navigate the gray areas of the tax code. Best of all, they keep you out of trouble.

Flexibility

That W-2 job may allow 8 weeks of PTO, but you can’t string together 3 weeks for a trip to Europe. This mostly applies to folks signing shorter locum style contracts as opposed to 24-month contracts.

With 1099 work, specifically short-term gigs, you choose the location and practice type. Flexibility, freedom, and independence are quite appealing.

Disadvantages of 1099 work

You are the first to go when budget cuts happen. Or when the next pandemic shows its ugly face. EmployERs will protect W2 employees before a contractor.

The protections afforded to W2 employees don’t apply. You could get undercut by a W2 employee, an anesthesia group, or other independent 1099 providers willing to fulfill services at a lower rate. The hospital just wants the spot filled.

Flexibility sounds great, but that may also lead to the lack of a steady gig.

Malpractice

Sure, you get a say by having your own malpractice coverage, but a hospital has a massive legal team. And you aren’t part of it. They have the resources to drag things out or settle out of court. You don't.

If litigation occurs, under the microscope you go. Say the surgeon, PA, and nursing staff work for the hospital. They are on the same legal team. Attorneys will pin the blame to anyone else in an effort to save the hospital money.

I've heard of CRNA groups abandoning a CRNA undergoing litigation to protect the image of the group. Just be aware you have fewer friends.

Insurance

Purchasing insurance on the open market is expensive. Consider health, life, and disability insurance at a minimum. No group rates unless you have an anesthesia group that can negotiate something reasonable. Expect the worst.

Only one flog for the horse…

To reiterate a couple points from above, 1099 contractors may have irregular incomes. That 3-week European get-away means 3 weeks without pay. Better have a solid financial plan.

And the taxation… Business deductions lower gross income, but you are responsible for paying all of the FICA taxes because you are now the “employee” and “employER.” And when you give yourself a salary, you are responsible for payroll taxes on that money.

To best optimize a 1099 setup, I would strongly recommend a CPA. There are plenty of threads online and on the CRNA pages, so give it a search. I’ll keep you all posted as I go through the process of preparing an LLC, which will file as an S-corp.

Long-winded again, but I hope you found something useful in this W-2 vs 1099 overview. Thanks for reading.