March 21, 2022

Young Dentists: The Pros and Cons of Working as an Independent Contractor vs. an Employee

By Drew Hinrichs, CPA, CEO of Engage Advisors

After earning a degree, one of the first decisions a newly minted dentist will need to make is whether to accept a position as an employee or work as an independent contractor. How do you decide? Personal preferences and work style are important considerations. But what often gets over-looked is the longer-term implications for building wealth. Let’s drill down on each so you can make a clear-eyed decision about what’s right for you.

What Qualifies as an Independent Contractor vs. an Employee?

First, let’s look at how the two positions are classified through the lens of the IRS, because the distinctions can be a little murky. The primary consideration is control and who has it. If the business controls the work an associate dentist does, provides all the equipment and supplies, directs how it is done, and manages all the related financials, the dentist is considered an employee. If the associate demonstrates self-sufficiency by doing things like bringing their own tools, controlling their own schedule, and they contract with more than one practice, they can be considered an independent contractor.

What an Associate Dentist Can Expect as an Employee

Benefits – Everybody loves benefits! They can range from modest to generous and may include paid vacations and holidays, health insurance coverage and retirement savings plan. It’s important to note that as an employee, your pre-tax contribution to 401(k) retirement savings is capped at $20,500.

Taxes – As an employee, you will receive a paycheck with state and federal income taxes withheld, and you will receive a W2 at the end of the year for filing your taxes. The employer is also responsible for payroll taxes, which is half of your Federal Insurance Contributions Act (FICA) and Medicare (MEDFICA). The employer and employee each contribute 7.65% of your income, for a total contribution of 15.3%

Work Style – If I were to sum it up in one word, I’d say working as an employee is simpler. You show up, do your job, leave at the end of the day. That’s an appealing prospect for someone looking for work-life balance. On the other hand, you are working for someone else, and will be accountable to them and subject to their preferences.

What an Associate Dentist Can Expect as an Independent Contractor

Income – Since the employer doesn’t provide benefits or pay payroll taxes, your compensation should be higher. How much higher depends on your ability to negotiate.

Taxes –As an independent contractor, you are essentially a small business owner, which opens the door to deductions that can significantly lower your income tax obligation. You can deduct all costs associated with your business such as professional tools and equipment, cell phone service, internet service, computer, car, home office, travel, meals, and entertainment, etc.

Even though you are responsible for paying the full amount for FICA and MEDFICA, which comes to 15.3% of your income, the net result should be reduced tax liability.

Retirement Contribution – As an independent contractor, you can contribute up to $61,000 in pre-tax dollars to your Solo 401K account, about three times more than if you were an employee. Plus, if you have a spouse and they play a role in your business, you can contribute as much as $20,500 for them.

Work Style – You are your own boss and can exercise more control over your schedule and the nature of your practice. You also assume more responsibilities for running a business.

Most associate dentists opt to work as contractors because it gives them more tools to reduce taxes and build wealth. The appeal of maintaining a more independent work life is also a strong pull. The good news is that either path can lead to practice ownership if that’s the ultimate goal.

If you’re starting out in dentistry and would like help making this or other important decisions, schedule a call with our team at Engage Advisors. We are ready to help you get your career off to a great start so you can begin building wealth today.