Dental temps: 1099 or W2. What’s the difference?
In the ever-evolving world of the gig-economy, dental professionals are often presented with conflicting information regarding your tax status. Are you a W2 employee or a 1099 independent contractor (known in the gig economy as a “freelancer”). We’ll go over all the definitions and explanations of what this all means.
What does W2 and 1099 mean?
W2 and 1099 are IRS tax forms that individuals need to fill out when being paid for work provided to a business. But in everyday use, they describe what kind of worker you are.
W2: You work for someone else.
You are employed by a business and they pay you an hourly wage or annual salary. They determine when you work and for how long. This can include full time positions and part time positions.
W2 employees have taxes taken out of their paychecks before you get the money (for example: social security, medicare, state taxes, etc.) At the end of the year when you do your taxes you can use deductions (or “tax write offs”) to show the government that you paid them too much and need a refund. Some common deductions for W2 employees include things like mortgage interest and charitable contributions.
1099: You work for yourself.
You own your own small business and provide your services to many businesses. You probably have a business entity like an LLC (a Limited Liability Company) that is registered with your state. LLCs are easy to set up and cost typically less than $100 to register. Here is our blog article that takes you through the steps of creating your own LLC.
1099 independent contractors pay taxes after you spend your money on business essentials. You have a lot more tax write offs available to you than a W2 employee, which means you pay less in taxes. We’ll go over tax write offs more below.
Many people work as both a W2 employee and a 1099 independent contractor! An RDH or DA may work part-time or full time at a dental office and on their days off they earn even more money as temps for dozens of different practices.
While both paths have their merits, it’s well known that as a freelancing professional, the 1099 route offers more personal and financial benefits, especially when it comes to tax savings.
Here’s why a growing number of dental industry professionals are leaning towards the 1099 model.
Benefits of 1099 work:
1. Greater Control Over Your Schedule
As a 1099 independent contractor, you are your own boss. This means you have the flexibility to set your hours, choose the days you work, and even decide which clients or dental practices you want to associate with.
For example, a temp RDH might choose to work only three days this week so they can go on a family vacation. The following week they choose to work 6 days because they want to buy a new TV. The important thing is…they get to choose!
2. The Power of Tax Write-offs
One of the most significant advantages of being a 1099 contractor is you pay taxes AFTER you spend your money. As a W2 employee, your income gets taxed BEFORE you even get it (you see all the deductions itemized on your pay stub). A great list of most of the common 1099 tax deductions can be read here.
Because you’re a business owner, anything you spend money on that is related to your business operations is a tax deduction.
Examples include:
Equipment and Supplies: If you purchased your own scrubs, dental instruments, sterilization tools, or even specialized dental software, these can all be written off as business expenses.
Continuing Education: Courses, seminars, association memberships, and workshops that help you stay updated in the dental field can all be deducted.
Travel: Gas to get to work, car insurance, car payments, parking fees, new tires, the number of miles you drive, etc. These are all necessary expenses that allow you to stay in business and now you can deduct them from your business income.
Home Office: If you have a dedicated space in your home for work related to your dental services (even if it’s just the kitchen table), you can claim the home office deduction. Cell phones, internet, printing supplies, rent, mortgage interest, utilities, home security system, etc. are all tax deductions available to a 1099 worker.
3. Higher Pay
When a W2 employee gets hired at a business their salary or hourly rate typically doesn’t change with the market rates. They have to negotiate and practically beg their boss for even the smallest raise.
But as a 1099 freelancer, every time you take a job you’re getting the current market value for your skills. You can even potentially charge more for specialized skills you’ve developed or obtained (like second languages or software certifications), or for last minute job opportunities like a shift happening the next day.
4. Self-Employment Tax
Social Security and Medicare are taxes that no American worker can avoid paying. W2 employees have that money taken out of their paychecks before they even get paid. As a self-employed 1099 worker, you’re in charge of setting these taxes aside (for 1099 workers they’re called “self-employment tax”).
A W2 worker let’s Uncle Sam hold onto their tax money all year long. It sits in a government bank account collecting interest the entire year until the W2 worker tries to get some of it back in the form of a tax refund. W2 workers are essentially giving the government an interest free loan all year long. As a 1099 worker, you let it collect interest for you all year until you do your taxes.
Most 1099 workers will set aside 20%-25% of their paychecks for when it's time to pay taxes. This ensures you have more than enough money to pay your year end tax bill. But unlike a W2 employee, you now get to deduct 50% of the self-employment cost from your business income!
5. Retirement Benefits
1099 contractors have the option to set up a Simplified Employee Pension (SEP) IRA or a solo 401(k), both of which typically allow for higher contribution limits than traditional retirement accounts. For dental professionals thinking long-term, this means you can put away more money each year can lead to significant savings and a more substantial retirement nest egg.
Conclusion
The decision between working as a W2 employee or a 1099 independent contractor in the dental industry boils down to personal preference and career goals. However, when it comes to tax advantages and potential earnings, the 1099 route often emerges as the more lucrative option. dentalWORKS is here to help you maximize the amount of money you can earn as a 1099 business owner.
By understanding the financial benefits and leveraging them effectively, dental professionals can optimize their income and set themselves up for a prosperous future. As always, it's wise to consult with a tax professional to ensure you're making the most of your 1099 status.
