Monday Sep 05, 2022

Ep 022 - The Benefits of 1099

Summary:

  • Pros And Cons Of Doing 1099 Work (Being An Independent Contractor Or Business Owner) [0:08:17]
  • Get Started On That 401(k) [0:11:01]
  • Super Roth – A Third Contribution To Your 401(k) [0:13:25]
  • Another Big Benefit [0:18:06]
  • By Being A 1099, You Can Buy The Insurance You Want (Plus Others!) [0:20:27]
  • Be Sure To Get A Financial Planner Who Always Touch Base With You Regularly [0:24:20]
  • If You’re Doing 1099, Don’t Forget To Pay Your Taxes! [0:27:55]

 

 

Welcome to the Financial MD Show. This is the only podcast designed specifically for residents and young physicians to help you become educated on financial planning for physicians and avoid many of the common financial mistakes doctors make. Your hosts, Jon and Trevor, explore a different topic with each episode. Jon Solitro is a financial planner and certified financial education instructor. He’s been working with young physicians for the better part of the decade and lectures to graduate medical programs around the country. Dr. Trevor Smith is a board-certified ophthalmologist with a full-time practice and he has learned the ins and outs first-hand what it takes to make smart financial decisions as a young physician. And now here’s your hosts, Jon and Trevor.

 

Pros And Cons Of Doing 1099 Work (Being An Independent Contractor Or Business Owner) [0:08:17]

 

Jon: Well that speaks to, I think, our topic today. We’re going to talk about alternatives like being an independent contractor or a business owner and the pros and cons of that and one of the big ones is you control your schedule a lot better – for the most part. Now, there’s certain like ER jobs where they give your schedule. You got to do it, but it’s still a 1099 pay but a lot of times if you’re doing shift work or locums or even self-employed, you’re kind of starting a little small practice, you got more flexibility on the schedule then.

 

Trevor: Yeah, there’s a lot of different ways to do 1099 work. Some people, it’s just picking up extra shifts and if it’s totally ad hoc, you get full freedom to just not do it for a month or two. Some places require a minimum and then they have a schedule, seniority of who gets to choose first and also and your stuck, not going out of vacation, six months down the road, just because you want to pick up some extra shifts here and there and you’re contractually obligated. All those like everything comes down to contracts and making sure you know what you get yourself into, but there’s a lot of money out there for a little bit of extra work on the side. You were just talking about how. We were talking about tax stuff. There are tax things you can do. That’s really, really getting into the weeds, I think, and even though or S corp and different things, you can read articles on that because it is pretty highly specific and even some of those benefits have changed over the years. They’ve changed enough like you have to talk to your CPA and find out if that’s even a benefit but the real one we were just chatting about that everybody loves is being able to do a solo 401(k). If you’re main gig is 1099, meaning, you’re an independent contractor, you run your own business and someone is paying you as a consultant to come in and do some work – medical work or otherwise – that is definitely a nice thing to be able to put money into your retirement account. It’s a super powered way of putting money away. If it’s at all possible basically to be 1099 or W-2, for me, I always want to be 1099 especially like last year, I didn’t have a W-2. I was just doing contract work, locums.

 

Jon: Okay.

 

Trevor: And that let me put away most of my salary other than what I lived on into my retirement account because you can put in like almost $60,000 between your own personal then you’re your own employer so then you can put in another almost 40,000 so 20,000 and then 40,000 roughly. These numbers vary by year and it doesn’t matter too much but it’s in the range of 20 yourself – that’s called an employee contribution – and then an employer contribution. For solo 401(k) can be another 40,000 as long as you haven’t put money into any other retirement. That’s like the total max amount you can do.

 

Jon: Yup.

 

Get Started On That 401(k) [0:11:01]

 

Trevor: And that’s one of the best perks and starting your own 401(k) is like $1,000, $1500 – something like that. It’s not too expensive. It’s a one-time thing. Some companies will do recurring fees to process paperwork and stuff but you can just do that typically on your own; has to get, I think, over 150k to have to file anything anyways. Maybe, it’s 250.

 

Jon: I think it’s 250, anyway, yup.

 

Trevor: So it’s just like some paperwork. We’re talking about like basic IRS documentations, very easy to do. Your CPA, your accountant, can do that for you. I didn’t think it was too tough. There’s a decent industry around solo stuff now like there’s also some scams, some scammy stuff out there, so you’d certainly want to do research on, making sure whatever company you use is a real place, but they end up contracting with the bank to kind of coordinate a lot of the stuff, so they end up doing a little bit of legal work on the front end to establish your plan and then you end up kind of just sending them some money and they put it in the bank. It’s not too bad. There definitely are some scammy things in that area who promise more than they legally can deliver. Personally, I don’t mind saying I used IRA Financial. I like them. They’re out of Florida. They’re out of Miami. Adam Neumann is the guy from WeWork. This guy’s name is Adam Kaufman.

 

Jon: Okay, yeah.

 

Trevor: So, I wanted to say, Adam Neumann, he’s the guy who did WeWork at the big publicly-traded company massive fiasco, you know, the whole thing. I just heard a podcast about him. Adam Kaufman is the guy who does IRA Financial. They’re great. He puts out a lot of free educational content on his YouTube page.

 

Jon: And they do a self-directed IRA or self-directed 401(k)?

 

Trevor: Yeah, they do all of the above. They kind of do all the self-directed stuff.

 

Jon: Okay.

 

Trevor: They do self-directed IRA, Roth IRA, solo 401(k). Solo 401(k) with them and what most people, you can have a traditional arm which is pretax contributions and post-tax contributions. You can do either one. Again, your max ends up being that like 60k. I believe that’s the vehicle with the maximum amount of Roth contribution is the solo 401(k). In terms of directly contributing, there’s ways of creating an account and then converting it – stuff like that – but you can do a true Roth contribution directly.

 

Super Roth – A Third Contribution To Your 401(k) [0:13:25]

 

Jon: And if they don’t get rid of it in any legislation, there’s this super Roth; it’s been called different things but basically, there’s a third contribution you can make in 401(k). It’s called just basic post-tax contributions or after-tax contributions that aren’t Roth so it’s kind of a hybrid where they would go in after tax but then the growth they get would be tax-deferred and tax-later. So you won’t be taxed on the principal when you take it out but you will be taxed on the growth or the gains. You could max out your 20,500 into a Roth contribution and then you could do the rest of it – so another 40,000 – in after-tax employee contributions which then you convert into the Roth bucket in your 401(k).

 

Trevor: Got it.

 

Jon: So there’s ways to get 60,000 and again, this has been on the table to be cut in legislation before but for now it’s possible. I have anesthesiologists doing that and a couple of reasons. They’ve got a unique situation. They’re husband and wife anesthesiologists, both 1099, and who, without going too deep in the weeds, they started a solo 401(k), maxing that out, both employee-employer and then they started a cash balance plan and doing that as well and then the husband is doing some moonlighting with a company that has a 401(k) so he’s doing that with some after-tax contribution, so they’re truly maximizing their income in that sense and it’s pretty cool. That warms my heart to see take advantage of all those different benefits of being a business owner, self-employed.

 

Trevor: Right.

 

Jon: Like Trevor said, there’s some paperwork to it and things, but I think once you get over the IRA limit of $6,000, it doesn’t take too much more to make the math work. If it costs you $1,000 or $2,000 a year to administer this 401(k), you know, at 30 percent tax rate, you have to put in another $6,000 to make that worthwhile to save that much of taxes, and so anything beyond that is just pure savings. Makes a ton of sense, and Trevor, you’re able to with self-directed ones. You could invest those in a lot of different things whether it’s real estate or other alternative investments, right?

 

Trevor: Yeah, you can basically do whatever you want with it as long as it doesn’t violate some pretty specific rules. There’s a number of them and they’ll be in your plan documents. If you got a good company like you’re working with IRA Financial, I can email them just their Compliance Department to say, hey, can I put money in this and if I do, how does that work? There’s some pretty creative ways of deploying money and then if you’re in a Roth, you know, like whatever you do with it, anything you make on, you never ever, ever, ever have to pay anything extra on that.

 

Jon: Yup.

 

Trevor: That’s a nice just piece of mind when I’m working with that portion.

 

Jon: Now the trick is the earnings have to stay in that self-directed, right?

 

Trevor: It’s all got to be. It’s like it’s sitting on an island. You can’t mix it with anything else and you can’t mix it with family stuff and you can’t mix it with your own businesses but you can do pretty much anything else you want with it. You can go into other people’s businesses which would be like buying a stock, I mean it’s like most, right, but it could be a privately traded company.

 

Jon: So you couldn’t invest it in something you own – real estate, something like that.

 

Trevor: No. There’s certain things you can do with real estate. I don’t mess with real estate. As you know, that’s just the territory that I don’t know well enough to be able to outcompete other very, very smart people. Winner take all to a degree in local real estate markets. I don’t mess with that but it does let you do alternatives. So if you want to get gold which is certainly being talked about right now, if you want to find inflation-hedging assets that are non-custody, meaning, like the bank doesn’t just hold the money on your behalf or like with stocks or basically certificates held two or three parties away. If you want other things like that like hard assets then you can use the money to buy the hard assets and then it’s just, yes, it’s part of your Roth IRA. So, if you make money off of them, that money has to stay in there. You can’t withdraw, you know. You get penalties for that kind of thing. That’s why you can’t be buying stuff in your own business and other things like that. But you can buy gold – physical, literal gold – silver. You have some freedom that you otherwise wouldn’t have when your 401(k) with your company. I tried to sacrifice and live like a resident so that I can put as much to my early career away into that knowing that I probably would be W-2 later and not really be able to put anything into that, not be self-directed necessarily for a long period of time. It’s probably my only funds I can do whatever I want with for a while, potentially.

 

Another Big Benefit [0:18:06]

 

Jon: Yeah, so that’s one of the big benefits obviously that comes to mind for us. I think equal to that depending on how you use it is just the ability to have business expenses and deduct more of your income typically than a W-2 can. It’s just so much more available to you. They greatly limit the tax deductions that a W-2 can make. There are a few things you can itemize and now with the standard deduction, it’s even less. So if you are a business owner and you have what’s called Scheduled C Income which is synonymous pretty much with 1099 income then you’re able to have a lot of leeway on business expenses, portion of your house or rent or utilities you can deduct or travel – all those kind of things – and last I checked with, say, travel, the mileage was at least 55 cents a mile – I don’t know what is now – but that’s a big thing. Maybe it makes more sense today if they haven’t caught up with it to deduct actual fuel prices but that can be huge. So those are the big things that at the end of the day even if you maybe end up making less as a W-2 or more as a W-2, you got to factor in all these other benefits that you’re getting long-term like Trevor was saying.

 

Trevor: Yeah.

 

Jon: Yeah, you’re putting away now more in your 401(k). You’re not keeping as much to bend on your things today but you’ll be glad you did later and then the things that you can deduct now is huge. I think most of the people that we talked to want to keep more money versus getting it to the government if they don’t have to.

 

Trevor: Yeah, I was just thinking about the benefits. It’s one of those – it’s easy to want to think that it’s simple so it’s like, oh, I got a W-2, these benefits are great, wow, like, man, you know. People like the safety of that. Okay, now I’ve got a job and it’s secure and now I’ve got these benefits. We’ll, I think very few people have or maybe even ever will sit down and do an apples-to-apples. If you’re a curious individual, make a chart and write down all the things you get from work and then all the things you have to pay. If you’re doing like locums and doing some travel and all that and then look at where your locums job would cover. So they covered pretty much everything except for food. If you do that apples-to-apples comparison, you’ll find like health insurance is “expensive,” right, but have you ever looked? Have you ever looked to see how expensive it is? Because for a doctor, it’s pretty unlikely that you’re going to look at it and go, oh my gosh, this is so expensive, I have to take this job.

 

Jon: Yeah.

 

By Being A 1099, You Can Buy The Insurance You Want (Plus Others!) [0:20:27]

 

Trevor: Because there’s a percentage of your income, you buy your own insurance as some on your 30s or 40s is substantially less than you probably would guess it is. It can be $350 a month and that’s kind of maybe an old school car payment. Car payments now are a little higher but $350 a month? Okay, let’s say it’s $500. Let’s say it’s $700 and you’re doing locums somewhere. If you’re a radiologist, you’re making $2500 a day and you’re worried about a $750 a month health insurance payment. I mean, you get the best health insurance that money can buy for probably $1,000, maybe $2,000 max deductible A to Z plan. So I think about these benefits. I think people just assume they’re good like a lot of things we assumed like oh, it must be, it’s benefits and I’m a doctor and I’m in a hospital so they must be good and that’s not usually the case.

 

Jon: No. I see a lot of benefits for our physician clients so I’ve seen enough examples.

 

Trevor: Are they good?

 

Jon: No. A lot of them they’ll take their spouses’ that are working somewhere else because it’s not great.

 

Trevor: That’s right. Yeah, the hospitals don’t usually provide that great of benefits unless you work somewhere like Mayo Clinic, certain like really well-known institutions that are known for treating their physicians well. They have ridiculous benefits that would take your breath away. I mean, it’s pretty wild. They might have two or three retirement plans or two retirement options and pension and all that kind of stuff. That’s a kind of a different scenario but your typical, just private practice or hospital, you’re getting the same insurance as the technician in your office that, you know, has a high school education and some credentials and they’re great. I’m not saying they’re not smart. They’re smart and you’re glad they’re there, but you have the same benefits as them because that’s what your company is required to do. It has to be equal distribution of benefits. By being a 1099, you can actually buy the good insurance that you want, for example. So let’s go through a couple other categories. Malpractice, you might think that’s really expensive. Well, it might be like $800 a month. That’s like a typical kind of early career amount. It’s more as you get through your career and they kind of balance it out but $800, it’s like not that crazy. They might have a promo then you first get out of residency.

 

Jon: Or always look at your associations for stuff like that too. You might find some decent discounts with joining associations.

 

Trevor: The doctors can always through shopping around because now you’re the only buyer, right. Even groups, they don’t switch very often but if you shop around, you can get a massive discount and sometimes they’ll even cover your tail coverage, you know, seal that previous malpractice.

 

Jon: Yeah.

 

Trevor: There’s all sorts of things you can do by just kind of shopping around a little bit. All that to say, that’s not that expensive either. Those are probably the top two things people would say like, oh, I’m so glad they cover my malpractice and my health and you’re talking about $1500 a month. It’s kind of silly and then you could for how much you’re going to save and what you can put away in your own solo 401(k) and if they have minimum matching, a lot of doctors get like 1, 3, 5 percent matching. Some places are generous. You know you might get 10+ but not that common. So I think people are often making this decision based on qualitative feeling of benefits rather than a quantitative apples-to-apples on how do I make my money, how do I want to keep my money, and what I spend the better than my company would spend it or my potential company, and that’s the real question. I don’t think people knew that. I don’t know why that is. It’s the same thing I always say like people will work their butts off to get their money and then they like almost don’t care what happens with after that. They just want to put it in the bank and they don’t want to think about it or they hire somebody to do it who just doesn’t have the same incentive to keep track so if you have somebody to help you set it up, you know, that’s kind of what you do. You set it up. You give a lot of great input. You check in periodically, but people don’t often prompt themselves to do those same things.

 

Be Sure To Get A Financial Planner Who Always Touch Base With You Regularly [0:24:20]

 

Jon: No, they don’t and that’s, I think, like you said, where a financial planner comes into play. Whoever you are using, make sure it’s somebody that’s going to touch base regularly and is reviewing everything. It should be comprehensive financial planning and you’re probably going to pay more as a business owner or self-employed because there’s more to it but you’re going to get more service. You’re going to have somebody who’s going to say, hey, we’re going to be doing some tax planning and looking ahead, taking advantage of some of the benefits of being a self-employed or business owner and we’re making sure you’re shopping this around. Even with our employee W-2 clients here, we’re making sure every couple of years, they’re shopping out their home and auto insurance, and so if you’re working with a comprehensive financial planner then if they’re doing what they’re supposed to do, they’re reminding you those timely things to say, hey, it’s been a couple of years, or even on a yearly basis and they will have contacts and people that they know to help you shop out these things or resources or places to go to. So, I think that also comes back to the idea of finding a specialist in terms of helping you with your financial planning; finding someone that you can sleep better at night knowing you’ve delegated this stuff, they’re keeping an eye on these things, they’re asking the right questions, they’re going through the right checklist every year. So, we’re not making this out to be an easy, simple thing, for sure. The W-2 is the dummy-proof turnkey way to just get paid and have a job but if you want to take a little bit more organization and thinking through and a little effort on the side, that can be financially better in the long run. But do that apples-to-apples like Trevor was talking about. Add up everything you get in your benefits – your employer matched the portion, the health insurance they paid for in malpractice – all those things, plus your salary. Compare it to a similar 1099 where they’re not covering anything. You’ll find it will be close and even if it’s close than the other ancillary benefits you get from being able to have more in a 401(k) or more tax deductions, whatever the case might be, it may be worth it.

 

Trevor: Right, yeah, absolutely. And if you’re running – if you have like a little booty practice, and you run it small, you may actually also get a lot more of your time back and be breaking even or making more.

 

Jon: Yeah. You at least have control over that for sure.

 

Trevor: Yeah, which is not everybody in a 1099 situation. I’d say probably most docs in a 1099 situation still kind of have more of an employer.

 

Jon: They’re working for somebody else, right.

 

Trevor: Relationship.

 

Jon: Paid under the table, so to speak, because they’re going to report it.

 

Trevor: Yeah, it’s very above the table, you know, on a 1099, but it’s definitely direct. It’s direct payment and you figure out your own expenses.

 

Jon: They’re not withholding, remember that.

 

Trevor: Right, yeah, so you work a week somewhere and they give you, you know, 12 grand or something. I guess, maybe even more probably for most 12 grand, 14 grand, and then yeah, you got to take taxes out on that yourself right away.

 

Jon: That’s not all your money, right.

 

Trevor: Yeah.

 

Jon: Oh boy, if I could tell you. A couple of years out of business, I met a guy who was an ER doc in Ohio, have been in practice two or three years and he said, yeah, I really can’t do anything right now. I’ve got to pay off this debt to the IRS. I owe them like $150,000 because I forgot to pay my taxes the last few years. I’m like, okay. You just thought this was all your money? Like okay, but that happens.

 

Trevor: So that’s easy to do especially if you’re making big money in 1099, I think, that can happen to people pretty quick.

 

Jon: Yeah.

 

Trevor: They’ll figure it out later like, wait a minute. That was a lot of weeks of work. You have a lot of multi-thousand dollar checks and I owe a decent chunk of that to somebody else.

 

If You’re Doing 1099, Don’t Forget To Pay Your Taxes! [0:27:55]

 

Jon: Well, and quite frankly, if you don’t start paying quarterly after a year or two of that, then the IRS does have an issue with that because they don’t want that to happen. They don’t want you owing them boatloads of money so they’re going to say, okay, you need to start paying quarterly and if you don’t, there’s going to be some penalties there. So the paying quarterly helps but still every paycheck, set aside whatever your CPA is going to recommend there. A lot of things to be aware of. It’s not turnkey but it’s not hard either and you’ll get the hang of it and it may be worthwhile for some of you. So ask us questions if you’re considering it; if you want to know if it’s right for you. We’d love to talk about it more. If you’re considering some opportunities that you want to shoot our way, Trevor and I are both happy to look at it and give you some of our advice and just experience but we’re out here to eradicate physician financial illiteracy so hopefully this made you a little bit smarter today and maybe gave you an edge somewhere down the road and you’ll come back or just give us a five-star review.

 

Trevor: Yeah, I was going to plug a book, too, the Medical Entrepreneur.

 

Jon: Oh, cool.

 

Trevor: The Medical Entrepreneur – a plastic surgeon wrote it. He’s started and sold multiple companies and had practice the whole time and he does a good once-over. If you’re just thinking about starting your own private practice or your little side gig business or whatever it is, it’s very broadly applicable to just starting any business but from a doctor’s perspective so that kind of helps the doctors where they’re at. I found that one really helpful. It’s sort of like reading a lot of articles, just putting them all together into a book. Very topical, but he pulls in expert opinions like CPAs and lawyers on different components so I recommend that one. I enjoyed it and I’ve even bought it for a couple of people that are non-doctors and they found it like a nice, helpful, basic starting-your-own-business book for their non-medical businesses. It’s a good one.

 

Jon: Awesome. All right, we’ll have a link to that in the show notes. Lastly, I want to remind you please share these shows. If you’re finding any benefit in these, then somebody else is going to as well. So please help us to eradicate physician financial illiteracy and share these shows. It’s easy to do in your apps. Leave us a review, that helps, again, more physicians find out about these shows. Any other things that are out there, so if this is the only place you’re hearing about us, get on at social media. Our Instagram and TikTok are updated all the time. These videos, we do a weekly Didactic Minute video with some financial tips, so links to these cool articles. We have a Financial MD Community which is a Facebook group just for physicians where were talking and giving and getting tips there as well. So plenty of places to follow us. Last, but not least, go to financialmd.com if you’re not catching anything that I just said. It’s all there and we’d love to chat more. With that, we’ll be saying adieu. This is Jon Solitro and my pal, Trevor Smith.

 

Trevor: Thank you, Sir.

 

Jon: We’ll see you next time.

 

Trevor: Later Jon.

 

Jon: Bye everybody.

 

Thanks for joining us for another Financial MD Show. Be sure to head over to financialmd.com to get more in-depth resources on financial tips for physicians and don’t forget to join the Financial MD community group on Facebook, where physicians at all stages of their career gather to share tips and get ideas on achieving true financial success. We’ll see you next time.

 

The Financial MD Show is for informational purposes only and is not an offer to invest. It is not financial, tax, or legal advice. Be sure to seek financial, legal, or tax professionals when making any financial decisions. Before investing, you should make sure that any investment strategy or investment meets your individual investment needs, goals, and objectives. Financial MD makes no claims or guarantees to individual investment performance. All investing involves the risk of loss as well as the potential for gain.

 

 

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