Which is a better deal for professionals? W-2 employment or 1099?

I was just reading the guidelines on the Attorney General's website around misclassification of employees as independent contractors, for reasons completely unrelated to my own employment. (Advisory is here, 42KB .pdf download.) This got me to thinking, for professionals who make a middle-class-ish living and can deduct a good chunk of our expenses on our Schedule C, is it better for us to get a W-2 or a 1099?

Many (most?) people doing clinical work, especially when seeing people at various program sites rather than in one clinic, are paid on a fee-for-service basis. Basically, we get a specific rate for each hour that is billable to insurance, usually a ridiculously small cut of what the insurance pays for the session. At many agencies, the revenue from the billable healthcare subsidizes other community programs the agency provides that aren't billable to insurance or eligible for any sort of other funding. Clinicians are usually viewed as independent contractors and receive a 1099, then file a Schedule C (small business profit/loss worksheet), which subtracts reasonable business expenses (mileage, licensure fees, continuing education, malpractice insurance, office supplies, therapy toys, books, etc.) from the amount paid on the 1099.

When looking over the guidelines, it seems to me that most clinicians would be considered "misclassified" by the AG's office, and should be W-2 employees instead of independent contractors. The guidelines use a "three-prong test," in which all three prongs must be satisfied in order for the employer to classify the worker as anything but "employee" (which means the person would receive a W-2). Prong two is "Service Outside the Usual Course of the Employer’s Business and the text explains that:
Some examples of how the Attorney General will apply prong two:
• A drywall company classifies an individual who is installing drywall as an independent contractor.   This would be a violation of prong two because the individual installing the drywall is performing an essential part of the employer’s business.
• A company in the business of providing motor vehicle appraisals classifies an individual
appraiser as an independent contractor.  This would be a violation of prong two because the appraiser is performing an essential part of the appraisal company’s business.
• An accounting firm hires an individual to move office furniture.  Prong two is not applicable (although prongs one and three may be) because the moving of furniture is incidental and not necessary to the accounting firm’s business. 
This seems pretty clear to me. Even at places I've worked for where counseling/music therapy is a small part of what the agency does, they still clearly provide these services in the normal course of their business. These aren't situations where I'm providing services to an agency's employees, or providing them for day program folks just once in a while in unusual circumstances. These are all places that have insurance billing contracts set up so that they can bill for healthcare services that their agency's contractors (employees?) are providing, and places that advertise clinical services as part of what they provide.

The other prongs are less clear, but again, only one violation is needed for there to be a misclassification. Just for discussion's sake, prong one ("Freedom from control") states that:
To be free from an employer’s direction and control, a worker’s activities and duties should actually be carried out with minimal instruction. For example, an independent contractor completes the job using his or her own approach with little direction and dictates the hours that he or she will work on the job. 

This seems less clear. Everywhere I've worked allows folks to set their own schedule and requires us to write our own treatment plans and choose our own approach to the work. Yet the agencies often also have a lot of policies beyond the insurance regulations and ethical codes that we abide by regardless. I could see this one going either way. I have had one fee-for-service agency that more clearly violated this one by acting as if it was unacceptable pretty much to ever reschedule an appointment. Oh, and I suppose that with most any agency that does contract work, we often get into working environments where there's considerable and often clinically inappropriate direction from the agencies that are sub-sub-sub-sub-etc-contracting our work, like when we see people at day programs and group residences. Sometimes this even affects our ability to get paid, like when I show up at a program and a non-clinician staff member tells me someone isn't allowed to see me today for whatever reason.

Moving on to prong three, "Independent Trade, Occupation, Profession or Business," which states that:
Under the third prong, the court is to consider whether the service in question could be viewed as an independent trade or business because the worker is capable of performing the service to anyone wishing to avail themselves of the service or, conversely, whether the nature of the business compels the worker to depend on a single employer for the continuation of the services.
and further:

In this regard, we determine whether the worker is wearing the hat of the employee of the employing company, or is wearing the hat of his own independent enterprise.
Again, less clear. In terms of the "hat," I think I definitely work "for" and represent the agencies where I do work more so than the aforementioned hypothetical furniture mover at the accounting firm. My treatment plans and summaries have the names and logos of the agencies. Some of the programs where I see people know what agency I'm from with regards to their folks and others don't. Yet I also don't have a phone number or a desk or anything at any of the places where I do fee-for-service work.

In terms of being able to do the work on my own without the agencies, yes, technically I could. I can and do see people whose programs or family members pay me privately and I do some pro bono consulting and sometimes pro bono therapy. Without the agencies, could I make a living seeing folks with DDS/DMH services and could I bill Medicaid? It's technically possible to get onto these insurance panels as an individual provider, but they make it incredibly difficult.

Getting onto the real issue, I think it's pretty clear that any of us could petition these agencies to change clinicians from 1099 employees to W-2 employees, but what would be the benefits?

W-2 status would get us unemployment insurance.  This is a good thing.

W-2 status probably still wouldn't get us health insurance, because even W-2 employers can claim the loophole that we aren't salaried and don't work a set number of hours per week, thus aren't benefit eligible even if the employer does provide benefits to some types of staff.

In most cases, 1099/Schedule C status benefits us from a tax perspective. On my Schedule C, I can deduct everything that is a legitimate business expense. W-2 folks can only use the "unreimbursed business expenses" category, which is more limited, and which is an itemized deduction, so it only lowers one's taxable income, not one's total income (line 22) or adjusted gross income (lines 37). And if someone doesn't have enough itemized deductions possible to exceed the standard deduction, they get no credit at all for all their out-of-pocket work expenses. Line 22 is the important one to reflect how much disposable income someone actually has, and is the line one has to use on financial aid forms and so forth.

At least in my case, staying with the 1099 seems the way to go. I have health insurance since I'm benefit-eligible at one of my employers, and I wouldn't be eligible for unemployment anyway if I were to lose one small contract and still have the rest of my work. The tax benefits are far better, at least in my situation. I wonder if there are situations in which W-2 employment would be preferable?


Jodie said...

I love the whole being a W2-employee at my main job, and then having smaller contracts that give me a 1099. It's the best of both worlds, especially getting to deduct licensure/continuing education/insurance/supply expenses. Both of the main employers that I worked for as a clinician in MA did that, and then I had contracts for schools/day programs, where I was going in once a week and doing music therapy, a service they clearly don't offer as a matter of their regular business.

When I moved to CT, my "main" job was part-time, and I was considered a contractor, even though I was doing the same exact job as all the full-time employees, just on a limited number of hours basis. I liked the job (though I hated the tax issue) and I think CT doesn't have the same rules about independent contractors, though I never really looked into it.

The huge benefit of having a main job that allows the W2 status is that you can have enough taken out of your taxes in many cases to cover your tax liability at the other- which is a huge relief when you're not making a whole lot of money, and having to come up with a few hundred dollars April 15th is a big deal.

I'm kind of bummed that I'm not doing any contract work right now, since it looks like I will be "closing" my business tax-wise with my 2010 tax return. Especially since I renewed my liability insurance just before the new year, but they didn't charge my card until after January 1. I pay a whole lot more now, so I'm pretty annoyed over that. :-)

Suldog said...

One benefit to 1099, which I don't believe you mentioned, is that you hold onto more of your money for a longer period of time than if the taxes and such were taken upfront. In that way, you can have the interest that the government would normally earn on your money prior to returning part of it to you. Not a huge thing, in most cases, interest rates on bank accounts being what they are, but it is something.

eeka said...

Yes, what thinking what both of you said.

Right now, I have a W-2 at my main job and I get health insurance and sick time and stuff through them. I end up getting wads of cash back from my taxes every year. At the other contracts, I have 1099s, so end up owing, but still get back overall because what I owe isn't as much as what I get back. And I get to take my mileage and supplies and everything out of a Schedule C rather than itemizing them.

Suldog, yeah, or in my case with both types of employment, I get to keep my money instead of sending it in every week and then getting most of it back. If you're only 1099 though, don't you have to file quarterly?

Oh, Jodie, I think you can still claim the insurance premium for 2010. There's even ways to make last-year donations to charities and things in January without claiming any processing lag or anything, so I'm thinking there's a way to do this. Besides, by the time you get audited, you'd be able to just shift it to 2011 if they care. I say deduct it, but ask the google machine to double check I spose.

Jodie said...

I wouldn't be able to deduct it for 2011 though, since I won't be filing a schedule C for 2011, at least as of right now (I currently only have the one W-2 job, no contracts/private clients, and no concrete plans to change that for now). I will look into being able to file it for 2010, though!