By Ben Nanney, CPA and CFP®
There are many things to consider when deciding on a new nurse practitioner job-location, work culture, and schedule requirements, for starters. And another important consideration for most all of us is-money! When it comes to money, understanding the difference between being a nurse practitioner paid as an employee versus an independent contractor (IC) is critical.
There are two basic financial distinctions between an employee and an IC: benefits and taxes. When you’re an employee, benefits are typically offered by your employer. These benefits can include health and disability insurance, contribution matches on your retirement account, vacation and sick pay, etc. Obviously, these benefits can make up a significant part of your compensation package.
An employer also lends a helping hand with what you pay to Uncle Sam. “Earned income” (the IRS term for money you are paid for performing a task or service) is subject to FICA taxes, which is comprised of Medicare and Social Security. The FICA rate is 15.3% on the first $127,200 of earned income (2017) and 2.9% on all earned income over that amount. Employers are required to pay half of this and you pay the other half. On a $100k salary, you and your employer would each pay $7,650 in taxes to the government. Not a small amount, right?
As a contractor, the situation is more straightforward. You are paid a set amount for your time (whether hourly, monthly, or another arrangement). There are no benefits and all FICA taxes come out of your pocket. Contractor pay rates are typically higher than employee pay rates for similar positions to account for the additional benefits and taxes not paid by hospitals and clinics. You should know that there are tax deductions available to contractors that aren’t available to employees, but we will cover that in an upcoming article.
To illustrate the differences between an employee and contractor position, here is an example comparison:
Comparing the two pay amounts alone, the contractor position appears the obvious choice with a $15,000 advantage. After adding in the benefit and tax portions, however, the employee-paid position with $119,793 in total compensation wins out over the contractor paid position of $117,692. Notice in both positions that we assumed two weeks would be taken off over the year for sick and vacation days. These were paid days for the employee, but unpaid for the contractor. We also assumed that the employee would make 3% retirement contributions to qualify for the 3% employer match.
In the end, every situation is different. Sometimes contractor positions are the better choice financially for nurse practitioners, and other times employee positions are the better option. The important takeaway is that, when comparing employee and contractor positions (or even employee versus employee positions), the base pay is just a starting point to begin calculating total compensation.
Ben Nanney, CPA and CFP®, is a fee-only financial planner with Fox & Company Wealth Management who specializes in working remotely with medical professionals throughout the US. He welcomes comments or questions and can be reached by email at ben@foxwealthmgmt.com or by phone at 270.247.0555.