Office wants to pay dentist as contractor (sub-s). Any issues?

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JaxFLbh
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Office wants to pay dentist as contractor (sub-s). Any issues?

Post by JaxFLbh »

Hi all. I am hoping someone can point me in the right direction (or even maybe flat out answer it) on a question about working as a medical professional and being paid corp to crop. A local dental office wants to hire my dentist wife and pay her as a contractor. Apparently the owners have many offices and pay all their dentists that way. They would offer W-2 and make her an employee if she wishes, but they stressed the tax benefits of taking deductions and distributions at a lower rate.

I’m no CEO but I remember from business classes that there are certain criteria that must be met to allow one to be paid as a contractor under a sub-s. Is there any concern on her end legally about entering into this agreement?

She doesn’t currently have a sub-s corp set up for herself as she’s a W-2 employee at her current practice. What type of professional should we be seeking? A CPA, a lawyer, a tax attorney? A combination of those?

I like the idea of getting creative with taxes, expenses, and distributions but not the idea of getting audited or breaking laws. I have a lot to learn about this though and wanted to get a Bogglehead opinion first and foremost!

-----EDITING TO ADD questions that came up:

To answer a few of these questions, it is a 30ish hour a week job. She sets the hours but they will not change frequently. She will be using office equipment. There are no other benefits offered (retirement, health insurance, PTO, etc) whether shes paid as a contractor or w-2. The compensation rate will be the same regardless of which way she goes.

I realize she will be responsible for more payroll taxes, but with the tax advantaged nature of being a corporation outweigh that extra 6-7% she'll have to pay in payroll taxes?

Also a big motivator for going sub-s is that she can shelter 50k per year in taxes with a sep-ira
Last edited by JaxFLbh on Wed Oct 18, 2017 7:56 pm, edited 1 time in total.
rkhusky
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by rkhusky »

The IRS has guidance on the difference between employees and contractors:

https://www.irs.gov/businesses/small-bu ... r-employee
Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
TylerS7
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by TylerS7 »

I bought my dad's dental office earlier this year and he has been working for me as a contractor. He sets his hours and does work however he pleases, we have an agreed upon percentage of his collections that I pay him for the work done. I write a check every month for his collections to his corporation that he still has. We have a CPA that we work with that did the practice transition and set this up. I would start there with your questions! I believe the big benefit is his self employment taxes are lower (again, I would have a good relationship with a CPA you trust) and it saves me in payroll taxes. Because he's self employed he cannot be on the office retirement plan, I can't pay for his license, continuing education, health care, etc. It has worked out well, but I have to be honest that I leave the details to the accountant and I just write the check for the agreed upon percentage each month. Our situation is obviously going to be much different than your wife's, so I think talking to a CPA about the pros and cons in your particular situation would be the best course of action.
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dm200
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by dm200 »

l2yangop wrote: Wed Oct 18, 2017 10:24 am Hi all. I am hoping someone can point me in the right direction (or even maybe flat out answer it) on a question about working as a medical professional and being paid corp to crop. A local dental office wants to hire my dentist wife and pay her as a contractor. Apparently the owners have many offices and pay all their dentists that way. They would offer W-2 and make her an employee if she wishes, but they stressed the tax benefits of taking deductions and distributions at a lower rate.
I’m no CEO but I remember from business classes that there are certain criteria that must be met to allow one to be paid as a contractor under a sub-s. Is there any concern on her end legally about entering into this agreement?
She doesn’t currently have a sub-s corp set up for herself as she’s a W-2 employee at her current practice. What type of professional should we be seeking? A CPA, a lawyer, a tax attorney? A combination of those?
I like the idea of getting creative with taxes, expenses, and distributions but not the idea of getting audited or breaking laws. I have a lot to learn about this though and wanted to get a Bogglehead opinion first and foremost!
No experience/knowledge with medical/dental related work, but I know that there have been some crackdowns on folks that are clearly "employees" who had been paid as contractors. One area I am very familiar with is music folks at places of worship. [Not a musician, but am involved with place of worship finances]. From what I have seen, locally at least, such music folks (choir leaders, soloists, organists, pianists, cantors, etc.) who are paid used to commonly be paid as "contractors" because it was easier for the place of worship and was often favorable to the music person. A few years ago, because of the need to comply with the letter and sprit of the IRS rules, all such folks are now W2 part time employees. These music folks have very little flexibility in what they do or do not do. They are required to show up at such and such a time, do music for the service and cannot leave until it is all over. They may also be compensated for a defined time and schedult of choir practices.

One exception where the musician is not considered an employee is one time appearances, such as a concert or, say, a trumpet at some event.

In religious denominations that have a strong hierarchy, the area governing entity often issues such mandatory W-2 requirements.
Andyrunner
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Andyrunner »

Exactly correct about the IRS guidance. This isn't a whatever the business owner wants, it should be whatever his business attorney recommends.

My non legal expert guess, wife is using the owners tools (equipment, computers, etc), works at the owners office, and works the shifts/hours the owner requests. She is an employee.

I could be wrong but, it is saving the owner money not you, unless he is paying you more as a contractor vs employee. He doesn't have to pay all of the payroll taxes, but your wife will make up when she files as a contractor. Taxman will get his cut whether its from the owner or your wife.
fposte
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by fposte »

Is there a hygienist and office staff? Who is responsible for paying them?
Vanguard Fan 1367
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Vanguard Fan 1367 »

l2yangop wrote: Wed Oct 18, 2017 10:24 am Hi all. I am hoping someone can point me in the right direction (or even maybe flat out answer it) on a question about working as a medical professional and being paid corp to crop. A local dental office wants to hire my dentist wife and pay her as a contractor. Apparently the owners have many offices and pay all their dentists that way. They would offer W-2 and make her an employee if she wishes, but they stressed the tax benefits of taking deductions and distributions at a lower rate.

I’m no CEO but I remember from business classes that there are certain criteria that must be met to allow one to be paid as a contractor under a sub-s. Is there any concern on her end legally about entering into this agreement?

She doesn’t currently have a sub-s corp set up for herself as she’s a W-2 employee at her current practice. What type of professional should we be seeking? A CPA, a lawyer, a tax attorney? A combination of those?

I like the idea of getting creative with taxes, expenses, and distributions but not the idea of getting audited or breaking laws. I have a lot to learn about this though and wanted to get a Bogglehead opinion first and foremost!
I feel like the subcontractor issue could have a tough time surviving an audit. My son is in the automobile racing business and he is frustrated by folks that want to pay him as a subcontractor when he really is an employee. I would guess that your dentist boss would like enough control over you so that you are an employee. Of course your best bet is to consult a tax attorney or qualified accountant.

I did at a hygienist's insistence pay her as a subcontractor a long time ago. Later the IRS made me keep all but 5 dollars of her pay each day and send the rest to them because she became behind on her taxes. The IRS didn't give me any trouble about the subcontractor issue although I agree that she was and in my old age would not hire a hygienist as a subcontractor.

To finish the story the hygienist quit very soon after my IRS garnish letter because she didn't want to work in that situation and didn't stay long at all.
John Bogle: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
TylerS7
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by TylerS7 »

The link you supplied is one click away from defining an independent contractor: https://www.irs.gov/businesses/small-bu ... or-defined

I do agree with what others said, I think that in your wife's situation she would probably be more like an employee. In our case, my dad comes and goes as he pleases, I don't set his hours or how he wants to deliver treatment to his patients or run his appointments. I also pay him a higher percentage of his collections than any employee that I've seen because he is responsible for his own taxes, so keep that in mind. It would definitely be easier for your wife to just be a W-2 employee and let her boss deal with the payroll.
Perkunas
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Perkunas »

What are terms of compensation? Hourly/ % of billable / salary?

What is schedule and who controls? Is it consistent?

Could she work for another dental office at same time?

A dentist obviously is t going to carry a full exam room of equipment around with them but that doesn't rule out Indy contractor.

Working 9-5 Mon-Thurs (full time dentist, right?!) might indicate w2. But terminal degreed professionals aren't managed and controlled the same way as other "paraprofessionals". Will she get benefits? 40 hrs and benefits would tilt the scales one way. Part time or temporary / "let's see how things go" or ability to fill-in shifts at a competitors office would tilt the other way.
Spirit Rider
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Spirit Rider »

All of the above employee vs. Independent Contractor (IC) statements might generally be true for most ICs who should be classified as at will employees.

However, it is relatively easy to structure a contract for a professional to qualify as an IC under IRS guidance. You just frame Behavioral Control, Financial Control and Type of Relationship as that between a client and an IC. Medical and dental professionals are routinely properly paid as contractors. As previously said the equipment issue is a Red Herring in this case. An emergency Doctor is not going to be bringing an emergency room with him. All they need are their knowledge, skills and experience. All gained on their own and their own dime.

It is not the contractor who has to worry about any possible audit, it is the client. The only times I have seen any enforcement is have been against larger corporations and/or companies taking significant financial advantage of much lower wage people.

The key determination should be between a total compensation package factoring in all benefits including employer retirement plan contributions. If the contractual hourly rate is sufficiently higher than the equivalent W-2 hourly rate, it can be advantageous to be an independent contractor.
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JaxFLbh
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by JaxFLbh »

Spirit Rider wrote: Wed Oct 18, 2017 4:13 pm All of the above employee vs. Independent Contractor (IC) statements might generally be true for most ICs who should be classified as at will employees.

However, it is relatively easy to structure a contract for a professional to qualify as an IC under IRS guidance. You just frame Behavioral Control, Financial Control and Type of Relationship as that between a client and an IC. Medical and dental professionals are routinely properly paid as contractors. As previously said the equipment issue is a Red Herring in this case. An emergency Doctor is not going to be bringing an emergency room with him. All they need are their knowledge, skills and experience. All gained on their own and their own dime.

It is not the contractor who has to worry about any possible audit, it is the client. The only times I have seen any enforcement is have been against larger corporations and/or companies taking significant financial advantage of much lower wage people.

The key determination should be between a total compensation package factoring in all benefits including employer retirement plan contributions. If the contractual hourly rate is sufficiently higher than the equivalent W-2 hourly rate, it can be advantageous to be an independent contractor.
Perkunas wrote: Wed Oct 18, 2017 3:35 pm What are terms of compensation? Hourly/ % of billable / salary?

What is schedule and who controls? Is it consistent?

Could she work for another dental office at same time?

A dentist obviously is t going to carry a full exam room of equipment around with them but that doesn't rule out Indy contractor.

Working 9-5 Mon-Thurs (full time dentist, right?!) might indicate w2. But terminal degreed professionals aren't managed and controlled the same way as other "paraprofessionals". Will she get benefits? 40 hrs and benefits would tilt the scales one way. Part time or temporary / "let's see how things go" or ability to fill-in shifts at a competitors office would tilt the other way.
Thanks to everyone who has replied

To answer a few of these questions, it is a 30ish hour a week job. She sets the hours but they will not change frequently. She will be using office equipment. There are no other benefits offered (retirement, health insurance, PTO, etc) whether shes paid as a contractor or w-2. The compensation rate will be the same regardless of which way she goes.

I realize she will be responsible for more payroll taxes, but with the tax advantaged nature of being a corporation outweigh that extra 6-7% she'll have to pay in payroll taxes?

Also a big motivator for going sub-s is that she can shelter 50k per year in taxes with a sep-ira
Spirit Rider
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Spirit Rider »

l2yangop wrote: Wed Oct 18, 2017 7:46 pm The compensation rate will be the same regardless of which way she goes.
This is never a good sign. This indicates that the employer is trying to save money with this move.
I realize she will be responsible for more payroll taxes, but with the tax advantaged nature of being a corporation outweigh that extra 6-7% she'll have to pay in payroll taxes?
7.65%, unemployment insurance, workman's compensation insurance, etc...
Also a big motivator for going sub-s is that she can shelter 50k per year in taxes with a sep-ira
This is a myth. There is no difference in the amount of retirement contributions between an S-Corp and self-employment on the same net business profit. In fact since employer contributions for W-2 employees are based in W-2 compensation, she would have to maximize her salary in order to maximize the employer contribution.

She should really adopt a one-participant 401k rather than a SEP IRA. You can reach the 2017 $54K maximum annual addition on $144K of salary vs. $216K salary for the SEP IRA. Note: Since the employer contribution has to come from the S-Corps accounts, she would need ~$280K in net business profits to max out the SEP IRA. Whereas she would only need ~190K in net business profit with a one-participant 401k.

Finally, an S-Corp is not necessarily the best business entity type for her to use. It is dependent on the specific facts and circumstances of not only her business income and salary, but also your joint income and other factors.
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Pajamas
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Pajamas »

If they are "hiring" her (your word) but offering her a choice of being an employee or a contractor, with the only difference being in what the relationship is called and who pays the taxes, then something is wrong. You said all the other dentists are contractors, but that doesn't mean that they aren't really employees wrongly classified as contractors.

A lawyer specializing in employment could answer that question for you, and an accountant who works in that area could tell your wife which is most advantageous for her.
SCSurf
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by SCSurf »

This is 100% illegal. No if ands or buts. Even a temp dentist/hygienist/assistant working one single day in the office has to be paid as a W-2 employee. The IRS is auditing 1099 work very closely. I own my own dental practice. I would think twice about working for this corporation since one they are breaking this law and two what other laws are they breaking.
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JaxFLbh
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by JaxFLbh »

Spirit Rider wrote: Wed Oct 18, 2017 8:35 pm
l2yangop wrote: Wed Oct 18, 2017 7:46 pm The compensation rate will be the same regardless of which way she goes.
This is never a good sign. This indicates that the employer is trying to save money with this move.
I realize she will be responsible for more payroll taxes, but with the tax advantaged nature of being a corporation outweigh that extra 6-7% she'll have to pay in payroll taxes?
7.65%, unemployment insurance, workman's compensation insurance, etc...
Also a big motivator for going sub-s is that she can shelter 50k per year in taxes with a sep-ira
This is a myth. There is no difference in the amount of retirement contributions between an S-Corp and self-employment on the same net business profit. In fact since employer contributions for W-2 employees are based in W-2 compensation, she would have to maximize her salary in order to maximize the employer contribution.

She should really adopt a one-participant 401k rather than a SEP IRA. You can reach the 2017 $54K maximum annual addition on $144K of salary vs. $216K salary for the SEP IRA. Note: Since the employer contribution has to come from the S-Corps accounts, she would need ~$280K in net business profits to max out the SEP IRA. Whereas she would only need ~190K in net business profit with a one-participant 401k.

Finally, an S-Corp is not necessarily the best business entity type for her to use. It is dependent on the specific facts and circumstances of not only her business income and salary, but also your joint income and other factors.
I guess I meant getting paid as a contractor in general and having retirement options versus w-2 as the employer doesnt offer any retirement plans to employees
123
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by 123 »

So how does dental malpractice insurance work in this situation? If a dentist is a contractor/self-employed do they have to provide for it themselves or if they are an employee does the employer provide it? Or is the individual dentist always personally liable with regard to malpractice whether he/she is an employee or contractor/self-employed?
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JaxFLbh
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by JaxFLbh »

123 wrote: Wed Oct 18, 2017 9:42 pm So how does dental malpractice insurance work in this situation? If a dentist is a contractor/self-employed do they have to provide for it themselves or if they are an employee does the employer provide it? Or is the individual dentist always personally liable with regard to malpractice whether he/she is an employee or contractor/self-employed?
shes always paid her own even as w-2. I think thats industry standard but IDK for sure
Perkunas
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Perkunas »

SCSurf wrote: Wed Oct 18, 2017 9:08 pmThis is 100% illegal. No if ands or buts.
This is 100% why I wouldn't go to a dentist for advice about employment law. I am copy/pasting directly from the IRS website, which was already linked above in this thread. Note: I am not saying the OP (or anyone else, for that matter) is definitely a contractor, but merely pointing out that your very strong opinion is not based in fact.
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case.
https://www.irs.gov/businesses/small-bu ... or-defined
SCSurf
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by SCSurf »

I really wish you would listen to a dentist. An employer/employee relationship exists. The employer is a dental corporation and they are hiring an employee (the dentist) and directing what work and how it will be carried out. She must absolutely work as a W-2 employee.
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JaxFLbh
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by JaxFLbh »

SCSurf wrote: Thu Oct 19, 2017 8:22 am I really wish you would listen to a dentist. An employer/employee relationship exists. The employer is a dental corporation and they are hiring an employee (the dentist) and directing what work and how it will be carried out. She must absolutely work as a W-2 employee.
For what it's worth (and that may not be much)I've spoken with a couple CPA's informally after I posted this to just run this by them and they generally agree it could work either way (1099 or w-2) but that you must be careful not to pay yourself primarily in distributions that are taxed much lower than a salary, or you risk being audited.
TylerS7
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by TylerS7 »

I respectfully disagree with the dentist that says it's illegal 100% of the time, and I'm comfortable with how my practice is set up but that's off topic. In your wife's circumstance she sounds more like an employee. I'm assuming the following: she's signing a contract with them, they can fire her, they are dictating her salary, they are providing supplies, they provide the patients and she cannot leave with those patients, they run the billing, they supply the auxiliary staff, they run the appointment book, etc. Additionally, if her compensation and everything else is equal whether she is a W-2 or 1099, I would imagine you would want the employer to pay their half of the payroll taxes. My girlfriend is also a dentist for a different office with 6 docs, I don't think she was given this choice, but unless the compensation was drastically higher we would definitely have her choose to be an employee. Granted they also provide health insurance and a retirement plan. Everyone's circumstances are different though, I wish you the best!
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JaxFLbh
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by JaxFLbh »

TylerS7 wrote: Thu Oct 19, 2017 9:17 am I respectfully disagree with the dentist that says it's illegal 100% of the time, and I'm comfortable with how my practice is set up but that's off topic. In your wife's circumstance she sounds more like an employee. I'm assuming the following: she's signing a contract with them, they can fire her, they are dictating her salary, they are providing supplies, they provide the patients and she cannot leave with those patients, they run the billing, they supply the auxiliary staff, they run the appointment book, etc. Additionally, if her compensation and everything else is equal whether she is a W-2 or 1099, I would imagine you would want the employer to pay their half of the payroll taxes. My girlfriend is also a dentist for a different office with 6 docs, I don't think she was given this choice, but unless the compensation was drastically higher we would definitely have her choose to be an employee. Granted they also provide health insurance and a retirement plan. Everyone's circumstances are different though, I wish you the best!
Thank you and your points are all valid. I'd agree she probably SHOULD be classified as w-2 based on all the contributions here and reading the IRS guidelines. But given the option we might chose 1099 only because we can shelter a lot of cash via retirement options which a w-2 arrangement would not offer.
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Pajamas
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Pajamas »

l2yangop wrote: Thu Oct 19, 2017 9:57 am Thank you and your points are all valid. I'd agree she probably SHOULD be classified as w-2 based on all the contributions here and reading the IRS guidelines. But given the option we might chose 1099 only because we can shelter a lot of cash via retirement options which a w-2 arrangement would not offer.
What are the usual penalties for this type of tax fraud? Would your wife be at risk or only the employer?
rkhusky
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by rkhusky »

One indication that you are a contractor is if you have multiple customers. If your wife can arrange to work for multiple dental offices, that would help in an audit. The contract should be written such that your wife can perform the dental services any way she might want with only the end result specified.
Big Dog
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by Big Dog »

if she is working full time at the dental office and does not have her own patients (i.e., really just renting a chair), there is no question that she is a W2 employee.
But given the option we might chose 1099 only because we can shelter a lot of cash via retirement options which a w-2 arrangement would not offer.
Don't forget that she has to pay both sides of FICA,
ralph124cf
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Re: Office wants to pay dentist as contractor (sub-s). Any issues?

Post by ralph124cf »

If your wife has her own sub-S corporation or LLC, then her corporation is getting the payments from the dental office. She is not getting paid by the dental office. She is a W-2 employee of her own corporation, not of the existing dental office that wishes to contract for her services.

As far as the existing dental office is concerned, they have an independent contractor, and no tax reporting or extra paperwork, and yet your wife is still a completely legal employee of her own corporation, paying all required employment taxes, and supplying her own malpractice insurance.

Naturally, her corporation needs to charge a higher rate for her services than she would charge as a W-2 employee to compensate for the additional expense and paperwork hassle.

Ralph
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