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Episode 87- Dental Associate Agreements from an Associate’s Perspective: “W-2” vs. “1099”

In this fourth episode of Dental Associate Agreements from an Associate’s Perspective Season, the Dental Amigos discuss the difference between being an employee and an independent contractor, as well as the risks and benefits of both.

Robert H. Montgomery III, Esq. and Paul Goodman

Rob and Paul start off by touching on what it means to be treated as an employee, or in other words, a “W-2” and what it means to be treated as an independent contractor, which is often referred to as a “1099.” They also discuss what an associate should look for and/or expect when entering into each type of arrangement. The Amigos speak in general terms about properly handling taxes whether you are a W-2 or 1099 and how to be fully prepared when it comes time for tax season. In addition, the Amigos discuss the fact that the government has certain criteria and full control over whether an individual is considered a W-2 or 1099, as well as the potential ramifications which may come along with being misclassified. Lastly, Rob and Paul explain additional, so-called “risks” which go along with being a 1099 and how having a trusted CPA by your side when considering taking a position as an independent contractor may be just as important as getting your associate agreement reviewed by an attorney prior to taking any position.

See the full transcription of the episode below:

Bumper  0:00  

Welcome to the dental amigos podcast with Dr. Paul Goodman and attorney Rob Montgomery, taking you behind the scenes of the dental business world. All the things you didn't learn in dental school, but wish you had. Rob is not a dentist and Paul is not a lawyer. But since Rob is a lawyer, we need to tell you that this podcast is for informational purposes only and shouldn't be considered legal advice. listening to this podcast does not and will not create an attorney client relationship. As is always the case, you should formally consult with legal counsel before proceeding with any legal matter. Learn more about the dental amigos at WWW dot the dental And now here are the dental amigos.

Rob Montgomery  0:39  

Hello, everyone. I'm Rob Montgomery and I'm joined as always by the head Nacho himself, Dr. Paul Goodman. Great

Paul Goodman  0:44  

to be talking Rob.

Rob Montgomery  0:45  

It's good to see you, Paul, and welcome everyone to another episode of the dental amigos Podcast. Today we are continuing on our season one of episodes concerning associate agreements generally from the associates perspective. However, as the show notes indicate, previous episodes, there's a lot of general interest content here. So even if you're not an associate or looking for an associate ship job, there are things that you'll be able to take away and I think and and apply to other aspects of your your dental, business and professional world. So as the intro says, you know that this is not legal advice, right? I'm not a dentist, you're not a lawyer. Neither of us are CPAs so we're gonna drift a little bit into the accounting place

Paul Goodman  1:34  

CPA on TV, I always want to play a lawyer on TV you know, Tom Cruise, remember, it's the kind of CPAs out there who are you know, you're they never start a movie, do they?

Rob Montgomery  1:41  

I don't think so. I hate to say this, because there are a lot of CPAs that I like, relationship people, they're just they don't make your movies or TV show. They definitely do they definitely do. You know, like the sexy you know, Trial Lawyer stuff and bucks. Nobody's ever writing about the audit. Right? Yeah, that won't be collaborate on the audit. And all this sort of nefarious things were going on behind the scenes, I guess, like the Enron days, like that was kind of like the CPA, a little bit of a, of a spotlight there when when that controversy was going on.

Paul Goodman  2:13  

It started out as an audit, but it ended up not being about an audit at all, right? Just accounting.

Rob Montgomery  2:19  

So today, you know, as we get back to topic, we're going to talk about 1099 versus W two, being an independent contractor, versus an employee, which is a subject that comes up a lot, I see it on message boards, I see it on Facebook groups, a conversation that I have, in my, my associate lawyers have a lot with, with clients, trying to help them navigate what the distinctions are. There are trade offs, there are risks, there are rewards. I think there are a lot of more risks and a lot of circumstances than rewards. But we're going to talk about what that means, what the ramifications are, of being treated one way or another, and some tax planning considerations briefly about being treated like an independent contractor. So when somebody says, you know, I am an employee, and then they say a W two, what that means is as an employee, you are receiving a W two tax form at the end of the year, in which your your salary and everything was paid to you gets reported to the government. And as a W two or an employee, the employer, you work for ducks, payroll tax, payroll withholding. So we're talking about Social Security, Medicare, you know, those two together refer to FICA, federal withholding. So this is a portion of the taxes, your tax liability that are ultimately going to have to be paid. And then there are state and local taxes that get deducted. And then some other sometimes some places have unemployment tax. So as an employee, all that stuff gets deducted. So you'll get this w two as an employee that says that your gross pay, which would be maybe your 35% of your $300,000 of collections is x. And then from that we deducted all these other things which the employer has paid to the government, and some things you match. So when you look at the W two, it'll show that the Social Security was deducted from your checkups 6.2% and that the employer match that 6.2% and pay that to the government. Yeah, same thing with Medicare, and there's some nuances to that, but generally, that's what we're talking about. An independent contractor or a 1099. In that situation, none of those taxes are deducted. So at the end of the year, you get a tax document from the practice. Notice I didn't say employer PA, right, because that's a distinction that says how much money you got. And so if you get 30% of collections and you had whatever $500,000 of collections that year, you were received checks $450,000 from the practice over the course of the year, you get a 1099 for $150,000. And then it's up to you to pay all the taxes and follow all the rules. Now, great explanation,

Paul Goodman  5:27  

Rob, I'll just jump in. And thank you. I think, you know, just add some insight for me as hearing this. So, you know, I was at W two jobs, you know, I worked at companies growing up, I made eight bucks an hour, these just w two, the only thing I ever worried about was was I gonna like, put the withholdings wrong, I'd ask my parents, like you don't have any dependents. Right? You know, you just have to do that one thing in the beginning of being hired as a guard and you're set. So it seems like as a W two, your, your life as the employee is very simplistic right? than it sounds like from the other side, if you're a business, providing 1090 nines, it makes your life pretty simplistic, because you just say, Hey, I paid Rob Montgomery $150,000. I know that's not the end of it with risk and liability. But just from a processing standpoint, you know, for associates listening, if you're a W two, your tax life is fairly simplistic and what you have to do with your the money is taken away from you before you're allowed to do anything with it. Right? As you deepen this conversation as 1099. That's not the case. Yeah, that's correct, right, you're giving basically at the end of the day, 10 at night, you're giving, you're given more money to hold than you are supposed to keep.

Rob Montgomery  6:35  

Right. Right. And that that'll that'll be our finale, which is the tax planning that goes along with that. So it's important to realize, though, that it's not up to the practice, to decide whether or not you are an independent contractor or an employee, the IRS, and local tax authorities have guidelines for when somebody should be treated like an independent contractor versus an employee. And, you know, obviously, the government is in the business of collecting money, right. So they don't just leave it to the dentist to say, Hey, I'm the practice owner, I'll determine whether or not this person is going to pay taxes, or pay Social Security or Medicare on these amounts. So these tests really go towards control. If somebody has is told when they have to work, where they have to work, if they're provided with all the supplies that they need, if they are followed, required to follow certain protocols, they're basically within the control of the practice. They're an employee. The the easy example of an independent contractor is the IT guy, you know, yeah, the IT guy comes in, when you have a problem with your network. And he fixes it, he sends you a bill, you pay him, he's not an employee, he's an independent contractor. And at the end of the year, guys, like your IT guy, your lawyer, your accountant, you send them a 1099 and say, here's what we paid you this year, you're not our employee, you're just somebody that we hired to help us out. Thanks. Can

Paul Goodman  8:06  

I ask a question? And maybe we don't have the ability to phone a friend, CPA. So but you probably know, as a business owner, because you know, this is the time during the recording this podcast, we're getting a lot of 1099 I'm getting a lot of stuff, right for dental nachos. You know, when I pay your dental lawyer for legal service, and your dental lawyers have business, you know, do I paid a business is the 1099 come into play when I'm paying an individual or it also comes in play for a business I'm just more curious

Rob Montgomery  8:34  

comes into play both got to know that, I will say that, my understanding is that if you are paying, treating someone like a 1099, like an independent contractor, if you are paying them to an EIN, a business entity as opposed to an individual, that generally gives you a little extra protection, I am told that I do not know that for a fact. But that disclaimer out there. But it's worse generally, when we're going to get to the next step, which is talking about scrutinizing these things. So, but it doesn't matter. If they're an independent contractor as an entity or an individual, it's the same thing. They get a 1099

Paul Goodman  9:15  

It's basically a trail of the money. It's saying, Hey, we paid dental nachos $3,800 preceded the 600. Right, right. So 30 100 Now they were saying it's dental nachos, John them through, pay the rest, so they better put that into their bank account for us to track exactly as

Rob Montgomery  9:29  

opposed to if you add an employee, you're going to take out what would be the the required IRS amount of tax withholding from each check Whatever 20% 30% Whatever the the tax bracket is, and they're paying that to the government. And then when you go to file your tax returns, you say, Well, my employer has paid this through my w two. So how much do I owe or how much do I get back but somebody has been paying those taxes to quickly on a monthly basis for you to the government.

Paul Goodman  10:02  

For a quick question, Robert, like, what is a good example of an independent contractor in life? Not in dentistry? Is it like the plumber that comes to your house?

Rob Montgomery  10:11  

I think I think the IT guy, IT guy. In the dental world, you know, I'll tell you one, that's probably a little bit more obvious where you have maybe the the column, the traveling oral surgeon or the traveling orthodontist that is in a different office every day. They come in, they treat the patients, they bring their own staff, they bring their supplies, their equipment, and they are truly free agents, right? You just say this day LMS is here. It's LMS day, I know they're doing their thing. And, you know, while we're not telling them how to do their thing, they do it they treat the patients and in the judgment,

Paul Goodman  10:48  

and it might not be totally fair question, but in my experience, it seems like general dentist often or not 1099 as frequently as specialist, is that accurate? It's

Rob Montgomery  11:00  

correct. I mean, they certainly I don't think they fit the true classification, either. I mean, if you are a general dentist, working in a general dentistry practice, I think it's almost impossible for you to be an independent contractor. I mean, you're doing the same. This is part of the business, you know, when you pay the the IT guy, or the practice consultant, or the lawyer, the CPA, that's not core to your business of providing general dentistry to your patients. When you hire a general dentist to take patients and treat them during the hours that you tell them they have to in the way they have to and you give them the assistant, the hygienist and all the equipment and all the supplies? Sure seems like they're an employee. A lot of times people get hung up on the fact that well, if somebody works part time, and they work for multiple practices, that makes them an independent contractor. Now, that doesn't that makes them a part time employee. There is like that other characterization. A lot of times people look at it very myopically that, hey, you're a 1099. You know, you're full time you're an employee, you're part time, you're 1099 right now, now there's part time employee, right? That's the thing too. And so you have to understand that there are there potential ramifications for somebody being, quote, unquote, misclassified. So if you have somebody that truly is not an independent contractor, they don't meet the test of the IRS to be deemed to be an independent contractor, they're a misclassified employee, there really should be an employee, but there'd be misclassified as an independent contractor, there can be liability for that. The the federal government wants to collect their social security and their Medicare. The local state unemployment Board wants to get contributions into that. But then also, you have to be careful, if there is a job, workplace injury, or workers compensation insurance will kick in. And you're an independent contractor who's not been covered by the same kind of insurance coverage that employees get. So with all of this, the government can come in and assess fines, interest, penalties, and I will tell you any kind of tax situation where you owe the government money, and it goes back a number of years, when you look at the numbers of what those what the federal penalties, and the fines and the interest are like that with that number that really snowballs in a hurry, you know, it's not, it does not appreciate as quickly as your bank account accrues interest and benefit, it is a number that can double in the in the matter of a few short years. So you know, not being treated, right? While it seems like in a short term, like hey, don't worry about it, I'm just going to, you know, skirt the law a little bit here and try to save a few bucks, that can come back to haunt you. Now, typically, that is going to be a liability of the practice. Right? So the practice is the one that's responsible for classifying you, giving you a W two withholding taxes. This is where this comes in as a problem for associates. Many, I almost might say most Paul, associate agreements where we see people are being paid as a 1099 will have a provision in there that will say that the associate agrees to indemnify means you're the insurer of the practice for any fines, penalties or interest arising out of the misclassification of this of this associate as an independent contractor when they should have been an employee. And what that means is, even though the practice is responsible for paying this if the government comes after them, you've agreed in that contract that the practice can now come back after you gotcha, which is you know, it's not that cool to keep for,

Paul Goodman  14:46  

for associates to be aware of this is something you've seen happen.

Rob Montgomery  14:50  

Absolutely. Yeah, absolutely. And so, and it's the practices responsibility, and especially we see situations sometimes where, in the course of a prac This transition, a seller insists on being treated like a 1099. And in that situation, we say, Hey, if you want to be a 1099, that's cool. But you got to cover us for this thing. This wasn't our idea, right? This is your idea. In the context of the we'll call it the employer or the practice in the associate. If it's the practices idea to do it this way, why should the associate be responsible for the consequences of that nefarious decision? Right. So looking for those provisions in the agreement, making sure that you're not on the hook for that. And it can be a significant liability. I think one of the traps that people fall into and Associates fall into, they think, Well, if I am an independent contractor, I can put all my expenses through my business. Not really, I mean, that doesn't mean that all of a sudden, because you're an independent contractor, you've got this business entity that you can write off your car, your all your phone trips, you know, maybe it takes some see, especially

Paul Goodman  15:57  

to getting the right people on your team and getting a good accountant that right through this because you may have a fun time writing stuff off. And your accountant might say, these are not legitimate write offs tacked on at the end of the year. So just like getting your employment agreement reviewed by an attorney before you sign it. This sounds like a good ounce of prevention type of thing. Yeah, like,

Rob Montgomery  16:18  

yeah, if you're if you're doing a 1099 situation, you need to have an accountant teed up for a lot of reasons. We'll talk about one in a minute. The other thing, the other sort of, we'll say, you know, urban myth, when it comes to independent contractor arrangements, if none of these taxes, none of this flake of Social Security, Medicare stuff is being deducted. As an independent contractor, however, as an independent contractor, you are going to have what's known as self employment tax, which the self employment tax amounts to having to pay the employers contribution, and the employees contribution of Social Security and Medicare. So right away, that's about 15%, on the first 100, and I forgot the limit is now 130 or so $1,000, that you are going to give up as the Associate right off the bat. So, you know, you know, there's only so many expenses that you can put through a business that are legitimate, they're going to be able to offset that. So a lot of times I think that's a huge misconception, like, hey, it's better for everybody. Yeah, not really. Yeah, exactly. And no, finally, too with that, you as an independent contractor typically or not, when I'm typically you're not entitled to all the fringe benefits that employees may have. So if there's a health insurance plan, or a retirement plan, and all that other stuff, you're not going to be able to participate in that because you're just like the IT guy, right, you're not you're not an employee. And so, kind of wrap it up with like the last issue, and this is really, to your point, Paul, where where you need the Hollywood CPA to come in and help you is tax planning. Yeah. So as a W two, as we said, you know, an employee, your employer is taking money out of your check, and paying it to the government as a pre payment towards your income taxes. If at the end of the year, you get your 100 in whatever, $50,000 1099 Because that's all the money you got. You're going to owe the government. I don't know, you know, what, $42,000 of taxes or more, I'm probably not doing good math here. But a big chunk of change, like that money's got to come from somewhere how to plan for that. Yeah, absolutely. And so this is where working with a CPA is important. How much money should you be setting aside each check to cover these taxes? Because, you know, it's not like, Okay, I took a groovy trip to Jamaica. I've leased a BMW. And look at this, I'm this living large, and then all of a sudden, I got this giant tax bill, where's the money gonna come from? And we've seen over the years where young dentists have wanted to buy practices, and they haven't been able to get financing because they've got these tax liens on time.

Paul Goodman  18:55  

Yeah. That's why I think it's just your what you've shared here. so valuable, you know, to go into with eyes wide open as an associate, and you know, sometimes not allow that. Not allowed. And this is how we've always done it type of stuff to rule roll over, right? So people say to me, I say, Well, how did you agree to this? They go, well, the owner said, This is how we do it for everybody else. Did you talk to us? No. And I understand it's tough when you're in those scenarios. That's why, you know, make the your advisors the bad guy. Sometimes I did that Mike and sometimes I tell a patient, which is not a lie. Our accountant says we can't extend credit to you for 24 months. Pretty kind of true. But he he would say of course the accountant that you can't see right now he's told me I can't take $10 a month for your care so say my accountant attorney to advise me that this situation here's not one that's favorable. Let's get one that's favorable. Yeah. You know, and then I think that's just valuable ways to learn some. I like telling helping dentists talk to patients help associates know how to talk to them owners.

Rob Montgomery  19:50  

Yeah, and that can be a tricky thing. I mean, you're definitely swimming against the stream. Once you've got this like momentum of like, that mentality drives me crazy. Obviously, Paul, you know, where you have the such ration were like, this is the way we've always done it. This is the right way, this is the way everybody does it like no, not necessarily. I only know how these people make their statements know that that's the case, right? You know, because many dentists are the only one on the island. Right? Right. And so maybe a couple of their friends did it that way. But it doesn't make it right. And it can be a difficult thing to kind of buck the tide there. You know, and you got all this momentum saying, Don't worry about it, don't worry about it, you need a job, you know, you really want the job. And this is where one of those things, we talked about contractual awareness. Maybe you can try to negotiate this, write up some things of it, maybe you can say I don't want to be an independent contractor, I want to be an employee. But maybe they'll say no, but even though you may not have been able to negotiate a change in the structure of this arrangement, you at least know that this is what you're going to have to do at the end of the year. And you can plan accordingly. And this is, this is one of the expressions of contractual awareness where knowing what you need to do and when you need to do it. Even if it doesn't, it doesn't mean that necessarily you're gonna go to hammer out some protracted negotiation on all these things with your employer, though, the indemnification thing is something that needs to be certainly checked into. But the rest of it is just knowing you know what you're going to be expected to do and obligated to do and plan for it accordingly. So you don't get blindsided by the $45,000.

Paul Goodman  21:20  

treatment plan. And dentists say it's a treatment plan for your taxes. You got to treat and plan your own finances for your own taxes if you're in that scenario.

Rob Montgomery  21:26  

That's it. That's that's the bullet for that's the clip for our promo for this for this episode. Right there, Paul. So thanks, everybody, for listening. Thanks, Paul for taking the time and be careful when you look at that w two versus 1099.

Paul Goodman  21:40  

Great points. Rob. Thanks.

Bumper  21:41  

Thanks for listening to another great podcast with the dental amigos. And don't forget to tune in next time to have the dental business demystified. If you're looking for more information about today's podcast, you can find it on the dental If you're looking for Paul, you can find Paul at Dr. Paul And if you're looking for Rob You can find him at your dental This podcast has been sponsored by Orange Line Media Group. Helping dentists and other professionals create content people love find out how we can help you take your business to the next level at WWW dot Orange Line Till next time

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