Taxes for Nurse Practitioners: W2 Employee vs 1099 Contractor
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When working as registered nurses, people are often employees working for hospitals or private practices. They are paid as W2 employees with benefits. On the other hand, working as a nurse practitioner can be quite different. There is the option to continue working as a W2 employee or to work as a contractor.
As a W2 employee, the NP receives a salary or is paid hourly. As a contractor, the NP is paid as a 1099 sole proprietor. This generally means no benefits are provided and no taxes are deducted from their income.
NPs also have the option of being business owners and setting up their own practice. There are pros and cons of being paid as a W2 employee or being a 1099 contractor (self-employed). Some may prefer having benefits being a W2 employee, such as health insurance, whereas some prefer being a 1099 contractor, where the hourly pay tends to be higher.
The Benefits of Being an NP with W2 Income
An NP working as a W2 employee is paid a yearly salary or hourly with performance bonuses. Both federal and state income taxes are deducted at each pay period. Other taxes such as social security and Medicare are also automatically deducted.
A W2 employee can qualify for many benefits depending on the company. They have more job security since their employer has to follow employment laws. It also can qualify the NP for unemployment benefits in case they are laid off.
The NP can elect into individual or familial health insurance as an employee benefit. Insurance premiums tend to be more affordable as an employee because the employer covers half the cost of the premiums, so the individual fees are lower. Moreover, some employers provide other options such as life or disability insurance. These are offered at a discount or sometimes even for free.
Contributing to an employer-sponsored 401k plan is another benefit of being a W2 employee. For 2023, NPs can contribute up to $22,500 of their income into their 401k plan for retirement. Many companies may offer a traditional 401k, in which funds are contributed pre-tax, or a Roth 401k, where contributions are made with post-tax dollars.
Depending on the employer, additional match contributions to the 401k can be provided on top of the contribution made by the employee. These matches by the employer are made on a percentage basis such as 6 percent, up to a limit of total employee compensation.
Another savings option offered by employers is a Health Savings Account (HSA). This savings account allows the employee to set aside money on a pre-tax basis to pay for qualified medical expenses. NPs can only contribute to an HSA if they have a high-deductible health plan. This is usually an insurance plan that only covers preventative services before the deductible.
For 2023, individuals may contribute up to $3,850 per year to an HSA account, or $7,750 for a family. Some employers even contribute a small percentage of these maximums for the employee for free.
Similar to an HSA, employers can also offer Flexible Spending Accounts (FSA). When an NP has health insurance through their job, they can use their FSA to pay for healthcare costs such as deductibles and copayments. An FSA is owned by the employer, whereas the HSA is owned by the employee and is portable. Contributions made to an FSA and HSA are both tax-free.
Paid time off (PTO) is a very popular benefit for W2 employees. Depending on the company, the NP may receive several weeks of PTO per year. This does not include holidays (when the site is closed), or sick time. One drawback is that PTO typically is limited, and employers frown upon employees taking unpaid time off once they run out of PTO hours. Additionally, employees can receive paid leave benefits such as maternity leave or FMLA.
Working as an employee also can allow the NP to receive continuing education reimbursement from their employer. For example, the NP can attend a professional conference or take an online course for licensure requirements and be reimbursed by their employer. They may also receive reimbursement for license and certification renewal fees. Also, as a W2 employee, the NP is provided with malpractice insurance, which can save them thousands of dollars.
Potential Disadvantages of W2 Income
One major disadvantage of having W2 income is that the NP will only qualify for a few tax deductions. For instance, they cannot deduct any expenses for a W2 job, such as supplies or technology. Since NPs are high-income professionals, their tax burden may be high.
Another con is that employers consider a benefits package as part of the overall cost for the employee. This means that they may offer a lower salary to be able to additionally provide a large benefits package. Even though some benefits are optional, even if the NP does not utilize the benefit, they will not be compensated more for not using it. Thus, there may be limited opportunities for NPs to negotiate their salary as W2 employees.
Additional cons of working as a W2 employee include having a fixed schedule and less flexibility compared to working as a 1099 contractor. The W2 NP may be required to pick up specific shifts or work certain undesirable hours, including holidays. Being on call may also be an obligation for them.
The Benefits of Being an NP with 1099 Income
Working as a 1099 sole proprietor, NPs often earn more per hour than W2 employees. The reason is since they are not receiving benefits and have to pay self-employment taxes, they are compensated better. A 1099 nurse contractor is paid 10 to 20 percent more than a W2 employee. Thus, NPs who do not need benefits from an employer will commonly choose to work as a 1099 contractor so that they may increase their take-home pay.
An NP working as a sole proprietor or receiving 1099 income can still contribute to retirement accounts, although it may look different from being a W2 employee. In 2023, a self-employed person with no employees can open a Solo 401k and contribute a maximum of $66,000 annually. As the employee, the NP can contribute the same $22,500 they would to a standard employer-offered 401k. Additionally, in their capacity as also being the employer, they can make an additional contribution of up to 25 percent of their annual compensation.
Other options for retirement contribution plans for NPs working as 1099 sole proprietors include SEP IRAs and Simple IRAs. Contributions to these funds are tax deductible and may depend if the NP is the sole worker or if they have other employees working under them.
A major advantage of earning 1099 income is that the NP can qualify for many tax deductions that they normally would not qualify for if they only had W2 income. These deductions can often add up and lead to more itemized deductions than the standard deduction.
Examples of expenses that the NP can deduct as a sole proprietor include meal expenses, cell phone costs, relevant car expenses, mileage, health insurance premiums, work supplies, home office deduction, travel, and more. These deductions frequently offset the added expense of self-employed NPs having to pay self-employment taxes. As a result, the 1099 NP can save thousands of dollars in taxes each year.
The flexibility and autonomy of being a 1099 worker also appeal to many NPs. They can pick and choose who they work with and when. They can often make their own hours and do not have to follow the exact hours of an institution. They tend to have more control over how they work.
Potential Disadvantages of 1099 Income
Since a 1099 worker is not an employee, they do not receive any benefits. Although it is possible to purchase private health insurance, the premiums tend to be higher than when purchasing it through an employer. Fortunately, the Affordable Care Act, established in 2010, has increased options and qualifications for private insurance. It has made affordable health insurance more available at the state level.
Taxes are not withheld by the payer for 1099 earnings. As a sole proprietor, the NP is responsible for estimating their taxes and paying the self-employment tax in addition to their income tax. This tax burden can be negative for many NPs because they may need to pay quarterly taxes on their income and hire an accountant to help with the calculations. The self-employment tax is higher for 1099 workers because normally, the employer would split the rate with the employee. But since the NP is self-employed, they would be responsible for the full payment.
Working as a 1099 contractor, no PTO is provided. This means if the NP does not work, they do not get paid. So, if the site is closed for a holiday, the NP will not receive any compensation. One advantage of this is that the NP can take as much unpaid time off as they please.
NPs working as 1099 contractors may have to carry their own malpractice insurance. This can be expensive and cost the NP several thousands of dollars per year. However, if the NP works through an agency, the agency may provide malpractice insurance. This is because the agency is taking a cut of the hourly pay that the NP would be earning through them, even though they are being paid as a 1099 contractor.
Conclusion: W2 or 1099?
As demonstrated above, working either as a W2 employee or as a 1099 independent contractor has many advantages and disadvantages. It all depends on the NP’s individual situation and priorities. As a W2 employee, the NP will receive many benefits and have more job security. As a 1099 contractor, the NP will have a higher take-home pay and experience more flexibility.
Sophia Khawly, MSNWriter
Sophia Khawly is a traveling nurse practitioner from Miami, Florida. She has been a nurse for 14 years and has worked in nine different states. She likes to travel in her spare time and has visited over 40 countries.
Being a traveling nurse practitioner allows her to combine her love of learning, travel, and serving others. Learn more about Sophia at www.travelingNP.com.