Tax Savings For Physicians Working From Home, Becoming A Statutory Employee
I love finding little loopholes that benefit me financially. I recently came across the Statutory Employee term when I was looking at my W2 in excessive detail. Doctors who practice in a clinic setting likely won’t benefit from this but one can make the case of a statutory employee physician. This would have major tax savings for the doc.
Here is a screenshot of one of my year-end W2’s:
The statutory employee isn’t checked, of course, because there are certain criteria which you must meet in order to qualify as a statutory employee. In this post I would like to talk about how this could immensely benefit a physician working from home, such as myself.
- By qualifying for this classification the physician gets to have 1/2 of their payroll taxes paid by their employer in line with a traditional W2 employee.
- They also get to deduct their work expenses on Schedule C instead of Schedule A. Schedule C isn’t subject to the 2% AGI threshold, offering much higher tax savings.
- Mainly Physicians who work from home under the control of their employer would qualify for this status.
- If you think you qualify, go ahead and check the box. Run it by HR for good measure but don’t expect much help, there.
Common Law Employee vs. Independent Contractor
I use the term common law employee to refer to any traditional W2 employee who is hired by their employer, gets employment benefits such as health insurance, and retirement benefits.
Most of us are common law employees and are paid on a W2 form. A few of us are partners and get K1 distributions and others are independent contractors. The advantage to the latter is the amazing opportunity to write off damn near everything – even that auto payment.
Common Law Employee (traditional employee)
When I was working for Kaiser Permanente I was a W2 employee, a common law employee. I got health insurance, life insurance, disability insurance, a pension, a 401k and other retirement benefits. I got sick days, educational leave and paid holidays.
It is incredibly advantageous, in some ways, to be an employee because of all the benefits that medical groups extend to physicians. They know we are behind on the 8-ball starting out and need all the help we can get.
Specifically, because I am employed, my employer will pay half of my payroll taxes, called FICA tax. I am responsible for around 7.65% and my employer for the other 7.65% – 15.3% in total.
- 6.2% goes towards social security
- 1.45% towards medicare
- Total = 7.65%
On $200k of income, the total payroll tax owed would be $30,600!
Common law employees can’t deduct too much as far as work related expenses – that’s why they are employees, meaning, someone else has taken on the burden of supplying them with what they need to perform the work they were hired to do.
The independent contractor is someone who is independent of their employer. They still receive their wages from that employer on a 1099 form but are either supplying the majority of their own supplies to perform the work or have complete independence to practice any which way they wish and work whenever they choose – without a defined contract.
This person has the disadvantage of being responsible for the entirety of payroll taxes – the entire 15.3%. These are referred to as SE Tax (self-employment tax), which is exactly the same as FICA taxes but because of semantics it’s called SE Tax.
The independent contracting physician, however, would have the advantage of being able to deduct their expenses on Schedule C which allows for a 1-to-1 deduction. If they spent $2,000 for their licenses/material/software then they can deduct that entire amount. We will get into why this is important.
Common Law Employee Vs. Statutory Employee
Here is where I want to get into the difference between being labeled as commoner employee versus a statutory employee. Surprisingly, there is so little information on this out there on the net. I definitely had to dig to come up with the right information.
In order to be taxed like a statutory employee all you would have to do is tick the box on the W2 form accordingly. Of course, the IRS would investigate this. It might be wise to send them a letter explaining why you think you’re doing this – we’ll get into that more later.
The IRS website has a small section on this topic and though it’s concise, it’s packed with essential details. There have been many interpretations of each section. John Zimmerman & Tom McCaslin published a thorough white paper on this topic and provided commentary on the various cases brought before the Tax Courts – some were able to successfully make their point, others were unable to justify their statutory status.
As it relates to the physician, you need to be working from home for an employer. You cannot have any ownership in that business and they must be the ones who provide you with the technology and patient leads to perform your work. This happens to apply beautifully to a telemedicine physician.
Meeting the criteria above would mean that you could get your employee benefits, save on payroll taxes and get maximum deductions for work related expenses.
The Home Worker Clause
There are 4 main ways you can be considered a statutory employee:
- agent/commission driver
- full-time insurance salesperson
- traveling salesperson
- home worker
The last one, the home worker, is the one that physicians can qualify for. Since doctors are always eager to find ways to save on taxes, here it is! I call this a loophole because this law wasn’t designed for physicians doing telemedicine. I doubt that governing bodies in the 1950’s had any idea we were going be treating patients over Vidyo.
Tax Benefits Of Statutory Employee
I discussed this already but I see 3 major ways that a statutory employee status can help you save money. There are other subtle ways but these are the main factors.
1. Payroll taxes
You pay only half of the social security taxes and medicare taxes as an employee. I should add that if you are an independent contractor then you can deduct the employer portion on your taxes – I’ll get into that more in another post.
2. Employee benefits
As an employee, you still would get the benefit of possible healthcare, retirement benefits, disability insurance, and life insurance often offered by most employers who hire physicians. We should mention workemn’s comp here as well.
3. Estimated taxes
I consider this a saving because I found out through my HR department that an incredible number of physicians end up falling behind on taxes and have their wages garnished. If they aren’t employees and either partners or independent contractors, they don’t pay adequately towards estimated taxes.
As an employee, your job deducts your federal and state taxes automatically so there is never an issue of missing these estimated tax payments.
As a common law employee, you must use this form (Schedule A, pdf) in order to calculate your itemized deductions. As a physician this might be a few work related expenses such as meals while traveling between clinics, specific travel expenses, professional dues, etc.
For the portion of Schedule A that’s labeled “Job Expenses”, you first calculate all your work related expenses and then deduct 2% of your AGI from this sum. If your AGI (adjusted gross income) is $350k then you have to subtract $7,000 from your work expenses – often, this won’t leave you with much.
Finally, because you are a statutory employee, you get to take advantage of some serious tax benefits in form of expense deductions. Instead of using Schedule A, subject to that 2% AGI loss, you can deduct every and all work related expense dollar-for-dollar on Schedule C (pdf).
If you had car or truck expenses, include them here. If you had home business related expenses, deduct those as well.
Action Points For Physicians
There is a checkbox which needs to be checked on your W2, indicating that you are a statutory employee. Ideally, your employee would do this but you can check it as well.
The main question is whether the IRS will consider you to be a statutory employee based on the work you do for your employer. It is likely something that will get audited, whether by letter or more officially, in person. That’s why it would be good to send a letter of explanation along with your taxes to the IRS to outline why you think you should qualify for this.
The worst case scenario would be that your work expenses would no longer be fully deductible against your income on a Schedule C and you’d have to redo the math on a Schedule A and pay any back taxes. Not a big deal at all. Never fear the IRS.
It would be ideal to run this by your HR department. They likely won’t be familiar with this designation but could consult their legal team.
Based on my research, you should be able to easily qualify for this and there wouldn’t be much of an argument the IRS could pose.