How to Transition from W-2 to 1099 Contractor as a Healthcare Provider
The current healthcare landscape is transitioning away from the traditional employment setup. No longer is it feasible to remain in a good job for an entire career. One with good benefits and a pension.
Over the past few decades, employers moved away from the pension system. No retention bonus. Minimal salary increases to mirror longevity. Without increasing the overall compensation package, there is less benefit to remaining with a single employer for a career.
Many new grads have the opportunity to start a job with the same compensation as veterans. A hefty sign-on bonus and relocation package covers the salary gap.
We could discuss at length whether new grads should earn the same as veterans when their billables and responsibilities are the same.
There are numerous studies reporting employees who change jobs every 2 years can increase lifetime earnings by 50%. That’s not insignificant. And that doesn’t just apply to healthcare.
The appeal of independent contracting is clear – higher earning potential and increased flexibility.
The transition from W-2 to any 1099 contractor work comes with new responsibilities and complexities. If you are looking for a guide out of W-2 work, this is it.
Differences between W-2 and 1099
Before diving in, it’s crucial to understand what sets these two employment structures apart…
W-2
W-2 refers to the IRS tax form filed by the employer. Employees fill out a W-4. As a W-2 employee, your employer sets up a benefits package. This includes a retirement account (commonly 401(k)), insurance coverages, and paid time off. Benefit packages can be quite expensive to replace. Your employer also withholds taxes from your paycheck, making the arrangement quite simple on your end.
1099
1099 contractors are self-employed. They contract to provide a service. 1099 refers to the tax form filed to the IRS to report income from services rendered. Usually a 1099-NEC or 1099-MISC.
There are a couple of options here – sole proprietors and Limited Liability Companies (LLCs). The differences come down to asset protection.
In both instances, you are fully responsible for supplying your own benefits and managing your taxes. Business expenses also become deductible. As a contractor, you don’t intend to work your entire career at a single gig.
Let’s be clear of one concept…1099 is a tax designation. 1099 contractors and locums are not synonymous. The standard 1099 contractor is treated almost like an employee. There is flexibility, but not nearly to the degree of a 1099 locum. Pros and cons of each.
Major Differences
Taxes are the most significant difference. Filing taxes as a W-2 employee is easy. Taxes are withheld from your paycheck. Your employer sends the tax documents at the end of the year. Transfer numbers to the appropriate line on your tax forms. Done.
1099 contractors are responsible for federal, state, and FICA taxes. It’s commonly recommended to withhold 25-30% of earnings in a separate account to ensure adequate funds to cover the tax bill.
I’m a bit conservative with my withholdings. I pay FICA taxes monthly. I pay federal and state taxes quarterly. After the quarter ends, I then take a distribution.
Benefits are important. Packages vary by employer. My first and only permanent CRNA job was a cash-heavy contract. I had solid health insurance, a 3% 401(k) match, and malpractice, but no PTO, sick leave, or additional insurance coverage options.
To calculate the equivalent W-2 to 1099 wage, it’s important to factor in benefits. It’s a matter of putting pen to paper.
Autonomy is different. The standard 1099 community likely has more flexibility regarding time off than a W-2 employee. Locums have the ultimate flexibility, but also greater unpredictability. This could be an entry all its own.
Great news, I just wrote a piece on this. I discuss the financial consideration, travel options, personal influences, logistical issues, and more!
Here are condensed points to consider:
What level of income do you desire?
What are you willing to tolerate for said income?
Can you handle job instability?
What are your travel constraints?
What do you want your work-life balance to be?
Are you willing to tolerate logistical headaches?
Steps to Transition
Personal financial preparation is key. Due to work instability, especially as a locum, it’s crucial to have a 6-month emergency fund. Plan for the worst.
Budget for variable income. Variability week to week and month to month. I negotiate guaranteed hours in my contracts. Typically, 40 hours per week with a 30-day out. That means I have a set income for the next 30 days on a rolling calendar.
My variability comes in the form of call. If I work 15 days of call versus 5 days of call, that’s a big difference. If I put in callback hours versus sleep through the night, that’s a big difference.
Variability might be $0 for a week off, $7,500 for a partial week, or $20,000+ for a heavy week with call.
Negotiate well and look for an average weekly income. I wrote a post, Locum CRNA Income and Expenses 2024, regarding additional details to locum income.
Plan for taxes. Seriously, set aside 25-30% (or more) of gross income for taxes. Don’t be that person who increases their cost of living, spends everything, and is staring down a $100,000 tax bill come March/April.
Taxes are real. The cost of earning money. For those who say high earners don’t pay their fair share, I beg to differ. Earned income problems…
Self-Employment Setup
Sole proprietorship is the easiest. You and your business are the same. Basically, claim gross income minus business expenses, then file your numbers on a personal tax return. I believe this is Schedule C on Form 1040.
Limited Liability Companies (LLC) are common in the CRNA community. Great for segregating personal and company assets. There are many guides to setting up an LLC or PLLC online. There are often state dependent rules as to setting up an LLC.
To ensure the paperwork was done correctly, I had an attorney setup my first LLC. I simply asked for a single entity LLC and paid $625. Done. Long story on why I didn’t set it up myself, but difficulty wasn’t the barrier. Fees are state-dependent, but most can be set up for less than $300 and have a small annual filing fee.
You may hear the term S-Corporation or S-Corp. This is a tax filing and it’s what I use. LLC is the entity. S-Corp is the tax status.
My Setup
I have an LLC that files as an S-Corp. I own 100% of the company. Mrs. TFC is a manager with complete privileges to do business, sign contracts, and move money. All contracts are between a hospital/recruiter and my LLC. All fees are paid to the LLC.
Mrs. TFC and I are both employees of the LLC. As employees, we are paid a reasonable monthly salary. These dollars are subject to FICA (a.k.a. payroll) taxes. This is a 15.3% tax towards Medicare and Social Security– half paid by the employER (my LLC), half paid by Mrs. TFC and I personally.
At the end of the quarter, our CPA looks at income and sends us our federal and state tax dues. We write a few fat checks. Anything left in the business checking account is taken as a distribution. So that extra money I held for taxes is now moved out of the company. These dollars are not subject to FICA taxes but are still subject to state and federal taxation.
Because I work in multiple states, I register as a foreign entity with the secretary of state when I’m working outside of my home state. This allows these other states to tax my income earned in their state. And me to avoid penalty.
If you are going the LLC route, this is also the time to open business bank accounts, apply for an EIN, find health insurance, setup a solo 401(k), and find a CPA. I have an entry, 1099: 13 Easy Steps to Get Started, that acts as a checklist.
Find Work
Write out your job criteria. I look for autonomous practices that pay well. I’m looking for a descent base wage plus call. No shame prioritizing compensation. It’s so important, I write a blog about its importance and how you can have/earn more dollars.
DIGRESSION POINT: I’m in the Midwest because the rates are solid. Autonomy is a bit lacking compared to my former Arizona job. Shoutout to my former coworkers and Southwest CRNAs.
I lose touch with reality sometimes, but even lower paying locum jobs pay well. With this in mind, we may become snowbirds, even if it means less income. The appeal of an Arizona or Texas Winter is strong.
When you find something meeting most of your criteria, begin negotiations. Contracts are definitely written to favor the hospital/agency.
Agencies have been pretty reasonable making verbiage changes when asked. It’s still a matter of knowing what to look for and what to suggest for a change. There are contract attorneys available.
This is another huge area that I’m not qualified for. I have a list of points I look for. Here are a few deal breakers:
Hourly, OT, Callback, and Call Rates
Specific Guaranteed Hours
Contract Duration
Notice of Contract Cancellation
Travel/Housing Reimbursement
Recognized Holidays
Non-Compete
Tax Planning
1099 folks basically need a Certified Public Accountant (CPA). It’s not worth the time to figure taxes when you can earn $2,000+ per day working.
Decide on a reasonable salary. Provide your CPA with expected earnings. They will in turn provide estimated payments. This becomes easier after you have been working a while and have more concrete numbers.
Here is a tax summary:
FICA Taxes – Biweekly or Monthly
State Taxes – Quarterly
Federal Taxes – Quarterly
Business Expenses
It’s a pet peeve when I hear the term “write-off.” They are business expenses that are necessary and ordinary to operate the business.
Track expenses diligently as they offset gross income. Major players are Solo401(k) contributions, travel, lodging, health insurance, and malpractice insurance.
Think about business expenses as expenses paid with pretax dollars. Basically a 40% off coupon.
Curious to know what my expenses looked like, My 2024 Locum Business Expenses, gives a bit of insight.
This section is very personalized. CPAs even view business expenses differently. Just understand that anything can be a business expense, but during an audit, it’s your responsibility to prove to an IRS agent how your business expenses are necessary and ordinary to operate your business.
Here are common business expenses:
Health Insurance
Malpractice Insurance
Travel
Lodging
Licensure
CMEs
Annual Dues
Legal Fees
CPA Fees
Work Supplies (Video Scope, Ultrasound)
Office Supplies
Home Office
Some CRNAs maximize expenses to pay less taxes. This equates to spending money to save on taxes. Sort of like spending $1 to save $0.40. Think about earning $1M only to buy a $1M airplane. This creates a low tax bill, but doesn’t put any money in your pocket.
Other CRNAs will minimize overall spending, pay higher taxes, and show a greater profit. Earn $1M…pay $400,000 in taxes…pocket $600,000. No plane, but $600k in your pocket.
Speak with your CPA and find a balance.
Retirement Planning
A solo401(k) is a great option. It’s far more flexible than a SEP IRA. IRS section 415 speaks to annual retirement contribution limits. Because my wife and I are employEEs of my company, we each have access to the $70,000 annual contribution limit.
This accounts for the employEE and employER portions. We can each contribute up to $70,000 into our solo401(k)s. A significant advantage over a W-2 employEE. Not bad.
We also have our $7,000 backdoor roth IRA and $8,550 Health Savings Account contributions. These three tax-advantaged accounts allow for a total 2025 contribution limit of $162,550.
Because I already have a 7-hour comprehensive course on how to make the most of your tax-advantaged accounts and investments, I’ll stop here. Really though, the price of the course is high, but for a comprehensive roadmap, it’s far less than what a financial advisor would cost.
1099 Pitfalls
Underestimating taxes is unfortunate. The flogging continues...set aside 25-30% minimum. Enough said.
Contract review is essential. I admittedly overlook something on every contract, but I’m getting better. Frequent contract review and signing is the downside of working at multiple locations concurrently or signing short contracts in general.
There are plenty of resources available as to what to look for with common language or verbiage. Contracts are a means of legal protection for the agency/hospital. It’s ideal to make it “fair” if I can even say such a thing.
Do research, ask around, upload to Perplexity, or hire a professional. Unfortunately, a good job with a bad contract isn’t worth accepting. During school, they don’t talk about business being business. All medical professionals are a means to generate revenue for the hospital. As a CRNA, I’m fortunate to be one of the high revenue generators which is reflected in my compensation.
But business is business. If another provider can do the job cheaper or someone commits to a longer duration, I’m on the out. Reasons for being ousted don’t need to make sense, it just happens. All the more reason to have an emergency fund and a reasonably strong contract.
Planning for variability is essential. I commonly have a 30-day notice, but it takes 60-90 days to become credentialed elsewhere. If a contract falls through, I’m out of work for a month or two.
Recommendations:
Have an emergency fund
Credential at multiple sites
Don’t become a target
Prepare for the worst
Conclusion
I have been a locum for 18 months and absolutely love it. It’s intimidating to make the transition from W-2 to 1099. I assure you that it’s a bit of work upfront, but once everything is in place, it’s just a matter of doing the job.
With a conservative approach to personal finance, taxes, and contracts, you won’t regret the decision. There is a high likelihood I will remain 1099 (+/- a locum) for the duration of my career. Leverage your advantage with a great team, a strong professional network, and the plethora of resources to guide your transition.
We are all in a unique position, so cater your 1099 experience to what is best for your family. My last few posts about my experience as a locum have generated significant interest and multiple inquiries. Something more you want to know? Send us an email.
If you want guidance about personal finance, investing, and retiring early, check out the online course. Thanks for reading!
