IC vs.employee-Tax problems later on?

  1. I am considering incorporating for the obvious tax breaks and increased income. My concern is - Does a nurse qualify as an independent contractor per the IRS guidlines? I have been on many sites including the IRS and still don't have a clear answer. I have also read about Qualifing Personal Service Corporations that are taxed at a flat 35%. The question is: Do you spend 95% of your time in performing the service for the client? If the answer is yes then are we trapped in the 35% tax? The professionals listed for this were accountants, lawyers, healthcare professional such as physicians, nurses and radiologists and PT and OT.
    Can anyone clear this up for me? I'm still learning but I DEFINITELY want to get it right!
    Thanks.

    MERRY CHRISTMAS TO ALL!
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  2. 22 Comments

  3. by   suzanne4
    If you set up yourself as an S Corporation, and since you will be the only owner, more than likely, that is the best way to go so that you are not double taxed. You then become an employee of your agency, not the facility that you are contracting to.

    You are setting up an agency, you are not an independent contractor if you are incorporated. Just look at it that way, and you will not have any issues.

    Hope that this helps.
  4. by   rdaven
    Another way of doing it is have a non-professional own at least 6% of the corporation. This can be a spouse, SO, or other family memeber or friend. Then they can not consider it a professional corp.
  5. by   suzanne4
    A nursing agency is not usually considered a "professional" corporation in the tax world.
  6. by   traumahawk99
    for what you'll make as a nurse, it's just too much trouble dealing with all the filing requirements. what are the purposes for incorporating? you'd still be liable for your actions. the only area where you'd save will be on fica, and you'd have to pay yourself a market rate for your services, and then pay fica and matching fica.... so you'd have to pay yourself a very small salary to keep the fica down and take the rest on a k-1. suspicious, since the irs can step in and demand that you pay yourself a market rate for all hours worked. you'll have tax forms galore to file and track.

    if you're thinking you can suddenly write off everything, the irs is looking much more closely at s-corps based in the home, for people doing exactly what you're wanting to do.

    all in all, for the very few dollars you'd save, it's just not worth it.. considering the audit risks.

    now, if you want to make a real nursing agency where you'd be employing nurses, etc.. with a viable business model, then an s corp would make a lot of sense.

    i'm a former cpa (i hated that career), and i'd definitely think this through before i went and incorporated. good luck.
  7. by   rdaven
    So what your saying is it is not worth making $55-$70/hr to become independent over staying a regular traveler and making $30-$45/hr? I became a corporation in order to make it easier to contract with hospitals. I know that a lot of hospitals will not utilize independent contractors but if your a corporation then there is no questions to your validity as far as employment status. The cost to incorporate was not that great and the paper work is not that much to diminish the increase in earnings. Plus the factor of you being in control of your destiny adds to the pot. There is no longer anyone else controlling where you live, what furnicher you will live with, what benifits you will get, what pay you will get for your services and so on. that in it's self is the true reason to become your own boss. Like the old saying goes you will never become rich as an employee.
  8. by   suzanne4
    Sorry, but if you are traveleer you are essentially not your own boss. You are under cvontraact to the facility to function in the same schedule as their employee.

    And you are talking of a salary of $35-$45 for you, then what the agency makes, by the time that you actually factor in the housing and car, and utilities, as well as insurance, etc., you really are not much further ahead.

    Not sure who you work for but I get an excellent salary thru my travel company as well as all of the perks paid for, and actually come out further ahead now at the end of the year.

    And I did own my own agency for years. As stated above, it is not worth the headaches any more.

    And as stated by other travellers here that have gone the agency route on their own, they have to wait about 60 days out to get paid, remember that you become a vendor to the hospital.

    To do it for only yourself, unless you have a strong business background, it just isn't worth it anymore.
  9. by   eddy
    I have to agree with Suzanne. Not only does she talk from experience, she's really quite versed on the whole financial impact being an agency of one can have both positively and negatively.

    Health Insurance costs continue to skyrocket, so if you plan on paying for your own, it's going to cost a fortune. Companies don't really like dealing with small groups or groups of 1, and they'll charge you a boatload because of it. They really don't value you.

    Liability Insurance costs are greater as a "company". Not only do you have to maintain your professional coverage but also general coverage. It costs more and you need more.

    Increased support costs. Like it or not, unless you are incredibly business savvy (and truthfully most nurses are not, it wasn't in our training, education or most job experience), you'll incur legal and accounting expenses each year. These folks aren't cheap. They bill a lot more hourly than you can... and you need them.

    Work Comp - While many states don't require you to carry work comp coverage, most hospitals will not do business with you unless you have it. Reason: If you got hurt on the job and didn't have coverage through your company, THEY could get stuck with the bill. Not a risk any of them are willing to take, though it seems some actually just miss this from time to time during contracts.

    Increased Audit Risk - You are greatly increasing your chances of being audited by the IRS. While you may feel you conduct all of your business practices and accounting/expensing methods perfectly, there is still a chance for a mistake here and there. It happens. Moreover, trying to go through a business audit (unlike personal) by yourself can be suicide. You will need your tax accountant to "represent" you... and THIS will cost a ton of money as well.

    There is so much more, but these are just a few things that I thought of as I read Suzanne's very common sense and well thought out response.
  10. by   eddy
    And as a rule of thumb... Always remember...

    "If it is such a good deal, why isn't everyone doing it?"


    Someone said in this thread, "you don't get rich by being an employee". You also don't get rich by paying a little less in taxes. In reality, that is really the only tangible benefit to incorporating. The problem is, you aren't likely going to save enough in taxes to offset the increased expenses associated with such a venture. Likely, you'll work a lot ON your business which prevents you from spending that time working IN it, and working ON it isn't billable. Either you sacrifice family and leisure time or you work fewer billable hours. One of them has to give.

    Agencies make money by employing large amounts of people. They make a very small amount off of each person, but when you add up their entire working roster it can produce some decent profits. It's called economies of scale. They are able to get their costs down per employee to the point that they can make some money. An agency of one lacks the bargaining power or the combined purchasing ability to accomplish such a thing. In other words, you 'll still be paying retail for your things while they, due to their numbers, are able to pay wholesale.

    THAT is how agencies make money. They aren't ripping you off. They merely have the power of numbers that you lack.

    You can also get poor really fast by working as an agency of one. Since you will be waiting 30-60 days to be paid, you could be well into your assignment and a line of credit to pay for living expenses before you realize the hospital may have a cash problem. You MIGHT have ended up working for free. Should they go bankrupt, you will stand in line with the rest of their creditors and vendors, and you may get your money, you'll likely get just some, and you possibly won't get a thing. Working for free ALSO does not get you rich.

    Larger companies know that every year they will likely have a certain amount of what is called bad debt. Due to their deversified client list, they have a good deal of protection because they are able to absorb a certain percentage of non-paying customers. You can't. Unlike a large company, THAT is your sole paycheck.

    More things to keep in mind while the supposed "experts" claim that you can get rich as an IC or an Agency of 1. They likely have a nifty booklet and stock forms to sell you, and that's how THEY are getting rich. If not, they are likely just not broke YET.
  11. by   HarryHK
    Quote from rdaven
    So what your saying is it is not worth making $55-$70/hr to become independent over staying a regular traveler and making $30-$45/hr? I became a corporation in order to make it easier to contract with hospitals. I know that a lot of hospitals will not utilize independent contractors but if your a corporation then there is no questions to your validity as far as employment status. The cost to incorporate was not that great and the paper work is not that much to diminish the increase in earnings. Plus the factor of you being in control of your destiny adds to the pot. There is no longer anyone else controlling where you live, what furnicher you will live with, what benifits you will get, what pay you will get for your services and so on. that in it's self is the true reason to become your own boss. Like the old saying goes you will never become rich as an employee.
    Dead right! Boy, there is a lot of misinformation on this thread!

    Quote from suzanne4
    And you are talking of a salary of $35-$45 for you, then what the agency makes, by the time that you actually factor in the housing and car, and utilities, as well as insurance, etc., you really are not much further ahead.
    The simplest way to analyze whether it is worth it to become an independent is that all costs that you have to pay, your former employer also had to pay as well as turn enough profit to pay himself and office costs. That profit is now yours! Gross agency profit after ALL direct nurse costs are paid (wages, taxes, housing, workers comp, unemployment, travel, etc.) runs between 20 and 30 percent of the bill rate. Stated in difference from pay as an employee, about $15 an hour more money before any tax advantages are thrown in. $15 an hour represents roughly the median family income in America, it is not to be sneezed at!

    Quote from eddy
    More things to keep in mind while the supposed "experts" claim that you can get rich as an IC or an Agency of 1. They likely have a nifty booklet and stock forms to sell you, and that's how THEY are getting rich. If not, they are likely just not broke YET.
    I'm not an expert and I have nothing to sell but I did work nine months this year as an independent. I did have an ideal "perfect storm" in terms of costs and revenue and deductions, but after meeting all personal costs and business costs for the entire year (not just nine months), I netted $90,000 in the bank after taxes. That was for an average 42 hours a week. Try that as an employee! I'm certainly not broke yet!

    Quote from eddy
    And as a rule of thumb... Always remember...

    "If it is such a good deal, why isn't everyone doing it?"
    The reason why most people choose the employee route is that they are risk adverse. And not all could do it anyway. Besides being able to take calculated risks for rewards (vision), there is the questions of business ability, personal circumstances, and market conditions. And in the broad macro-economic view, it would not be efficient for all workers to be independents. But for the few that can, the rewards are there. I think the purpose of this forum is to encourage entrepreneurship, not to discourage it. Let's give newcomers some support!

    The insurance that hospitals require of agencies cost me $265 this year for both professional liability and general liability.

    The cost to incorporate is under $200 in most states, with California being the obvious exception to this rule. $125 in mine, with ludicrously easy paperwork that basically consisted of typing my name and address four times. Certainly not worth paying an internet site even $100 to "assist".

    Quote from krazenurse
    I have also read about Qualifing Personal Service Corporations that are taxed at a flat 35%. The question is: Do you spend 95% of your time in performing the service for the client? If the answer is yes then are we trapped in the 35% tax? The professionals listed for this were accountants, lawyers, healthcare professional such as physicians, nurses and radiologists and PT and OT. Can anyone clear this up for me?
    Quote from suzanne4
    A nursing agency is not usually considered a "professional" corporation in the tax world.
    Looking at the IRS rules about a personal service corporation does make it look like a nurse contracting themselves out fits the rule. It is my belief that we are not, but I'm still working on proof. My logic goes that the rules apply for those who provide services to the end user. As an agency, we are providing contract employees to the hospital, it is the hospital that is providing the professional services. We are not billing the end user as in the case of all other professional service agencies.

    Quote from rdaven
    Another way of doing it is have a non-professional own at least 6% of the corporation. This can be a spouse, SO, or other family memeber or friend. Then they can not consider it a professional corp.
    Actually, this specific scenario does not get you off the hook. Read IRS Publication 542 for the bad news.

    But it is irrelevant anyway. Sure, PSCs are subject to a 35% tax. But that is a tax on PROFITS. Regardless of business form, you probably should not be leaving any money in a corporation. All revenue should be expensed as expenses and wages. So no company taxes. It is true that every state has some sort of corporate minimum tax, but it is not onerous. In my state it is called a franchise tax and it is $50. In other states it is called a filing fee, generally not over $100 a year if no profits.

    Taxes are easy. A corporate 1120A tax return is much easier than itemizing personal taxes for example. Payroll is harder, most find it worthwhile to use a payroll company. Software is readily available, but you still have to file with all the taxing agencies.

    Personally, I recommend a C corporation, but many independents do an S corporation or an equivalent "pass through" LLC entity. The only benefit to an S corp is that you can pay yourself a "reasonable" salary and the rest is a K1 distribution not subject to FICA (a 15.3% advantage). But as traumahawk99 implied, it is an ambiguous standard. A little scary if you get audited.

    A C corp makes up for this in that you can do profit sharing to your 401 that is also not subject to FICA. This is solid and well defined, not subjective. In addition, all healthcare costs are deductible, not just insurance.

    Quote from traumahawk99
    all in all, for the very few dollars you'd save, it's just not worth it.. considering the audit risks.
    It is not just a "few dollars", and actually, audit rates are much lower for all types of corporations compared to a sole proprietor. The IRS believes, as do most people, that it is just too much for most people to consider incorporating just to save on taxes.

    Quote from suzanne4
    Not sure who you work for but I get an excellent salary thru my travel company as well as all of the perks paid for, and actually come out further ahead now at the end of the year.

    And I did own my own agency for years. As stated above, it is not worth the headaches any more.

    To do it for only yourself, unless you have a strong business background, it just isn't worth it anymore.
    Did you have your own agency where you were providing all the services yourself? Or were you working in an office trying to make a living contracting out others? If the latter, then I agree with you. Really doesn't take a lot of business acumen if the former. You just keep on doing the same thing you were doing before, just bill the hospital instead of the agency. Sure it is more work, but I have doubled what I put in the bank as an independent compared to what I did as a very well paid traveler for traditional agencies. I'm frugal so doubling was no mean feat.

    Quote from suzanne4
    And as stated by other travellers here that have gone the agency route on their own, they have to wait about 60 days out to get paid, remember that you become a vendor to the hospital.
    I think that is the point, to be a vendor to the hospital rather than an employee. But your point about having to wait to get paid is well taken. Anyone wanting to become independent should have at the very least, three months of expense money. After invoices start being paid, your reserve no longer matters except as prudent financial management.

    Yes, it is worthwhile to be an independent and an entrepreneur. If not, then this whole subforum lacks any reason for existence.

    Happy New Year All!
  12. by   rdaven
    Hello Harry,
    Thank you very much for the response to all the posts. I have sat back and listened to everyone and was going to post a reply to suzanne4 & Eddy but you beat me to it. And said it as good and if not better than I could. Like I said before you will never get rich being someone elses employee it is only when you take the chance and yes the risk to strike out on your own and take control of your destiny that you have a chance to acheive the dreams that you know exsist. I never said that it is an easy road, that you can sit back and have all the free time you have enjoyed before you became independent. Working for yourself takes time I do agree but it is time well spent if you succeed. It is a risk and I am sorry if suzanne4 did not succeed but it does not mean that it can't be done and I know quite a few people that are doing it, with success. So Harry I agree with your post whole heartily.
  13. by   nightingale
    I agree, well said by Harry; I too am an independent. I think, there are many ways for Nurses to be successful and our circumstances are ALL different. There are times in our professions that IC is beneficial and I am sure Suzanne had great successes in her business; for now, working in Ca. (high rents, high overhead, etc.) it may be easier for now to do a regular Travel Contract and let someone else deal with the details.

    Is't it incredible the options we do have and the ability of this website to freely provide the support and guidance?

    To me, there is no one or two right answers jsut informed options that we can help each other with. We ALL win... we are ALL right.
  14. by   HarryHK
    It is definitely true that IC is not for everyone. And the corollary is that it may not be right for anyone, all the time. And sure, it is great to have a public forum, but we can not always share here. I've already been booted once before from here for commenting on the negativism of some posters here.

    I heard something interesting on NPR last week about an interesting quality of CEOs. They are invariably optimistic about their company, no matter how badly things were going. Midlevel managers did not have this characteristic. I myself consider myself a pragmatist and think everything through, more of a pessimist preparing for the worst than anything else. That said, in my opinion, forums such as this should provide helpful advice to those seeking to become successful. There is a place for bad news, but to say it is not worthwhile is not a good role model for success.

    In any endeavor, there will be nay sayers who will give you lots of reasons why something can't or shouldn't be done. These people are rarely as successful as those who search for ways it can be done.

    I'm here as an example that independent contracting can be hugely financially successful as a single practitioner. And one comment that stands out no matter what the financial rewards (many small businesses do not do as well as employees do), is that sense of freedom and control over your life that having your own business can engender.

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