Where Will You Go From Here?
By M. Shayne Ruffing, CLU, ChFC, AEP
As the calendar points towards Scientific Assembly, the EMRA job fair and the start of another interview season, the choice for many will be which type of practice to choose? The three most common are working as an independent contractor, working with a democratic group or being a faculty member in an academic institution.
Each carries separate considerations from a financial standpoint. This article is intended to highlight some basic differences as you evaluate future opportunities. You will want to consider the following factors.
Clinical Faculty / Academic institution:
This is commonly the easiest financial position to understand. Income is typically paid as it is during residency. All taxes and other deductions are withheld by the hospital. You will commonly be provided health insurance paid by the hospital, basic life insurance and basic disability insurance. You do not have to qualify for any of these from a medical perspective. Most hospitals have a 403(b) retirement plan that will allow you to contribute up to $15,500 per year before taxes and will often have supplemental programs to allow greater contributions. In some cases you will also have a relationship with a private hospital practice that provides additional benefits.
- Pros: Benefits are automatically provided, retirement matching is common, and the contract is stable. Teaching opportunities are available.
- Cons: Salaries are typically more limited than other arrangements. Retirement funding may not provide the opportunities of private practice. Tax deductions are limited. State, local and hospital political considerations can impact your practice.
As an independent contractor, you take on the responsibilities of being self employed. You will likely contract with one or more staffing groups at a fixed hourly rate. There are not commonly any benefits provided and you will be responsible for understanding your tax liability and scheduling appropriate payments. You will want to establish a separate checking and credit account for your business and either become proficient with an accounting software program or hire a bookkeeper / practice manager. You will need to understand and qualify for your own health insurance, disability insurance and life insurance. You will need to establish your own retirement plan, and fund it with your own money.
- Pros: Maximum flexibility in scheduling, health insurance and retirement funding reduce taxable income. Many common expenses can become tax deductible. You can employ your spouse and further reduce taxation. There is a high level of retirement funding possible, although reduces personal income pro-rata.
- Cons: You pay an extra 7.5 percent in tax as a self-employed physician. All benefits must be qualified for and paid for. Personal medical history can make some benefits prohibitively expensive or unavailable.
This often provides the best of both hospital and independent contract work. A decent sized group will provide health insurance, basic life insurance and may provide basic disability insurance. Commonly a 401(k) plan will allow you to defer $15,500 per year towards retirement and will often be matched up to the maximum federal contribution (+/- $45,000). The group shift schedule often provides greater flexibility than a hospital can offer. There is often a partnership track allowing greater income potential through ownership of the practice and a percent of the profit. As an employee you are taxed the same as hospital faculty. As a partner you are probably taxed as an independent contractor.
- Pros: These include camaraderie of peers/ partners, ownership potential, tax management and income potential of IC with benefits of hospital.
- Cons: Contracts with hospitals can be lost. Decisions are made by group consensus. Group revenue and expenses determine profitability and ultimate income.
As you explore potential practices, take the time to consider your personal retirement, debt repayment needs, family and lifestyle objectives and use them to determine which type of practice will best allow you to accomplish your goals. Once you can articulate your own objectives you can understand how your future practice will allow you to reach them. This should become your guide for an efficient and effective transition plan, allowing you to confidently take advantage of opportunities and avoid common mistakes.
Please note that this article contains brief guidelines only and you should always discuss your individual situation with your tax, legal and financial council.
Best Wishes as you move towards your future.
Shayne Ruffing, CLU, ChFC, AEP is the creator of the Confident Transition Plan™ for medical residents, the Physician Disability Income Analyzer™ and the Physician’s Financial Navigator™. Shayne specializes in executive benefit planning for physicians and medical practices. He can be reached at 800.225.7174, or via e-mail at email@example.com.
Shayne is an Financial Advisor offering Securities and Advisory Services through NFP Securities, Inc., a Broker/Dealer, Member FINRA/SIPC and Federally Registered Investment Advisor.