Should you incorporate as an associate?

Taxes 1040 formAfter dental school graduation, many students begin to work in dental offices as associates.  When a dentist begins to work as an associate, they may work as an employee of the practice or as an independent contractor.  Typically, an associate will not have a choice whether to be an employee or independent contractor when they join the practice.  If the practice has always treated associates as employees, they should treat any new associates as employees too; the same goes for independent contractor treatment.  If an associate starts to work as an independent contractor, they have the choice between remaining a sole proprietor and incorporating themselves as a business entity.  The advantages of staying a sole proprietor (and reporting income on Schedule C of your tax return) are these:

1)     It is easy and requires no extra administrative effort on your part, other than filing Schedule C with your individual tax return each year;

2)     You will not have to file a separate corporate tax return each year; and

3)     You are able to become an LLC to take advantage of limited liability treatment.

However, as a sole proprietor, ALL of one’s net profits will be subject to self-employment tax.  In essence, this means that the associate (you) will be paying payroll taxes as an employee AND as an employer.  You also must make estimated tax payments, as you will have no employer withholding from your income.  Sole proprietors are also more likely to be the subject of IRS audits than their incorporated counterparts.

If you choose to form a corporation for yourself, you will have the liability protection of the corporation as a separate entity.  For this reason, all of your income should be paid to the corporation, not to you personally.  If you form an S-Corporation, which many dentists do, not ALL of your income will be subject to payroll taxes and you will be less likely to undergo an IRS audit.  However, accounting/bookkeeping for a corporation is more complex; you must also file a corporate tax return AND payroll tax returns, as the corporation would be paying you as an employee.  This all creates higher accounting fees, but lower taxes overall.

Speak to your accountant or tax advisor about which option would best fit your situation.

Has anyone yet considered the option to work as a sole proprietor or incorporate?  When might you NOT want to incorporate?

~Megan Hille, Esq., Pesavento & Pesavento

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Comments (6)

  1. Dr Robert Allen VCU 1959

    The following is the initial statement of the author:

    “After dental school graduation, many students begin to work in dental offices as associates. When a dentist begins to work as an associate, they may work as an employee of the practice or as an independent contractor. Typically, an associate will not have a choice whether to be an employee or independent contractor when they join the practice. If the practice has always treated associates as employees, they should treat any new associates as employees too; the same goes for independent contractor treatment. ”

    Stop!!

    Students right out of dental school have so much to deal with, I believe consideration of becoming incorporated is out of the question. For me, I have practiced many many years and dealing with immediate dental treatment options and considerations ( such as a newly graduated dentist must face) are second nature. I have not a second thought about what treatment I choose for my patient–I am not concerned about whether my proposed treatment will be successful–or if my proposal will even be accepted by the patient.

    Introducing ” incorporating” into the life of a recent graduate at this stage is inappropriate. Allow the new dentist to gain confidence in clinical dentistry and once that is achieved, then introduce him or her to other options than employee & independent contracting.

    Reply
  2. Ryan Dulde DDS

    Megan, thanks for this informative post!

    To answer your question, wouldn’t I be smart NOT to incorporate simply because my employer is willing to pay me as an employee (and cover my payroll taxes in the process)?

    I suppose being an independent contractor would be a good idea if you operate in multiple locations, or have significant tax-exempt expenses that you’d like to run through your own SC. Is this correct?

    R

    Reply
  3. Rami T DDS

    I just started working and knew I had to incorporate myself from the get-co. If you want to pay more money/tax to uncle Sam do not incorporate, but who would actually want to pay more tax?

    Reply
  4. Megan

    Ryan- Thank you for the comment! Yes, if your employer treats you as an employee, you would not need to incorporate. Your employer pays their half of employment taxes for you.

    Reply
  5. Justin

    I have a contract signed for a future buy in date with the current dental practice I am at now. I just moved to a position as an associate with equity and would like to take advantage of any tax savings as possible. I know if I create my own S corp and the practice pays my s-copr and then I pay myself I have the advantage to write off a few more items. On the other hand with my s corp would I be accountable to pay both my personal taxes and then business taxes as well? Right now I am just paid as an employee, and I just pay my personal taxes and the practice pays the other portion. Would starting my own S corp be advantages for me? Thanks!

    Reply

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