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. 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