Tax Implications of Your Nurse Practitioner Job Offer
I have been procrastinating from getting my tax return materials together for exactly 47 days now. And, there's no end in sight when it comes to my lack of motivation. Sigh. Filing my tax return, or rather gathering all the necessary paperwork just in time for my CPA to file an extension, is exactly the type of thing that requires much less effort than anticipated and the dread it causes is worse than the act itself. I need to get my act together. But, not quite yet...
My procrastination today got me thinking, what are the tax implications of accepting a new nurse practitioner or physician assistant position? The way you are paid and the perks you're awarded affect how much you'll owe Uncle Sam (or how much he'll owe you!) at the end of the year. Here are a few tax implications to consider in evaluating your next NP or PA job offer.
Independent Contractor vs. Employee Status
Some hospitals, clinics, and other employers hire nurse practitioners and physician assistants as "independent contractors" rather than traditional employees. This means that come tax season you will receive a 1099 IRS form rather than the standard W-2. What's the difference?
If you are a W-2 employee, income taxes as well as social security and medicare taxes will be automatically deducted from your paycheck. Independent contractors, also referred to as 1099 employees, do not have income taxes, medicare, and social security automatically withheld from their paychecks. So, in the short-term, their paychecks look much bigger. So, working as an independent contractor must be the way to go, right? Not so fast.
If you are a 1099 employee, or independent contractor, you actually owe more when it comes to your taxes. You owe not only income tax but self-employment tax as well. Your social security and medicare payments will be higher as well. This has financial benefits for your employer, but not for you, the employee.
Health Insurance Offerings
Believe it or not, the type of health insurance plan your employer offers can confer tax advantages. Health savings accounts, or HSAs, are tax deductible savings plans that can be used towards healthcare related expenses. With an HSA your money goes in tax free, grows tax free, and is spent tax free. If you don't use the money in your HSA toward medical expenses, you can withdraw it without penalty at age 65 or older. Essentially, this type of health insurance plan can be seen as a retirement account, or at least a pre-tax way to pay your medical bills.
Some employers choose to reward productivity with quarterly or yearly bonuses. The IRS typically requires that 25% of a bonus be withheld as it considers bonuses a "supplemental wage". While 25% of your bonus will be withheld, you may not actually owe that amount when filing your taxes. You may be required to hand over more, or may receive a refund, when you file your tax return. Receiving a bonus may bump you into a higher tax bracket, however bonuses are ultimately taxed at the same rate as your other wages.
Tax implications of retirement accounts can get pretty complex. So, we'll go with a general overview here. If you have an option when it comes to the type of retirement account you are setting up, talking to an accountant can clear up your more detailed questions.
- Traditional Individual Retirement Account (IRA)- The amount you contribute to your IRA can be deducted when you file your taxes. Once your money is in the account, it grows on a tax-deferred basis. When you withdraw the money in retirement, you will pay income tax on the amount you withdraw.
- Roth IRA- Funds contributed to a Roth IRA cannot be withheld upon contribution, but they can be withdrawn tax-free in retirement.
- 401K- A 401K allows you to contribute to your retirement while reducing your overall tax liability. The amount you contribute to your 401K will not be subject to income taxes. You will need to pay taxes when you withdraw the funds. Many employers will also match the amount you contribute to your 401K.
If you're packing up your life and relocating for your next position, moving expenses you incur in the process may be deductible on your tax return. Keep receipts for packing charges, moving trucks, and travel. The IRS doesn't consider all moving related expenses such as meals on the road or breaking a lease deductible. Talk to an accountant about which expenses are legit to deduct.
Licensing Costs and Continuing Education Expenses
Obtaining the necessary licenses to practice as a nurse practitioner can add up. Applying for a DEA number, for example, will cost you upwards of 700 bucks. Many employers will reimburse you for these expenses and outline an allotted amount they will contribute in your employment agreement. This way, you aren't paying licensing costs and continuing medical education fees out of your hard-earned taxable income.
While it may require more effort on the front end, planning carefully when it comes to your taxes can make sure you are maximizing your income. You don't want to overpay Uncle Sam!
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