Apples to Apples: The Financial Implications of Working 1099 Vs. W-2 as a CRNA

As a CRNA, you make critical decisions all the time, oftentimes without even thinking about it. Your years in school prepared you to make sound medical decisions at a moment’s notice. But beyond the operating room, some important choices may not come as naturally.

With today’s high demand for CRNAs, many practitioners are wondering if freelancing might be right for them, either full-time, part-time, or as a supplement to their W-2 job. We’ve put together this overview of some of the major financial implications of freelancing versus working W-2. Of course, only you can decide if the freelancing lifestyle is right for you, but the potential to control your own schedule, earn a higher income and make larger contributions to your retirement accounts might influence your decision. What’s important is choosing the path that helps you reach your personal goals.

The 1099 CRNA

CRNAs can either work as a W-2 employee or as a 1099 independent contractor (a.k.a. freelancer). As a freelancer, you are not only a CRNA, but also a business owner. This means that you have additional responsibilities outside the OR including paying quarterly taxes, tracking business expenses for deductions, keeping detailed books, and deciding how you will pay yourself. Unlike many W-2 positions, you will likely need to secure your own health insurance, malpractice insurance, liability insurance, disability insurance, pay both sides of your FICA tax, and be the sole contributor to your retirement accounts.

Why would anyone sign up to do all this extra work? Well, beyond the lifestyle factors, the answer is simply money. According to the 2018 AANA Annual Compensation and Benefits Survey, the average freelancer makes around $230,000 a year whereas the average salary of a W-2 employee is $187,000. The top 10% of freelancers bring home over $300k annually! But, as we mentioned above, freelancing requires you to personally purchase the benefits and insurances that your employer would otherwise be paying at a W-2 job. With this being the case, many CRNAs wonder (a) is freelancing worth it, (b) will I really make more money at the end of the day, and (c) are there any other financial benefits?

The answer is pretty simple: freelancing is only financially beneficial if you are bringing home more money or are able to save more for retirement. If at least one of these two conditions is being satisfied, then objectively speaking, it may be a financially favorable choice.

However, strategic financial management is crucial in order to cover your extra freelancing expenses and still bring home a higher annual salary. It is important to have a financial advisor and/or tax professional who truly understand the intricacies of the CRNA industry. 

Mitigating Taxes  

The biggest difference between working as a W-2 employee and a 1099 contractor is that as a freelance CRNA, you are now a business owner. As the business owner you are both the employer and the employee. This means you will be responsible for paying both sides of the mandatory FICA and SECA contributions, also known as a self-employment tax. So instead of splitting these expenses with your employer, 6.2% each for social security and 1.45% each for Medicare, you will now be responsible for the entire 15.3%. This self-employment tax is a major concern for many freelancing hopefuls and can initially be discouraging.

Fortunately, there are measures to take to alleviate this additional tax burden. For example, if you set up an S-Corp, business distributions are not subject to the 15.3% FICA tax the way they would be if you ran your business as a sole-proprietorship and simply wrote yourself a check each month. This is not to say that you can avoid FICA taxes altogether, as the IRS still requires you to pay yourself a “reasonable” salary. However, there are certainly ways to minimize the taxes paid based on your circumstances and financial goals.

As a 1099 contractor, you are also eligible to deduct business expenses from your taxable income. Potential deductions can include your automobile, computers, printers, a home office, travel costs, uniforms and more. W-2 employees have far fewer opportunities for work-related expenses and cannot itemize any deductions until the expenses exceed 24% of their annual income.

Alternative Retirement Options

One of the major benefits of being a freelancer is the ability to make significantly higher retirement contributions, which is especially helpful for CRNAs whose extensive schooling deters them from working until a later age.

With a W-2 job, it is likely that you and your employer are both making contributions to a company sponsored retirement plan – like a 401(k) or 403(b). In 2019, the maximum contribution limit to 401(k)s, 403(b)s, and 457 retirement accounts increased from $18,500 to $19,000, plus a $6,000 catch-up allowance for contributors over age 50.  But even with maximum annual contributions, it may be difficult to fund a retirement comparable to the higher standard of living most CRNAs enjoy.

As a 1099 CRNA, there are a handful of different ways to help you save for retirement and simultaneously minimize some of your tax burden. For years, CPAs around the country pushed CRNAs to open SEP IRAs. However, this retirement plan type only allows the employer to contribute. So in order to make the maximum annual contribution to an SEP plan, a 1099 contractor would have to pay himself a higher salary therefore being exposed to higher income taxes.  With a maximum allowable contribution rate of 25% of total compensation, it would take a salary of almost $225,000 to take full advantage of the 2019 IRS contribution limit of $56,000!

However, a Solo 401(k) offers the same $56,000 contribution limit in 2019 (plus the $6,000 catch up for those over age 50) but allows for both employer and employee contributions. As a freelance CRNA who owns his or her own business, this means you can make contributions from both sides of the table. As an ‘employee’ of your company, you can contribute up to the same $19,000 IRS limit as if you were a W-2 employee (plus $6,000 catch up if over age 50).  However, a 1099 contractor can further leverage his or her business ownership by taking a profit-sharing approach to contributions whereby the corporation can make contributions up to 25% of total employee compensation. This allows CRNAs to make a higher annual contributions without maxing out their “reasonable salary” and paying higher taxes.

Defined benefit plans are also great vehicles for retirement saving when you have maxed out your 401(k) or IRA limits. Because defined benefit plans have much higher tax-advantaged contribution limits, they allow the employee to save hundreds of thousands toward retirement in a short period of time.

Whether you are a freelancer or a W-2 employee, it is likely that a combination of retirement and non-retirement accounts will be necessary to help you save for a comparable quality of life in your post-working years.

While freelancing may not be for everyone, don’t let the extra financial expenses be a deterrent! With proper planning and the help of a qualified financial and/or tax advisor experienced with 1099 CRNAs, you may be able to mitigate your increased tax burden and liability expenses while granting the potential for more flexibility, a higher income, as well as a more robustly funded retirement.