As a new associate, should you opt to become an employee or be a self-employed independent contractor? How you structure your relationship with a practice will influence factors like your earning potential, benefits, retirement options and taxes.
Here’s what to consider if you’re trying to decide which is the right fit for you.
Working as an employee of a practice
When you’re an employee of a medical or dental practice, the terms of your employment will be set out in an offer of employment. Then, when you accept that offer, you accept those terms, which become the basis of the employer-employee relationship.
The benefits of becoming an employee:
- Your compensation will be in the form of salary (and potential bonuses), negotiated between you and your employer.
- You’ll qualify for Employment Insurance, which will provide some income if your employment comes to an end through no fault of your own.
- You may qualify for severance pay from your employer if your employment ends.
- Both you and your employer will contribute to Canada Pension Plan or Quebec Pension Plan premiums, depending on your province of employment, on your salary income.
- You may also be offered employee benefits — such as extended health care or retirement savings — as part of your employment.
Potential downsides of becoming an employee:
- The amount you can earn is generally set by your salary, and your ability to earn more may be limited.
- You may be restricted, by the terms of your employment, from working for anyone other than your employer.
- The hours and other conditions of your employment are largely set by your employer and may be inflexible.
- You are required to pay Employment Insurance premiums, even if you never benefit.
- Although you may be able to deduct some work-related expenses from your taxable income, these deductions can be minimal.
Working as an independent contractor
As an independent contractor, you are not an employee of the practice. You operate under a contract of service negotiated between you as a service provider. The practice is the purchaser of your services. The terms of your contract may be more extensive than a contract of employment, allowing you to negotiate more aspects of your working relationship, such as compensation and hours of work.
The benefits of being an independent contractor:
- You negotiate the terms of your contract, including compensation.
- Your terms are generally more flexible than with an employment contract.
- As a contractor, you can deduct various expenses associated with the provision of your services from your taxable income. This means your take-home pay may be greater than you might receive as an employee.
- You generally have more control over your hours and other conditions of your work.
- You are not required to pay Employment Insurance premiums.
- You are generally free to work for more than one practice, subject to the terms of your agreement.
Potential downsides to being an independent contractor:
- Independent contractors generally have less employment security than an employee.
- You are not entitled to either severance or Employment Insurance if your contract comes to an end.
- Compared to employees, you are required to keep more extensive financial records to support any claims.
- Unless you incorporate and structure your compensation in the form of salary, not dividends, you will be required to pay both the employer and employee shares of Canada Pension Plan or Quebec Pension Plan premiums each year.
Incorporating as an independent contractor
Structuring your relationship as an independent contractor also opens up the possibility of incorporating. Your corporation would enter into the contract of services with the practice.
In this case, the corporation would bill the practice for its services, and you — as the owner and principal shareholder of the corporation — would be paid in turn by your corporation.
You could opt to take compensation from the corporation in the form of salary, dividends, or a mix. If you opt for dividends, you may not be required to pay Canada Pension Plan or Quebec Pension Plan premiums.
You may also structure your compensation for greater tax efficiencies, aligned to your specific situation and preferences. For example:
- If you wanted to make contributions to a Registered Retirement Savings Plan, you might arrange to take more salary than dividends or to take all of your compensation in the form of salary.
- If you didn’t want to pay Canada Pension Plan or Quebec Pension Plan premiums, you might take compensation in the form of dividends, not salary.
When you’re thinking about if you want to become an employee or be an independent contractor, there are many factors to consider, and your personal preferences, goals, and circumstances will play an important role. For more financial advice, talk to a dedicated RBC Healthcare Specialist.
Read related story:
- Should You Incorporate Your Medical Practice? Understand Your Options
- Salary or Dividends as an Incorporated Physician – What’s Right for You?
- The Different Types of Medical Practices
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.