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I’ve talked before on this blog about the issue of independent contractor vs. employee, and the problem of calling a worker an “independent contractor.”  I recently found a U.S. Tax Court case the points up an additional concern that might come your way, if you are an independent contractor.  What happens if you are hired as an independent contractor and no one pays the Social Security/Medicare taxes?

Being Hired as an Independent Contractor.  In this case, a worker was hired by a company to do some work over several years.  The company, calling him an “independent contractor,” did not take payroll taxes (Social Security and Medicare) from his checks, nor did they set aside money for the employer portion of these taxes.  Each year, the company gave him a 1099-MISC (reporting income for contractors) instead of a W-2 (reporting income for employees).  He didn’t report this income (somehow figuring the IRS wouldn’t find him), nor did he pay self-employment taxes (the full amount of Social Security and Medicare owed on his income for those years.)

The Tax Court Ruling.  The IRS said he should have been considered an employee, and the Tax Court ruled that he was an employee (you can read more about this case and the Court’s opinion to find out why).  Then the question came up, as it always does:  Who is going to pay the income taxes and self-employment tax?  The worker must pay the income taxes, of course, but he was also required to pay the self-employment taxes for those years.  The employer was not required to pay these taxes.

What Does This Case Mean for You?   You go to work in a chiropractic practice and when you receive your first check, you see there is no withholding for income taxes and no deduction for Social Security and Medicare.  No matter what your contract says, you are being paid as an independent contractor.

Congratulations!  You are now self-employed, in the eyes the IRS, at least.  You should:

1.  Start setting aside money to pay your income taxes, since nothing is being withheld.

2.  Also set aside money to pay the payroll taxes (figure 15.3 percent on your net income from your self-employment as an independent contractor).

3. Start adding up your business expenses so you can lower your income and pay less income tax and payroll tax.  More on this in the next post….

Related posts:

What is an “Associate?” Employee or Independent Contractor?

Associate/Independent Contractor Issues - A Wrap-Up

I talked this morning with a student who is just starting her last year of school.  She is going into her clinical experience, but she is also trying to decide where to practice and whether to open her own business or associate.  After we talked a while she said, “There is not a lot I can do right now, is there?”  Well, yes and no.

Here are some things you can do in your last year while you are waiting anxiously to graduate.

1.  Settle on a location.  Visit towns and cities where you are interested in practicing.  Talk to the doctors in those places, especially the ones who are doing the technique you want to do.  Drive around; walk around; talk to people in the town or city.

2. Search out used equipment to buy. Check on software vendors and get demos.  Check on prices for expenses like rent, utilities, phone.  Go to practice management seminars and decide if you want a practice management company or not.

3.  Look for practices to buy, particularly in areas where you are considering moving.  Talk to the doctor; maybe you can get a externship experience with that doctor and see how the practice works.

4.  Read books, like my Planning for Practice Success, so you know the start-up process.  Start filling in a business plan, with numbers for things you will need to buy for start-up and costs for expenses (like utilities, rent, Yellow Pages).

5.  Prepare for your discussion with a bank.  Get your personal credit in order.  Seek out co-signers.  Learn about banks in your area.  Talk to vendors about leasing equipment.

5.  Finally, be flexible.  Sure, you can work toward a goal, but don’t ignore other possible opportunities that come along.  One might be THE place, THE practice you have been looking for.

I just talked to a new grad who talked to several banks and got a startup loan with only 10% down and no co-signer.  I also have heard that SBA loan money is getting harder to come by, but I heard of someone else who got an SBA-guaranteed loan.

Can you still get a loan, despite the dificult credit situation?  It depends:

• It depends on the bank.  You have to keep looking, making changes in your request, talking to bank after bank.  If you go to 10 banks, don’t give up. Maybe the 11th will be the one that says “yes.”
• It depends on the region of the country where you are, the state where you are.  The first instance above was out west.  Banks and SBA offices in other states might not be so willing to give.  I’ve never been able to figure that one out.
• It depends on your personal financial situation.  Especially your credit rating.  Banks are requiring higher FICO scores, over 700 and even up to 750 now.  Know your credit score; if it’s low, think about how you will overcome that number.
• It depends on how much you are asking.  Cut down your request to an absolute minimum.  What do you REALLY need, as opposed to what you think you want?  The less you ask for, the better your chances of receiving it.

A note of encouragement:

Perseverance is a great element of success. If you only knock long
enough at the gate, you are sure to wake up somebody.       — Longfellow

You’re headed off to the bank with fantastic business plan in hand, but you have no cash, no co-signer, no collateral.  Don’t be surprised if the bank turns you down. Banks want to loan money via “secured” loans - loans that have something of value behind them that the bank can take if you don’t pay.  That “something of value” has to be something that the bank can quickly turn into cash without much loss.  Obviously, cash is best.  Next would be something like a building that you or your co-signer owns that the bank can expect to get money out of.  In these times of decreasing home values, don’t be surprised if the bank says the equity in the home has to be much greater than the loan value.  The equipment that you bought has value, but it depreciates (loses value over time), so the bank will take a loss if you have to sell it.  That’s why they often ignore all that great stuff you just bought.

Why is the bank so picky about this?  Businesses go bankrupt, including chiropractic businesses.  And banks want to be “first in line” to get their money back.  So they want a solid assurance that they can get that money back, easily and quickly.  In these tough financial times, banks are even more skittish than usual, because business bankruptcies and mortgage foreclosures are more common.  The bank will fail (like Washington Mutual) if they continue to make high-risk loans.

Just one more point:  If you want a line of credit for working capital, in the past a bank might give you this money unsecured, but these days they want security, for the reason I discussed above.  It’s often said that “banks loan money to people who don’t need it.”  This is what they mean.  Be prepared to pledge assets, or find a co-signer who will do so.

In my last post, I talked about the importance of  making sure you have all the insurance coverage you need.  One type of insurance that I didn’t mention is disability coverage.

When I talk with new DC’s about insurance, I usually put disability coverage on the list.  I usually get a blank stare and I can see that they don’t really register its importance.  But even if you are “well adjusted” you could be in an accident or have a disabling illness.  I know disability insurance is an additional expense you think you can live  without, but don’t wait until you need it - it will be too late.

Three companies specifically provide disability insurance for chiropractors.  Investigate the features and costs for each and get disability insurance as soon as possible.

ChiroSecure

Chiropractic Benefit Services

NCMIC

Also, be sure to read this informative article from a recent issue of Chiropractic Economics about disability insurance.

Sure, you know you need malpractice, but what else?  Many businesses neglect getting these insurances until it’s too late:

• Business interruption insurance, to help pay your bills and provide temporary facilities if your business is destroyed because of a disaster, like fire
• Key person life insurance to protect your family and your business if something happens to you (some banks require this anyway)
• Employment practices insurance to cover you if an employee sues you for harassment or wrongful dismissal
• If you have an office in your home, you will need separate property/casualty/liability insurance on your business equipment and the section of your home devoted to business (in other words, it’s not covered by your homeowner’s policy)

The National Association of Insurance Commissioners (the national organization of insurers that works with state insurance commissioners) has an informative website called InsureU for Business (http://www.insureuonline.org/smallbusiness/ )  that gives you information on different types of business insurance.  Before you start your practice, spend some time in this site learning about types of insurance, what it is used for, and the varieties of coverage.

If you have been to the bank and you were turned down, don’t despair.  There is another possibility for getting some of the “stuff” you need for startup.  The alternative is “trade credit.”  In a nutshell, trade credit is using vendors and suppliers to finance your purchase of their products.

For example, you will need office furniture for your startup, so you could head to Staples or Office Max and see if they will give you a credit card.  Or, better, go to your local office supply plaee.  You might be able to get credit from them without having to get a credit card.

Talk to chiropractic vendors, like table manufacturers and x-ray machine companies.  See what kind of credit they will give you for startup.

Yes, you may pay more in interest, but you will be establishing BUSINESS credit, which is separate from personal credit.  You could also open a credit card for your business, but be cautious about putting a lot of purchases on it until you are sure you can pay it back.

What I’m really saying is to consider other sources of credit before you go to a bank.  Once you have built up a reputation for paying your business bills, you can talk with a bank more confidently, and they feel more comfortable about giving you a loan when they see that you already have a business going and that you are a responsible business person.

I just saw a great article by a business funding expert, discussing the reasons why business plans fail.

Some of these failings I have been talking about with classes for many years.  In particular:

* Value Inflation - Many DC grads have an over-inflated idea of their value to society.  Just because you think chiropractic is wonderful, doesn’t mean others will too.  You must PROVE your value by providing care that relieves pan and through outstanding customer service.  Don’t toot your own horn until you have something to toot about.

* “We have no competition.”  Yes, you do; it’s every other chiropractor in your community, in addition to orthopedic doctors, physical therapists, and osteopaths.  This statement shows an ignorance about the basics of business that turns off banks and lenders.  Until you can prove to prospective patients that your practice is valuable to them (see item 1), you are just like any other chiropractor.  People who don’t know chiropractic don’t know the difference between NUCCA and Gonstead.

 *Trying to be all things to all people.  I know when you start out, you want to take everyone.  But you need to more specifically define your market.  What kind of patients are you really looking for?  What do they look like?  What kind of care do they want that you can provide?  Limiting your market actually brings you MORE people rather than fewer.  Trust me on this; I’ve seen it work many times.  If you don’t define your market very tightly, no one will know they are supposed to come to your office.

* Unrealistic financials.  I see lots of business plans with very high income projections and minimal expenses.  Back way off on the income projections.  Even if you think you can start out with an income of $10,000 plus a month, the bank won’t believe you.  And be sure to put all possible expenses in your cash flow listing.  Put a large amount in Miscellaneous (at least $500 to $1000 a month).  Remember Murray’s rule:  Over-estimate expenses and under-estimate income.  And you’ll be about half right.

* Forgetting Cash.  Speaking of cash, understand the difference between cash and profits.  Just because you bill it, doesn’t mean it wil be collected.  You must manage collections to bring in the money you need to pay your bills.  If you bill $10,000 a month and you only collect $5000, you may not have enough to pay expenses.  This is the place where I lecture on keeping down expenses (but I’ll save that for another blog post).

In conclusion, read the About.com article carefully and follw what he says.  If you follow the ideas in this article, it could mean the difference between getting your loan accepted or not. 

I just heard of a young DC who graduated a few years ago.  He was in a terrible accident and sustained major injuries.  He may not be able to practice - ever.  He has no health insurance and no disability insurance.

If you are starting your practice and you think, “I’ll wait to buy health insurance and disability insurance until I can afford it,” THINK AGAIN.

You may be young and health and “well-adjusted,” but you never know what might happen.  Please, for the sake of your family, get health insurance and disability insurance.  If you think you can’t afford it, sacrifice something else (like that fancy couch in the reception area) and buy it.  At your age, it won’t be terribly expensive.

For health insurance, try Ehealthinsurance.com .  I’ll get back to you on where to get disability insurance.

There are many situations that may cause a new practice or an existing practice to have trouble paying its bills:

• Like many practices in the Midwest this spring, your business may have been hit by a storm or been flooded out
• You may have had a personal tragedy that caused you to neglect your practice
• You may have been a victim of theft or embezzlement
• You may have been served with a malpractice lawsuit or other legal action

In any of these situations, as well as the difficulties of practice startup, you may find yourself in the position of not being able to pay your business bills. 

SCORE (the Service Corps of Retired Executives - an SBA partner) has a new booklet that might help you with these bills.  Their brochure is titled Pay Business Debts You Can’t Afford. It’s worth a look.

The booklet takes you through the steps in debt restructuring, from categorizing creditors setting a monthly budget, sending out hardship letters and working with each creditor, and implementing your monthly budget.