A Case Study For The Financial Benefits of Employment Lite

My Discovery Of Employment Lite

Over 10 years ago, with the assistance of business consultants, I discovered an alternative to traditional employment known as "employment lite." This option offered the professional framework to maintain my autonomy and improve my financial well-being. As I approached burnout, transitioning to the PC-Employment Lite model became a lifeline that revitalized my professional life.

The long version of the story is chronicled in my best-selling book Doctor Incorporated: Stop the Insanity of Traditional Employment and Preserve Your Professional Autonomy

Today, I want to share with you a pivotal personal case study that convinced me that this move was the best financial decision for me. The data I am sharing are real numbers associated with my professional financial world. As a scientist, before I made the leap, I sought tangible evidence of the real financial benefits of self-employment. I believe many of you share this same sentiment about the value of case studies over slick marketing info-graphics.

Before I dive into the case study, let me make sure you understand what I mean when I talk about converting to a PC-Employment Lite Structure.. You can read more about it here or check out my KevinMD post about it called Physician Employment 2.0.

For a quick overview of employment, here are the essential features:

This business to business contract is in contrast to traditional employment which is an individual to business contract. In essence your professional micro-corporation (PC) is interjected into the equation in this new model. Unbeknownst to most of you, your professional micro-corporation is a powerful professional entity that every licensed physician has earned the right to create. Here is a visual of the contrasting contractual structures:

This novel PC-based employment model seemed promising on paper and showed potential to be a corrective plan for resolving the core cause of my burnout crisis—the moral injury from losing control over my professional life. It had great potential to restore my professional autonomy, and I knew I needed some systemic change from the traditional employment model. Thus, converting to a non-employee role as a long-term independent contractor made sense.

Beyond Autonomy, Are There Financial Benefits?

However, I was a little unsure about starting a professional micro-corporation while still working for the same employer, as it seemed counterintuitive. Thus, I asked my consultants for more evidence that it was a wise move, especially in addressing one of my primary concerns: fair market compensation. I had long felt undervalued.

They carefully explained how small business owners possess autonomy and control over their professional and personal lives. Starting my professional micro-corporation would help restore my fundamental need to regain professional control over my life. Just as importantly, the PC-employment lite model would shield me from the intense marketplace uncertainties that private practice physicians endure. This is because the compensation was purely productivity-based, which I preferred due to my natural tendency to be highly productive in my family practice work, including surgical obstetrics, inpatient care, and outpatient care. As an independent contractor, I could use a negotiated compensation contract separate from the restrictions and compensation ceilings baked into traditional employee contracts.

Regarding compensation, they compared my earnings in traditional employment to receiving the same gross compensation through my professional micro-corporation (PC). They were confident that a PC business structure would allow me to retain more income, based on their experience operating small businesses. At this point, due to my >90% MGMA productivity, we both knew I deserved higher pay from my employer. However, we assumed a worst-case scenario in our "what if" evaluation of converting to a PC-Employment Lite structure. Thus, the main variable in our case study—my traditional employment compensation—would be identical to the earnings in my micro-corporation, enabling us to effectively compare cash flow differences between the PC-Employment Lite structure and my traditional employment setup.

Case Study

Take a look at my side-by-side breakdown of the "As Is" versus "As Is" case study.

Please note that in structuring my Professional Corporation (PC) for this comparison, I utilized the SimpliMD small business model, which capitalizes on advantages commonly found among physicians in small businesses. Here are the key points from the side-by-side case study comparing my traditional employment to the new PC-based employment lite architecture:

1. Compensation (Gross Pay to Doctor):

I would receive the same pay from the employer whether I received it personally or via my PC. This was an important starting point because their one non-negotiable feature was that they couldn't pay me more as an employee. Thus, my case study had to start with the premise of not getting paid more. On a side note, once I established that I would be using a non-employee contract in my business-to-business PSA, I later had the opportunity to negotiate greater FMV compensation—more on that later.

2. Professional Overhead and Expenses:

This includes CME, professional society membership, malpractice, life and disability insurance, and licensing fees. In traditional employment, my employer covered these expenses, which could be a combination of untaxed and taxed fringe benefits. With employment lite, these responsibilities now fall solely on my professional corporation (PC) but are treated as pre-tax business expenses that flow through my company. Later, when negotiating non-employee contracts, I would discuss "grossing up" these professional expenses that the hospital used to cover as part of my physician labor expenses. In essence, I would seek compensation for these expenses.

3. Healthcare Expenses:

The benefits, including health, dental, and vision insurance, were covered as a mixture of pre-tax and post-tax benefits by my employer. Under my employment lite contract, my Professional Corporation (PC) now covered the cost of these as pre-tax business expenses. In my situation, I enrolled in a more affordable health plan than the one offered by my employer. Initially, sourcing my own benefits seemed daunting, but it proved easily outsourced. Moreover, when benefits are under your complete control, you can personalize them to best suit your entire household. These physician labor expenses were negotiated as "grossed up" compensation for my non-employee contract.

4. Household Money:

In the PC-employment lite model, you must shift your understanding of how money arrives in your home.

In traditional employment, your "take-home" pay is straightforward after taxes and retirement plan deductions—it's directly deposited into your bank account every few weeks. However, in the PC business structure, you'll pay yourself a reasonable W-2 salary as a self-employed owner and can consider hiring your spouse within the company as another source of household income. In my case, my wife was hired as the corporate bookkeeper.

As I'll explain later, your micro-business structure will create additional income channels, so all your income will no longer come from a single paycheck.

The end result will be a smaller regular paycheck, which will lead to a greater tax efficiency for your W-2 income through your PC. This, in essence, is a business trade secret of the wealthy—learning how to efficiently get earnings into your household by not solely moving it through a paycheck. For high income earners like yourself, W-2 earners leave very little room for tax optimization.

As shown in the case study, the actual pay from my PC would be considerably lower than what I received from my hospital employer.

Since like most doctors, I was naive to everything I just mentioned, when I looked at the side by side comparison, the smaller paycheck made me anxious as I was accustomed to receiving a large deposit every few weeks from my employer.

At that time, I lacked understanding of about how small businesses functioned, which made me hesitant despite reassurances from my business consultants. It took about a year before I fully grasped the secret of how a small business's cash flow structure ultimately benefits my household through four separate channels of household dollars, rather than just one as I was accustomed to as a traditional employee.

5. Income Channels:

A crucial concept for small business owners is that their paycheck is just one part of how money reaches their household. In addition to earned income as an employee of the business, other elements include business distributions, tax-advantaged home income, and tax-deferred retirement plans. These income sources, related to employment, come from the 1099 income generated by the business. These additional channels offer resources that enhance their household's financial well-being and accelerate net worth growth, primarily through increased retirement savings.

However, you have to understand that the flow of these total dollars into the bank account will be more asynchronous than the singular bank deposit you are likely accustomed to. It may take time to adjust to this.

In contrast, traditional employment only provides one channel for earned income. The nice thing is that your paycheck is large, predictable, and simple. Your employer’s payroll department does all the heavy lifting for you. The ease is a little deceptive though because it allows you to passively ignore all that is happening behind the scenes with your earnings (taxes, benefits, and retirement). Due to your high income, the tax burden on earnings as a traditional W-2 employee is particularly high (averaging around $85,000 annually) makes it more challenging to grow household net worth solely through this singular paycheck channel.

The best strategy for keeping more of your earnings involves taking back control of the earnings through self-employment (1099 worker), working with your CPA to actively manage the tax optimization of your earnings, and then take control of your personalized benefits and retirement planning.

6. Retained Income:

The outcome of this micro-business model is retained income, which represents the money I could keep through smart business structuring and tax optimization strategies as a micro-corporation rather than as a traditional employee.

By comparing receiving the same compensation from my employer as traditional employee versus receiving it through a PC-Employment Lite agreement, I could retain $70,000 more as a self-employed doctor. Frankly that’s a lot of money to leave on the table each year, just by blindly having a predictable paycheck dumped in my bank account every two weeks as traditional employee! It certainly convinced me that transitioning to employment lite was right move financially.

By the way, this doesn't mean W-2 employees can't take advantage of income retention opportunities through itemized tax deductions like charitable contributions and tax-advantaged retirement plans. However, for high-income individuals like you, the available options are diminishing and being eliminated by the federal government.

By transitioning your earnings to 1099 income rather than solely W-2 income, and then incorporating these small business tax optimization strategies, you can significantly expand your net worth through retained income.

Work Smarter Not Harder

In summary

This case study demonstrated that while a new micro-business architecture would decrease my monthly paycheck, it would paradoxically increase my household's retained income, offer more control over my life, and accelerate the growth of my net worth!

Even if I didn't change my employer's compensation formula, transitioning to self-employment through a professional micro-corporation and employment lite contract would result in significant financial benefits for my household annually. This revelation confirmed my belief that my professional services were worth more than what was landing in my bank account from my employer.

It also demonstrated that I could increase my household income without having to work harder or longer. Essentially, I learned the power of working smarter, not harder.

Too many of you falsely assume that the only way to bring more income to your home is take on side gigs or do more work. The reality is that you are unaware of the concept of retained income, and how that is easily within your reach. By transitioning to self-employment with 1099 income you can retain 10-15% of your earnings. You can keep more by being smarter about how you receive your earnings!

Once I had solid evidence that transitioning to the PC employment lite model would improve both my autonomy and financial health, I then revisited negotiations with the hospital regarding non-employee fair market compensation and practice management solutions. These were essential to my long-term personal and professional satisfaction.

Without delving into details, the end result of my negotiation for a non-employee contract was an added value of $147,000 annually.

2 Million Dollars Difference

Let the total sink in.

Had I kept toiling away as a traditional employee, I would have made a large sum of money annually—just shy of $500,000. That’s a pretty comfortable living—and nothing to fuss about.

By switching to this non-employee micro-business model and continuing the same work, I would be $2 million ahead in 10 years! It may seem unbelievable, but I assure you, it's not a mirage or marketing gimmick—it's true. And the amazing part is that you can do it too!

If only I had known this information when I started my career over 25 years ago!

This model has generated a professional income of nearly $900,000 this year, with an effective tax rate less than half the national average for physicians. As a result, my net worth has grown significantly, allowing me to retire from my 27 year clinical practice this past spring.

I realize I have a story to tell, and I shouldn't hide this valuable insight any longer.

My experience has inspired me to dive and make this my post-retirement passion project of making physicians all over the country aware of this relatively hidden option. I call it SimpliMD and it is an online education community that is meant to fill the gap on physician small business illiteracy, much like WCI fills the gap for physician personal finance illiteracy. My eye is especially on young doctors because of the importance of launching their career on the right foundation, but also because of my determination to offer my son, who is a family medicine resident, the best fatherly advice on how he can thrive in the marketplace.

I invite you to get take your first step in the self-employment journey, by purchasing my course “Creating A Practice Without Walls”. After completing this <$200 course, you will be able to establish a virtual professional micro-corporation tailored to your professional  and personal goals that results in a stronger well being and enhanced financial health. A micro-corporation provides you with far greater tax optimization and wealth accumulation tools than traditional employment and allows you retain more of your hard earned income!