Stop Losing Money on Side Gigs: Why W-2 Income is Holding You Back

This article was originally published on Dr.Incorporated April 23, 2023 and has been edited for our SimpliMD audience

Stop Losing Money

If you're earning side income through a W-2 job, you're making a big mistake—and it's costing you more than you realize.

Most doctors fall into one of two categories: those with no side gig (60%) and those with one or more (40%). Within that 40%, many doctors mistakenly take on side jobs through their primary employer, leading to double W-2 income. It seems convenient, but it's a tax nightmare. By earning all your income as W-2 wages, you’re losing a significant chunk to taxes, money that could be in your pocket if you were getting paid as a 1099 independent contractor.

Let’s break it down:

The Trap of W-2 Side Jobs

Many you take on extra work like call coverage, medical directorships, or leadership roles through your primary employer. It’s easy and comes with perks like malpractice coverage and a simple paycheck addition. But here’s the catch: all this extra income is funneled through W-2 wages, which means you’re taxed at the highest rates with little room for deductions.

On the flip side, if you negotiate to be paid as a 1099 contractor for your side work, you can save significantly on taxes and retain more of your hard-earned money. With a 1099, you can deduct business expenses, contribute to retirement plans, and gain access to other tax-saving strategies.

Your employer wants you on a W-2 because it’s easier for them and keeps you under their control. But this arrangement benefits them more than it benefits you. The good news? You can ask to be paid as a 1099 contractor. This move can put thousands of dollars back into your bank account each year.

The Bottom Line

It’s time for you to stop thinking like a factory worker tied to the corporate machine. You’re not just a cog in their wheel—you’re a highly trained professional with the power to structure your income in a way that benefits you, not just your employer. By embracing your small business power and demanding 1099 income for your side gigs, you can unlock financial freedom and take control of your career.

Don’t let your employer’s convenience cost you your hard-earned money. Demand what’s rightfully yours and keep more of what you earn.

And if your employer doesn’t want to support your view that your side work represents 1099 earnings, then you have plenty of other market place options to do side work that will support your role as a 1099 worker. You can stop your side hustles with your primary employer and do them elsewhere. You should be in control of this and not them. On that note, please be aware of any contractual non-compete obligations that could come into play. Pro-tip: If you have any of these, negotiate them out of your next contract!

Now let's get practical about this and look at a comparative case study of side jobs and W-2 and 1099 income. As I unpack this study, it brings back memories of meeting with my accountant early in my career. When I triumphantly explained that I had taken on some additional call income through the hospital on top of my clinic compensation, rather than a high five, he glumly said, "That's not helping you as much as you think it is." Ouch, that kinda stung and internally I thought at least getting something more—that should be a win! Naively, I thought, "Wow, that extra $40k is going to really help us pay down our mortgage." Turns out he was right, and I was wrong. Let's review why in our case study.

A Comparative Case Study of Four Physicians

Many of you are exploring side jobs to supplement your income and diversify your careers. According to recent data from Medscape, nearly half of you engage in some form of side work. This trend reflects a growing desire among our profession to increase our financial security, manage burnout, and gain more control over our professional lives. In this case study, we’ll compare four physicians, each earning $400,000 annually from their primary job, and an additional $50,000 in side income, examining how different employment models impact their taxes, time, energy, and retained income.

1. Dr. Anderson: The Traditional W-2 Worker with No Side Job

Income and Taxes: Dr. Anderson is a cardiologist earning $400,000 annually as a full-time employee at a large hospital. With no side jobs, her entire income is taxed at the W-2 rate. Assuming a marginal tax rate of 37%, she faces significant tax obligations. Her employer withholds taxes for Social Security, Medicare, federal, and state taxes. With limited deductions available, Dr. Anderson’s tax burden is high, and she retains about 60-65% of her gross income, which amounts to approximately $240,000 to $260,000 after taxes.

Time and Energy: Dr. Anderson devotes 40-50 hours per week to her hospital job. She enjoys a predictable schedule, but the lack of flexibility often leads to burnout. The demands of her job leave her with little time and energy for personal pursuits or professional growth outside her current role.

Retained Income: With no additional income streams, Dr. Anderson’s financial growth is directly tied to her hospital salary. After accounting for taxes and retirement contributions, her retained income is about $240,000 to $260,000. Without any side jobs, she has limited opportunities to increase her financial stability or explore new career avenues.

2. Dr. Johnson: The W-2 Worker with Side Jobs Through the Hospital

Income and Taxes: Dr. Johnson, a pediatrician, also earns $400,000 annually from his full-time hospital job. He supplements this income with $50,000 from extra shifts within the same hospital network. Since both incomes are W-2, the additional $50,000 is taxed at his marginal rate of 37%, leading to a combined gross income of $450,000. However, because his side income is taxed at a higher marginal rate, he retains a smaller percentage, resulting in a net retention of around $265,000 to $275,000 after taxes.

Time and Energy: Dr. Johnson works 50-60 hours per week, splitting his time between his primary job and additional shifts. The extra income comes at the cost of increased stress and reduced personal time. The additional work hours significantly drain his energy, making it difficult to maintain a healthy work-life balance.

Retained Income: While Dr. Johnson’s gross income is higher than Dr. Anderson’s, the heavily taxed additional income leaves him with a retained income of about $265,000 to $275,000. The extra effort for a modest increase in retained earnings may not feel worthwhile, especially given the toll on his time and energy.

3. Dr. Smith: The W-2 Worker with 1099 Side Jobs Outside the Hospital

Income and Taxes: Dr. Smith, an orthopedic surgeon, also earns $400,000 annually from her hospital job but adds $50,000 from 1099 consulting and telehealth work. The 1099 income allows Dr. Smith to deduct business expenses, such as home office costs and travel, reducing her taxable income. While she must pay self-employment taxes (15.3% for Social Security and Medicare) on her 1099 income, she can deduct half of this amount. This tax strategy allows Dr. Smith to retain a higher percentage of her income. After taxes, her retained income is approximately $280,000 to $290,000.

Time and Energy: Dr. Smith balances 45-55 hours per week between her W-2 job and 1099 side work. The flexibility of her 1099 jobs allows her to manage her time more effectively, reducing burnout. She can choose when to work on her side projects, giving her a greater sense of control over her schedule.

Retained Income: Dr. Smith’s effective tax rate is lower than that of Dr. Anderson and Dr. Johnson, allowing her to retain about $280,000 to $290,000 of her gross income. The 1099 side jobs provide her with both financial and professional growth opportunities, making her overall employment model more sustainable.

4. Dr. Lee: The Self-Employed Doctor with Multiple 1099 Income Streams

Income and Taxes: Dr. Lee, a family medicine physician, is fully self-employed, earning $400,000 from a 1099 contract with a telehealth company and an additional $50,000 from consulting and locum tenens work. As a self-employed individual, Dr. Lee can take advantage of numerous tax deductions, including health insurance premiums, retirement contributions to a SEP-IRA or solo 401(k), and business-related expenses. These deductions significantly reduce her taxable income. After taxes, Dr. Lee retains approximately $315,000 to $325,000 of her income, the highest retention among the four doctors.

Time and Energy: Dr. Lee works 40-50 hours per week, with complete control over her schedule. She divides her time between her primary telehealth role and additional consulting work. This flexibility allows her to focus her energy on projects that align with her professional goals and personal interests, helping to prevent burnout.

Retained Income: With the ability to optimize her tax situation and control her expenses, Dr. Lee retains about $315,000 to $325,000 of her gross income. Her diversified income streams and lower effective tax rate give her a significant financial advantage over her peers, making her the most financially secure and professionally satisfied of the four doctors.

Comparative Analysis: Who Comes Out on Top?

Taxes: Dr. Lee, the self employed doctor with 1099 side jobs, benefits the most from tax advantages, retaining the highest percentage of her income. Dr. Smith follows, thanks to the deductions available through her 1099 side work. Dr. Anderson and Dr. Johnson face higher effective tax rates and fewer opportunities for tax optimization, with Dr. Johnson’s additional W-2 income being particularly heavily taxed.

Time: Dr. Anderson has the most predictable schedule but the least flexibility. Dr. Lee, despite managing multiple income streams, has the most control over her time. Dr. Smith enjoys a balance of stability and flexibility, while Dr. Johnson struggles with the demands of additional W-2 work, which leaves him with the least control over his time.

Energy: Energy expenditure is closely linked to schedule control. Dr. Lee’s self-employment allows her to allocate her energy toward fulfilling work, while Dr. Smith also benefits from some flexibility. Dr. Anderson and Dr. Johnson, primarily W-2 employees, expend more energy dealing with the rigidity of their jobs, with Dr. Johnson’s additional shifts further draining his energy reserves.

Retained Income: Dr. Lee retains the highest percentage of her income due to her self-employment tax advantages and diversified income streams. Dr. Smith follows with a strong retention rate from her mixed W-2 and 1099 income. Dr. Anderson retains the least, as her entire income is subject to W-2 taxation, while Dr. Johnson, despite earning more, sees only a modest increase in retained income due to the high taxes on his additional W-2 earnings.

Conclusion: The Case for Diversification and Self-Employment

This case study highlights the significant differences in taxes, time management, energy expenditure, and retained income among physicians based on their employment models. Dr. Lee’s self-employment showcases the financial and personal benefits of taking control of one’s career through 1099 work, offering both greater income retention and professional satisfaction. Dr. Smith’s model, balancing W-2 and 1099 work, demonstrates how diversification can lead to better financial outcomes without fully committing to self-employment.

For physicians like Dr. Anderson and Dr. Johnson, who are primarily W-2 employees, exploring side income opportunities, particularly in the 1099 realm, can provide financial relief and help reduce the burnout associated with traditional employment.

As the medical field continues to evolve, the trend toward self-employment and diversified income streams is likely to grow. Physicians who adapt to these changes and explore alternative employment models can achieve greater financial security, job satisfaction, and work-life balance.

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