W-2 vs 1099 Physician: The Financial Planning Differences That Matter

As a W-2 employee, the employer withholds income tax from each paycheck and pays half of the FICA tax (7.65%) on your behalf. The employer may also provide health insurance, malpractice coverage, CME stipends, access to a retirement plan, and paid leave, all of which are part of total compensation even though they do not appear as cash in a pay stub.

As a 1099 independent contractor, there is no tax withholding, so estimated tax payments are generally required throughout the year. The physician pays both the employee and employer halves of Social Security and Medicare as self-employment tax, purchases their own benefits, and may need to arrange their own malpractice coverage rather than relying on an employer's policy.

Because of these differences, contract rates typically need to exceed comparable W-2 salaries by roughly 15-25% or more for a 1099 physician to net a similar amount, once self-employment tax, self-funded benefits, and the loss of employer retirement contributions are accounted for. Some physicians hold both types of income at once, for example a hospital-employed physician who also works locum tenens shifts on the side, which means both sets of rules can apply within the same tax year (see ACEP's overview of how employment type affects physicians and Residency Advisor's key tax factors for choosing W-2 or 1099).

The qualified business income (QBI) deduction under Section 199A allows up to a 20% deduction on qualified business income earned through a pass-through entity: a sole proprietorship, S-corp, partnership, or LLC. Medicine, however, is classified as a Specified Service Trade or Business (SSTB), which subjects the deduction to income-based phase-out rules that other businesses do not face.

For 2026, following the One Big Beautiful Bill Act (OBBBA), which made the QBI deduction permanent and widened the phase-in ranges, the SSTB phase-out for single filers and heads of household begins at $201,750 of taxable income and is fully eliminated at $276,750. For married couples filing jointly, the phase-out begins at $403,500 and is fully eliminated at $553,500. Below the lower threshold, a physician operating through a pass-through entity can access the full 20% deduction on qualified business income even though medicine is an SSTB; within the phase-in range, the deduction is reduced proportionally; above the upper threshold, the SSTB deduction is eliminated entirely.

At most attending physician income levels, taxable income often exceeds these SSTB thresholds, which means the QBI deduction may be partially or fully unavailable for many physicians regardless of entity structure. Maximizing retirement contributions through a solo 401(k) or cash balance plan, funding an HSA, and charitable giving are all ways taxable income could be reduced enough to access at least a partial QBI deduction, though the benefit depends on how close the physician's income is to the phase-out range (see National Tax Tools' QBI deduction guide, Manay CPA's 2026 Section 199A guide, Taxstra's QBI deduction guide for physicians, and Reed Corporation's 2026 QBI deduction guide).

W-2 physicians generally cannot deduct unreimbursed business expenses. The Tax Cuts and Jobs Act suspended the federal deduction for these expenses, and the One Big Beautiful Bill Act extended that suspension, so it remains the controlling rule for 2026 for most employees.

1099 physicians, by contrast, may deduct ordinary and necessary business expenses against self-employment income: malpractice insurance, licensure fees, CME, professional dues, travel between work sites, a home office if used regularly and exclusively for business, equipment, and legal or accounting fees. These deductions reduce net self-employment income, which in turn can reduce both income tax and self-employment tax.

The value of a deduction depends on the physician's marginal tax rate. At a combined federal and state marginal rate around 40%, a $25,000 deduction could save roughly $10,000 in taxes, though the exact figure varies by bracket and state. Documentation matters throughout: expenses need to be ordinary, necessary, and substantiated with records to hold up if reviewed (see Physician Tax Solutions' 1099 versus W-2 tax planning guide and Residency Advisor's deep dive on tax trade-offs and structures).

W-2 physicians generally carry less personal liability exposure tied to business decisions, since the employer bears that exposure, though professional liability from malpractice applies regardless of employment status. 1099 physicians operating as sole proprietors carry unlimited personal liability for business debts and obligations; forming an LLC or corporation may provide a liability shield for those business liabilities, though not for professional malpractice itself.

Asset protection considerations vary by state. Some states offer strong protections for certain assets, such as retirement accounts or a homestead, regardless of employment structure, while others offer more limited protection. The choice of entity (sole proprietorship, LLC, or S-corp) interacts with both liability protection and tax treatment, and the structure that fits best depends on state law, income level, and the physician's own risk profile.

This section is general background rather than legal advice, and physicians should consult an attorney licensed in their state for entity formation and liability matters specific to their situation. Our guide to financial planning for physicians and our guide to tax planning for high-income earners look at how these entity and tax decisions connect to the rest of a physician's financial plan.