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WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February, 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

 

 


February, 2005

HOT EMPLOYMENT LAW TOPIC: NON-COMPETE AGREEMENTS

by Judy L. Polacheck

  • A surgeon is negotiating for a position with a teaching hospital.  Her future employer presents her with a contract including a term prohibiting her from practicing as a surgeon anywhere in the metropolitan area for a period of one year if she resigns.  Should she sign the contract?

  • A physician group would like to ask a long-time employee to sign a new agreement prohibiting him from practicing medicine anywhere in the state for a period of five years should he leave the practice.  Is that legal?

  • A pediatrician wishes to leave the hospital that employs him in order to take a job with a small private practice located across the street from the hospital.  Might he be violating his contract if he does so?

Hospitals and physicians?groups frequently request that doctors agree not to practice within a specified geographic area for a certain period of time after their employment ends.  These agreements are often referred to as “non-competes.?nbsp; The non-compete might be part of an employment agreement entered into upon hiring, or it might be a document that the employer asks the physician to sign at some later stage, such as the time of promotion.  Some non-competes also provide for the employee to pay pre-determined sums in “liquidated damages?should they violate the agreement.

Physician non-competes are periodically the subject of lawsuits.  Hospitals and individual doctors have sued former employees who have taken new positions in different hospitals, or opened new practices on their own.  Through a claim that the former employee is violating the agreement, the employers seek to prevent the individual from continuing to compete and to obtain an award of damages.

There are no universal rules about when non-competes are enforced against physicians because the law varies widely from state to state.  There are a small group of states that look with disfavor on all physician non-competes.  In California, for instance, non-competes are rarely enforced against anyone, including doctors.  Under Massachusetts law, the right of a physician to practice medicine after the termination of employment cannot be restricted by contract or agreement.  Colorado similarly prohibits any agreements restraining doctors from practicing, although courts will nonetheless enforce liquidated damages clauses so long as the damages are reasonable.

In most other states, the enforceability of a physician non-compete is determined by a multi-factor analysis.  While the factors are not identical in each state, they generally involve:  (i) whether there is a legitimate interest for which the employer is seeking protection through the non-compete, such as goodwill, or whether the employer is, instead, seeking to stifle ordinary competition; (ii) whether the non-compete imposes an undue hardship on the employee; and (iii) the impact that the non-compete might have on the public interest.  As part of this analysis, courts consider whether the temporal and geographic restrictions imposed by the non-compete are reasonable.

In a recent New Jersey case, a teaching hospital successfully enforced a non-compete against a neurosurgeon who had resigned from his employment.  The physician was prohibited from practicing his specialty within a thirty-mile radius of his former employer for a period of two years.  The court found that the hospital had a reasonable interest in protecting its patient base and that enforcing the non-compete did not present an undue hardship on the physician, nor was it contrary to the public interest.

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Courts in certain other states have found that public interest considerations weigh heavily against enforcement of physician non-competes.  When the Arizona Supreme Court declined to enforce a non-compete between a medical group and one of its shareholders, a pulmonologist, it determined that the special relationship between a doctor and patient is entitled to unique protection.  The non-compete at issue prohibited the doctor from working with any competing medical practice within an area of approximately 235 square miles and from treating any patients that he had treated while employed, for a period of three years after his departure from his employer.  When evaluating these restrictions, the court found that the former employer’s interests in its patient base and referral sources was protectable, but that other factors, including the rights of patients to choose their own doctors, outweighed those interests.

When evaluating the enforceability of a physician non-compete agreement, it is important to be aware of applicable state law.  In the majority of states, where the above three-pronged test applies, courts may consider such factors as the scope -- both in time and geography -- of the restrictions that the non-compete imposes; the extent to which the non-compete precludes the physician from practicing his or her chosen profession; the availability of medical care in the area; and the rights of patients to choose their own doctors.

The information in this document is not legal advice.  It is provided for educational purposes only and is not a substitute for professional advice on your specific situation.  If would like more information or advice about a particular non-compete agreement, contact Judy L. Polacheck, 617-666-2888 in Massachusetts, or a member of the bar in your state.

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MEMO TO MOONLIGHTERS 

by Andrew D. Schwartz, CPA

Do you moonlight as a way to supplement your salary, pay down your student loans, or build up a little nest egg? 

Whatever the reason, when you moonlight, how you're compensated determines how you will be taxed.  If taxes are withheld from your pay, you're considered an employee.  No taxes withheld means you're an independent contractor.  Generally, each employer has a set policy as to whether they compensate their moonlighters as employees or as independent contractors.

There are advantages and disadvantages to being compensated as an independent contractor.  Let's take a look at some of the advantages:

  • You can deduct your professional expenses directly against your income.  Let's say you earn $10,000 moonlighting as an independent contractor, and have $6,000 of unreimbursed professional expenses. In this case, you'll pay taxes on only $4,000 of net moonlighting income. (Check out our listing of professional expenses to find out what your colleagues are deducting against their moonlighting income.)  If you're paid as an employee, you'll claim your professional expenses as an itemized deduction subject to a various limitations.

  • You have the option of establishing and contributing money into a pre-tax retirement account based on your net moonlighting income.  You have until April 15, 2005 to set up and fund a SEP IRA for 2004, and sock away up to 20% of your net moonlighting income.  Amounts contributed reduce your taxable income and grow tax-deferred.  Other pre-tax savings opportunities available to independent contractors include SIMPLE IRAs and Solo 401(k) plans.

  • You can deduct 100% of your health insurance premiums.  As long as you're not covered under an employer sponsored health insurance plan, being paid as an independent contractor allows you to write-off your health insurance premiums paid during the year. 

So what's the catch?  Here are some of the disadvantages of being paid as an independent contractor:

  • You're subject to an additional tax known as the "self-employment tax".  When you work as an employee, your employer withholds social security and Medicare taxes from your pay at a rate of 7.65%, and then matches the taxes withheld.  So the government gets 15.3 cents for every dollar you earn.  When you're self-employed, you're required to report and pay that 15.3% tax, known as the self-employment tax, as part of your federal tax return.  (Your self-employment tax rate goes down to 2.9% once your combined salary and net moonlighting income exceeds $87,900 in 2004 and $90,000 in 2005.)

  • Your tax return becomes much more complicated.  The days of preparing the 1040-EZ are over.  Now, you'll need to complete and send in the long form, along with a Schedule C, Schedule SE, and whatever other tax forms and schedules might be required.

  • You may be required to prepare and submit quarterly estimates.  The government generally doesn't want you to write them a big check on April 15th.  Depending on how much you earn moonlighting and what else you have going on with your taxes, you might need to send the IRS some money every quarter to keep from getting penalized.  Use a Form 1040-ES to remit your federal estimated tax payments.

 

Employee vs Independent Contractor:

Employee

  • Receive W-2 Form

  • Report income with other wages earned during the year

  • Claim professional expenses as an itemized deduction


Independent Contractor

  • Receive 1099-Misc

  • Report income on a Schedule C

  • Claim professional expenses directly against income earned on the Schedule C

 

 

Watch Your Withholdings

Even if taxes are being withheld from your moonlighting income, don't automatically assume that enough taxes are being taken out.  That's because each employer withholds taxes as if they are your only employer.

Let's say you earn $20,000 from three employers during the year.  The amount of federal income taxes withheld from your pay will be significantly less than if you had earned $60,000 from just one employer.

To make matters worse, if you tell your employer you're married, they withhold even less taxes, since the withholding tables for a married person assume your spouse doesn't work. 

If you moonlight and get paid as an employee, keep an eye on how much taxes are being withheld.  Otherwise, you might get hit with a surprisingly large tax bill on April 15th.

The 40% Rule

Moonlighters who are paid as independent contractors have no taxes withheld.  In that case, it's generally a good idea to set aside 40% of what you earn for taxes.  Remember, you'll owe federal taxes, state taxes, and self-employment taxes on your earnings. 

Plan Ahead

The taxes you'll owe on your moonlighting income are manageable if you plan ahead.  Don't let the possibility of a  surprisingly large tax bill deter you from taking advantage of moonlighting or consulting opportunities that may arise.

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TAX AND FINANCIAL PLANNING CALENDAR FOR FEBRUARY, 2005

Month

Income Taxes

Saving and Investing

 

February

  • Get a jump on your tax prep and call one of the MDTAXES CPAs by 2/28/05 to set up an appointment

  • Organize your tax information

  • Try to have holiday credit card balances paid off by 2/28/05

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2004 & 2005 TAX FACTS

  • For 2004 the standard deduction for a single individual is $4,850 and for a married couple is $9,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. Our March, 1998 newsletter addressed the issue of itemizing your deductions.
  • For 2004, the personal exemption is $3,100. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes will be $90,000 for 2005 up from $87,900 in 2004.
  • The standard mileage rate is $.375 per mile for 2004, and will increase to $.405 per mile for 2005. Deducting automobile expenses was addressed in our March, 1996 newsletter .
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $14,000 for 2005.  And if you'll be 50 or older by December 31, 2005, you can contribute an extra $4,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $3,000 for 2004.  And once you turn 50, you can contribute an extra $500 into your IRA this year.  You have until April 15, 2005 to make your 2004 IRA contributions.  For 2005, you can contribute up to $4,000 ($4,500 if 50 or older) into your IRA.

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copyright - 2005 - The MDTAXES Network

 


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Tax and financial planning calendar for February, 2005


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GOT STUDENT LOANS?

Here are some revelations for people in student loan nation:

  • Consolidation before grace period expiration

  • Notification of your relocation

  • Rehabilitation before consolidation

We're pleased to have a student loan counselor available on staff.

If you have questions about your loan portfolio, or want to find out more about the services we provide, please call (800) 471-0045 or e-mail us at studentloans@mdtaxes.com


 




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