Question

For the tax scenario that you are assigned, write a short memo explaining the tax policy to a client. Keep in mind that the client will have limited understanding of income taxation, so you need to analyze the issue at a high level and then draw a conclusion. Explain the impact that your conclusion will have on the tax position or taxes payable (now or in the future).

Christine is a dental hygienist and has worked at ABC Dentistry for the last 15 years. She works three days per week so that she can maintain her households and take care of her children. She arrives at work and checks her appointments for the day. The dental receptionist books all the clients for her based upon the patient list of the dentist. If the patient cancels, Christine still gets paid. She will watch Netflix or go on a coffee run unless the dentist wants her to help the receptionist unpack supply shipments. Christine has her own scaling equipment but, otherwise, relies on the dentist to provide the other equipment such as the dental chair. She performs x-rays, teeth cleaning and fluoride treatments on the dental patients before they see the dentist. It used to be that she could only work “under the guidance” of the dentist but that recently changed. She is now permitted by her profession to do her work, even if a dentist is not on the property. Christine gets paid $45 dollars per hour. Her dentist charges her work out at $90/hour. For this reason, Christine wants to become self-employed and invoice the dentist for her services. She would likely charge him $65/hour because she thinks she would lose her paid vacation time and employee benefits. She would like your opinion on her status. Can she be a self-employed dental hygienist?

Answer 1

Christine can choose to be self employed if she so wishes. As a self employed person, she will have to pay 15.3% of her net income as social security and medicare taxes, as an employee she only had to pay half that at 7.65% of her net income since the employer pays the other half. The 7.65% employer payment can be used as a deduction for income tax purposes. So she will have to pay an extra 7.65% on $65 out of pocket or $5 as compared to her job. Hence the actual hourly gain after considering extra self employment taxes is $15 ((65-5)-45). There will not be a significant change in income tax as Christine's slab rates will be the same and she can claim expenses against her earnings like depreciation on tools, conveyance, and the above mentioned 7.65% employer portion of the self employment taxes. Also being self employed Christine will have to keep track of her earnings and expenses for tax filings. Aside from the tax implications she will not have a consistent income as the dentist will call her only when he requires her services and thus self employment might not lead to an increase in income as compared to her job. I would advise Christine to retain her job as a consistent wage of $45 per hour will be better for her income in the long run as opposed to a $65 hourly rate on a contract basis. Also she will lose out on paid idle time.