With locum tenens assignments come 1099 tax status, which means you need to decide which tax structure is right for you. As a self-employed physician, you can be taxed on your personal income tax return or file as a corporation. The good news is that recent tax reforms have opened up considerable lawful deductions for locum tenens physicians. On the other hand, it can be difficult to assess which locum tenens tax structure is right without expert advice. We spoke to tax strategists who specialize in the medical field and experienced locum tenens physicians to help guide you in making this important financial decision.
Are you new to locums?
If you’re new to locums and have always received a W-2 instead of a 1099, two actions can help you avoid tax-time surprises.
Regardless of what business structure you choose, Alexis Gallati, principal tax strategist at Gallati Professional Services, recommends opening a business checking account first thing. A separate checking account makes it easier to keep your books organized, and clean books make for easier locum tenens taxes.
The second action is to get set up to pay estimated quarterly taxes. The rules for how often and how much you pay will change depending on your business structure and whether you set up a tax entity.
Do you need to create a tax entity?
This is probably the biggest decision you’ll make regarding your locum tenens taxes. As high income earners, locum tenens physicians often find it worthwhile to form an LLC, PLLC, S corp, or C corp to better control how much money flows through as taxable income.
Gallati points out a few of the factors that can influence this choice: “Generally if you’re paying more than $7,000 in self-employment tax then you’re going to want to look at becoming a corporation. Also, it depends on the state. In Tennessee, for example, S Corps aren’t desirable because of the way they’re taxed by the state. In a lot of other states, however, S Corps are desirable because the tax savings are high.”
Dr. Joseph Kittah, a critical care physician, first formed an LLC, and within a year, decided to change his tax structure to a S Corp.
“As your income goes higher you have a lot more deductions with an S Corp,” explained Dr. Kittah. “I recommend talking to other locum tenens physicians about the structure they’ve set up and use that as a starting point.”
Do you work in more than one state?
Each state has different filing and tax entity requirements.
Laura Clifford, President of Fox & Company CPAs explains, “Working in several states can complicate your tax filings. Each state you work in — as long as they have an individual income tax — is going to want you to pay tax to them, but if your resident state also has income tax, they’re also going to require a filing. You won’t pay tax on the same income twice because states give you a credit for what you’ve paid toward another state, but you do have additional filings to do.”
Different states also have different rules for what type of tax entity you need to set up depending on your situation. This can make it worthwhile to hire an accountant to manage multiple state setups and filings.
Dr. Jim Mock, an emergency medicine physician, uses an accountant and the help of Weatherby’s payroll department to make his multi-state tax returns easier.
“I predominately work in South Carolina,” noted Dr. Mock, “but the past couple of years, I have gone back to work in Illinois. As a result, last year we filed a separate income tax form for Illinois because I worked enough time there that we needed to file a State tax form there as well. My accountant took care of that, and it was easy to determine from my payroll because Weatherby tracks payments by where you work.”
Do you make more than $315,000?
One of the biggest considerations in choosing your tax structure is household income. And physicians earning more than $315,000 stand to lose 2018’s biggest new tax deduction (section 199A) if they don’t get set up correctly. This deduction alone can equal the cost of a new car.
Gallati explains it this way: “Even if you don’t go the corporate route and you’re a sole proprietor or single member LLC, you can still take advantage of the new Qualified Business Income deductions under section 199A. This deduction came out with the new tax reform and is an automatic 20% deduction for any sort of profit that you have. The caveat is that physicians are considered a specified business service and so, if your household income is over $415,000, you don’t get any part of that 20% deduction. Tax planning can help you find ways to lower your taxable income so that you do qualify for the deduction.”
How can Weatherby help?
Weatherby can alleviate much of the income tracking burden for locums.
As Dr. Mock explains, “All of my expenses come from one source. I basically get a few reports from the payroll at Weatherby, hand them over to my accountant, and in two days I’m done with my corporate taxes for the year. It’s extremely convenient and well organized. Weatherby also provides me with a spreadsheet that I use every month to determine how much to prepay for my taxes because as an S Corporation I am required by Federal law to phone in my prepaid taxes every month.”
Plan today to avoid tax-time surprises
Whether you choose to manage your locum tenens taxes yourself, or decide to have a specialist manage them for you, a little planning can save you a lot of money and increase your peace of mind.
Dr. Mock sums it up this way: “I know my withholdings are set to my income level. I’m not withholding more than I should and I’m not withholding less than I should. I don’t get surprises at the end of the year, so that’s a big advantage of doing a little planning.”
SEE ALSO: Tax benefits for independent contractors