Jovan Johnson, MBA, CFP®, CPA/PFS
Becoming a locum tenens physician can help you experience freedom, flexibility, and potentially greater income. It offers the opportunity to explore new places and communities you might never have experienced otherwise. However, as you weigh your decision, be sure to account for taxes, especially multi-state taxes.
Accepting locum tenens engagements in multiple states introduces a complex tax scenario that can be overwhelming for many physicians. If you accept engagements in more than one state, plan for potential taxes in multiple states. Temporary work in another state doesn’t exempt you from filing taxes there. In this article, we provide tips on how to navigate multi-state taxes as a locum tenens physician.
Consider Additional Tax Filings and Regulations
Your home state retains the right to tax your income, regardless of where it is earned. However, when you work in multiple states, those states may also levy taxes on your income. In such cases, your home state typically provides a tax credit for taxes paid to other states, preventing double taxation on the same income. This often entails filing a residential tax return for your home state and nonresidential or partial residential tax returns for other states.
The specific tax forms required depend on your business’s tax classification. For example, S Corporations paying salaries must handle payroll taxes in every state. As you can see, there is an increase in complexity based on entity choice.
Exceptions exist, such as reciprocity agreements among certain states. Under these agreements, income earned in a border state is treated as income earned in the resident state. For instance, if you work as a locum tenens physician in Virginia but reside in the District of Columbia, your Virginia income is considered District of Columbia income.
Additionally, some states don’t impose state income tax, eliminating the need to file income tax returns in those states.
Plan for Quarterly Estimated Tax Payments in Multiple States
As a locum tenens physician, your work might take you across state lines, presenting unique tax challenges. One crucial aspect to consider is making quarterly estimated tax payments. It is important to earmark funds for these payments for each state of practice (there are a few exceptions). Doing so not only helps you to avoid penalties for underpayment of taxes but also ensures compliance with state tax laws.
It is critical to familiarize yourself with the different state tax rates and rules. Some states, like Utah and Colorado, have flat tax rates; while others, such as Florida and Washington, have no income tax. Nevertheless, most states have progressive tax brackets and require data from federal tax returns to determine taxable income. Additionally, many states offer deductions that may or may not align with federal tax rules.
Tax laws can be complex, especially when working across multiple states. Therefore, seeking guidance from a Certified Public Accountant (CPA) or a qualified tax professional is highly recommended. Their expertise can help to ensure that you are compliant and optimize tax planning strategies tailored to your situation.
Keep Detailed Records of Business Deductions in Each State
As mentioned earlier, state tax regulations may deviate from federal tax regulations. Most states begin with the federal-adjusted gross income figure and then apply positive and/or negative adjustments to arrive at the state-adjusted gross income. However, it is important to note that some states do not adopt federal AGI or federal taxable income as their starting point.
As a locum tenens physician, detailed record-keeping of your business expenses is critical. You should document which state(s) each business expense relates to. Expenses that are relevant to all states will be prorated across tax returns.
Certain state tax authorities may request additional documentation, such as copies of returns filed in other states. Additionally, it is crucial to differentiate between expenses applicable to all opportunities—such as scrubs or reference manuals—and expenses specific to particular states.
By maintaining organized and detailed records, locum tenens physicians can effectively manage business deductions across multiple states, ensuring compliance and maximizing tax efficiency. If you want to learn more about some business deductions applicable to locum tenens physicians, check out our blog.
Final Thoughts
State tax laws and regulations are very complex and vary across states. To ensure you are compliant and optimize your tax planning strategies, consider partnering with a Certified Public Accountant (CPA) or qualified tax professional. This professional can help answer any questions that you may have about tax issues specific to locum tenens physicians.
If you would like to learn more about how state taxes impact your specific situation, please feel free to schedule a free consultation.
Disclosures
None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
