Most W2 physicians who make the switch to a 1099 independent contractor do so for one or all of the following reasons: higher earning potential, flexibility, better tax deductions, retirement savings flexibility, or work-life balance. While being a 1099 physician comes with many advantages, it can add some significant tax challenges. As an independent contractor, you are now considered self-employed and responsible for paying both the employee and employer portions of Social Security and Medicare taxes.
For this reason, many 1099 physicians consider transitioning their sole proprietorship to an S Corp. While some tax benefits come along with becoming an S Corp Physician, there are also many things to consider. The added complexity of managing an S Corp should be understood before electing this tax classification status.
1.) Payroll in Multiple States
Most 1099 physicians may get contracts in multiple states during one tax year. You may need to run payroll in another state in addition to your state of residence due to tax requirements. To limit the complexity of managing all of the forms and documentation needed with payroll, consider using a comprehensive payroll software such as Gusto.
It is recommended that you work with a CPA to ensure that you are adequately running payroll in multiple states. There is also added complexity because some states have reciprocal agreements. This reciprocity allows your employer (business) to withhold taxes from the state where you live instead of the state where you work.
If you are interested in learning more about how to navigate multi-state taxes, consider reading one of our previous articles.
2.) Reasonable Salary for Your Current Role/Position
As an S Corp physician, you are required to pay yourself a reasonable W2 salary from your business. The IRS requires a reasonable salary to match what someone in a similar role would earn for the same services.
This can prove to be a significant hurdle for many physicians looking to elect S Corp status. Physicians need higher income as 1099 contractors than W2 to justify S Corp tax benefits due to their high salaries. This is because any W2 salary paid from the S Corp will be subject to self-employment taxes (employee and employer portions of Social Security and Medicare). If most 1099 income becomes W2 salary, electing S Corp status offers no tax benefits.
Another thing to keep in mind is the social security wage base. This limitation would also lower your potential tax benefit as an S Corp since the social security tax will fall off after this wage base is attained.
3.) Account for Additional Expenses
If you are an S Corp physician, your business will accrue some additional expenses that you will want to account for. Some of the most common expenses associated with S Corps include the following:
Hiring a CPA
With the additional complexity of running payroll and calculating estimated tax payments, it is highly recommended that you work with a CPA to make sure that your S Corp is set up correctly. You want to partner with someone who is well-versed in the ever-changing tax landscape. In addition, CPAs can make recommendations on reasonable salary adjustments, additional tax savings, and how to stay compliant with multi-state tax laws.
Payroll Software
Since you will need to run payroll for your S Corp, you will need to invest in good payroll software. We recommend comprehensive software like Gusto that streamlines the process and files/remits taxes on your behalf. In addition, you want to ensure that your payroll software allows for multi-state taxes if you plan to take multiple contracts in different states.
Bookkeeping Software
If you have not been using bookkeeping software, such as Quickbooks to keep track of your business income and expenses, now is the time. As an S Corp, you must keep track of your income, payroll, expenses, and distributions. These numbers are vital in making sure that your tax projections and estimated tax payments are calculated accurately.
Federal and State Unemployment Taxes
S Corporations are required to comply with federal and state unemployment tax requirements. The Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Acts (SUTA) require that employers pay a federal and state unemployment tax. This tax is only paid by the employer (S Corp).
4.) Additional Tax Returns (Form 1120S)
S Corporations are required to file a separate business income tax return known as Form 1120-S. This business tax return is usually due one month before the traditional tax filing deadline (March 15th). This complex form often incurs extra CPA fees. S Corps with over $250,000 in revenue must complete additional schedules (Schedule L and M-1) on Form 1120S.
5.) Distributions vs. Payroll
A key part of becoming an S Corp physician is understanding the differences between payroll and distributions from your business. Payroll (reasonable salary) is taxed at Federal, State, FUTA, SUTA, Social Security, and Medicare levels. Additional distributions face only Federal and State taxes.
Final Thoughts
As you can see, becoming an S Corp physician requires additional analysis and consideration. As more independent contractor physicians choose S Corp status, understanding the added requirements and regulations is crucial.
Minimizing taxes should not be the only goal to consider when determining the optimal business structure; therefore, seeking guidance from a qualified CPA or tax professional is crucial.
Would you like to learn more about whether electing S Corp status is the right fit for you as a 1099 physician? If so, please feel free to book a free consultation with us to explore an S Corp analysis.
If you would like to receive more information on how to optimize your business and personal finances as a contract physician, subscribe to our newsletter.
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.
