Jovan Johnson, MBA, CFP®, CPA/PFS

Locum tenens can serve as a great career alternative, providing you with true freedom, flexibility, and more income. You can experience new places and locations you would not have otherwise visited. However, as you weigh your decision, make sure to account for taxes. Most locum tenens physicians and physician assistants are independent contractors, which is equivalent to being self-employed for tax purposes. So instead of receiving a W2 with taxes automatically taken out of your paycheck, you will receive a 1099 form to report your income and you will have to calculate and pay taxes on your own. In this article, we discuss locum tenens tax advice for physicians and physician assistants

1.) Business entity selection and tax classification

As an independent contractor, you are treated as self-employed for tax purposes. Consequently, it is very important to create a legal separation between you and your business. In the case of an audit or legal pursuit, having a legitimate business structure will be crucial. It is also important to open a separate business checking account, savings account, and credit card to further separate business activities from personal ones.

I would like to highlight that a federal tax classification may be different from a business entity selection (created at the state level). For example, you can have an LLC taxed as a sole proprietorship or an LLC taxed as an S Corporation. As you can see, this can become very complex which is why it is critical to seek advice from a CPA or business attorney in your state.

Choosing the right business entity is a very important decision that should not be taken lightly. Some factors to consider when making this decision are liability protection, tax implications, costs and complexity, future business plans, flexibility, and state regulations. Before deciding, consult with a CPA or business attorney who can provide tailored advice based on your goals.

2.) Plan for quarterly estimated tax payments and self-employment taxes

Arguably one of the largest differences between a W-2 employee and an independent contractor is that independent contractors must pay quarterly estimated tax payments (which include both self-employment taxes and income taxes). As a W-2 employee, you get the luxury of your employer withholding taxes and paying them to the respective regulatory agencies. Also, many W-2 employees are not aware that their employer pays an equivalent portion of Social Security and Medicare taxes (FICA) to the IRS. Now as an independent contractor, you are both the employee and employer. Consequently, you are responsible for paying both employer and employee portions of the FICA taxes. In addition, because no employer is withholding taxes for you, you will need to make quarterly estimated tax payments (which include both self-employment taxes and income taxes) to the IRS and your state department of revenue, if applicable.

Also, be aware that you will only receive your Form 1099 annually. Therefore, you will need to keep good records of your income and expenses throughout the year, preferably using some bookkeeping software. This will allow you to calculate quarterly estimated tax payments throughout the year.

I strongly recommend that you seek advice or assistance from a CPA to help calculate these payments for you. In addition, a CPA can provide more specific locum tenens tax advice tailored to you.

3.) Consider that you may have to file taxes in multiple states and local municipalities

I think this shocks most independent contractors. Just because you temporarily worked in another state does not mean you do not have to file taxes in that state. If you will be traveling and working across multiple states, plan to set aside money for quarterly estimated taxes for each state (there are a few exceptions). It is best practice to assume that you will have to file a tax return in each state. Be aware of the different state tax rates and rules. If you plan to work internationally, that may create more complexities, but I would plan on paying taxes to the IRS on income earned outside the country.

4.) Take advantage of tax deductions

A great benefit of being an independent contractor is that you can deduct business-related expenses. Some examples of these deductions include:

  • Home office deduction
  • Travel expenses (lodging, flights, taxis, meals (50%), etc.)
  • Moving costs
  • Work uniform
  • Transportation (gas and mileage)
  • Insurance (health, dental, malpractice, etc.)
  • Professional memberships and licenses
  • Continuing education
  • Retirement savings
  • Any other costs directly related to your locum tenens work

It is critical to keep good records to claim these business deductions on your tax return. Start by opening a separate business checking account, savings account, and credit card. Then implement a bookkeeping software where you can link these accounts and easily track your income and expenses.

You may qualify for many other deductions. It is worth it to work with a CPA to ensure your bookkeeping is correct and you are taking advantage of all deductions applicable to you.

5.) Consider funding a self-employed retirement plan

Funding a self-employed retirement plan is the best way to reduce your taxable income. Many of these plans allow pre-tax contributions of up to $60,000 plus. If your effective tax rate is 30%, this could amount to $18,000 plus in tax savings. Two of the most common self-employed retirement plans are the Simplified Employee Pension (SEP) IRA and the solo 401(k). Both plans allow pre-tax or Roth contributions. The contribution type should depend on your financial goals and retirement plan.

As an independent contractor, you are now in charge of saving for retirement. You are tasked with opening the self-employed retirement account, funding it, and selecting the investments.

Final Thoughts

There is a lot to consider when transitioning from an employee to an independent contractor. Tax laws can be very complex and may differ across jurisdictions. It is advisable to partner with a CPA who can help you stay on top of all the different facets of tax planning and ensure you are making informed decisions based on your goals and the most up-to-date tax regulations. Tax planning is a dynamic and tailored process. Working as a locum tenens physician or physician assistant has its own set of advantages and disadvantages, however, it can be an incredibly rewarding career.

Our team of CPA and CFP® professionals specializes in providing locum tenens tax advice for physicians and physician assistants. Please feel free to contact us if you would like to learn more.

Disclosures

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