Tax planning for physicians: W-2, 1099 and locum tenens

• Hospital or group W-2. Taxes are withheld. Your employer pays half of FICA. Unreimbursed job expenses are generally not deductible on your federal return.
• 1099 moonlighting, locums or expert witness work. Reported on Schedule C. You pay self-employment tax and make estimated payments. Ordinary and necessary business expenses are deductible, such as licenses, malpractice insurance you pay, CME tied to your current work, and business travel away from your tax home.
• Locums through an agency. Some agencies pay W-2, others 1099. Read the contract. Travel and lodging paid by the agency may be reimbursed under an accountable plan or included in income.
• Partner or K-1 income. Practice partners report their share from the partnership return and generally pay self-employment tax on it.

Tax home. Under IRS Publication 463, travel is deductible only when you are away from your tax home. Physicians who work only locums and have no regular base need to check this carefully.

An S corporation can make sense for a physician with substantial, steady 1099 or practice income. Profit above a reasonable salary is not subject to self-employment tax. But the salary must be reasonable for the services you perform. For physicians, reasonable pay is often high, so the savings may be smaller than expected.

An S corporation also means payroll, a separate Form 1120-S and state filings. See S corp reasonable compensation and S corp accountable plans.

QBI. Health is a specified service trade or business under Treas. Reg. §1.199A-5(b)(2)(ii). The qualified business income deduction phases out above income thresholds for physician income.

IRS Publication 560 covers the three main options.

• SEP IRA. Employer contributions only, based on net self-employment earnings. Can be set up and funded up to your return due date, including extensions. Simple, but no employee deferral.
• Solo 401(k). Employee deferrals plus employer contributions. The employee deferral limit is shared with any hospital 401(k) or 403(b) deferrals, because it is one limit per person. A sole proprietor with no employees can adopt one after year end, by the return due date without extensions, but deferral elections for the year must be made by year end.
• Defined benefit or cash balance plan. Contributions are actuarially determined to fund a target benefit and can be much larger than defined contribution limits for older, high-earning physicians. Requires an actuary and ongoing funding.

Plans can be combined, with coordination rules. Employees of your practice may need to be covered.

Holding licenses in several states does not create tax by itself. Working there does. Locums income is generally taxed by the state where you perform the work, and your home state may give a credit. DC, Maryland and Virginia residents who work across the line have their own rules. See live in Virginia or Maryland, work in DC.

Federal estimates are due in four installments. Higher earners use a 110% of prior-year tax safe harbor when prior AGI exceeded $150,000 ($75,000 MFS), per IRS Publication 505. See quarterly tax planning.

Best for: hospital-employed physicians with side income, locum tenens physicians, CRNAs, NPs and PAs, and practice owners.

1. Free initial consultation. Share your W-2s, 1099s, contracts and states worked.
2. Fees quoted upfront, in writing. Transparent, fair fees in an engagement letter.
3. Plan. We map entity, retirement plan and estimate choices to your income.
4. Setup. If an S corporation fits, we handle the election, payroll and accountable plan.
5. Returns. We prepare federal, resident and nonresident state returns.

Own a practice? See medical practice accounting.