Starting a role as a 1099 physician can be intimidating, especially when it comes to financial planning. Here are the key financial items a locum tenens physician needs to know including paying taxes through 1099 forms, options with SEP-IRA, and quarterly taxes.
#1 1099 vs W2 Physician – Learn the Financial Terminology
Just like with medicine, finance has its own language. Each term has a precise meaning and if you don't know what it is, you not only look ignorant but are likely to make critical mistakes.
- An employee receives a copy of the W-2 tax form their employer filed with the IRS at the end of each year. That information flows directly onto the 1040 tax form.
- An employee fills out a W-4 for their employer.
- An independent contractor is self-employed and receives 1099 forms from each client they did work for during the year.
- An independent contractor fills out a W-9 for their client.
- For a sole proprietor, these 1099 forms (along with all the business expenses) flow onto Schedule C and then on to the 1040.
- For a partner, these 1099 forms flow onto Schedule K of a partnership return (1065). The partnership issues the partner a Schedule K-1 which then flows onto the 1040.
- Similarly, income paid to a corporation goes on to the corporate return (1120 for a C Corp or a 1120S), which issues W-2s to its employees and K-1s (for an S Corp) or 1099-Divs (for a C Corp) to its owners. LLCs are taxed either as a sole proprietor, as a partnership, or as a corporation (C or S).
- You don't “pay taxes” through a 1099 form. Most of the time, you are issued 1099 forms and you pay taxes via the 1040. There is also no such thing as a “1099 employee”. If you're getting a 1099, you're in business.
Recommended Reading
Understanding Your Tax Return: Income Flows
#2 Decide on a Business Structure
Speaking of business structures for locum tenens, every self-employed doctor has a decision to make. If you fail to make the decision, you automatically become a sole proprietor. The good news is that is usually fine for an independent contractor doctor. Even if your spouse is also an independent contractor doctor, there's no point in forming a partnership. Just have two separate sole proprietorships. The main reasons any doctor ever considers doing anything else is to reduce liability and to reduce their taxes. However, the main liability most doctors face is malpractice, and malpractice is always personal.
Forming a partnership, a limited liability company, or a corporation, doesn't reduce your malpractice risk. It can potentially reduce some business-related risks, but for a typical independent contractor doc without employees, that risk is negligible and can be safely ignored.
Forming a partnership or an LLC doesn't reduce your taxes at all. However, if an LLC or a corporation is formed AND chooses to make an “S election” it will then be considered an S Corporation by the IRS. This allows the owners to split the income from the business into salary and distributions. Salary is taxed just like it is for any W-2 employee and since the owner must pay both the employer half and the employee half of the payroll taxes, you will end up paying an equivalent amount of tax on W-2 salary issued by your S Corp as on sole proprietor income. However, the savings comes in on the distributions. Distributions are not subject to payroll taxes such as Social Security tax, unemployment tax, and Medicare tax. Most doctors are going to max out their Social Security and unemployment taxes anyway if they are paying themselves a salary the IRS will consider reasonable, but there are potential tax savings available due to the Medicare tax.
For example, if a doctor forms an S corp and pays herself a salary of $200,000 and distributions of $100,000, she will save 2.9% in Medicare tax on that last $100,000, or $2,900. In reality, it is less than that, since $1,450 of that tax is deductible to the business. Of course, there is also additional time, hassle, and expense associated with corporation formation, maintenance, and tax returns that should be taken into consideration with this decision. I think a good general rule is that if your distributions won't be at least $100,000 per year for at least a decade, I would not bother forming an S Corporation, I would just function as a sole proprietorship.
C corporations have a few advantages, but these are almost always outweighed by the disadvantages for a typical physician independent contractor.
#3 Estimated Quarterly Taxes
Another big change for a lot of newly self-employed doctors is making quarterly estimated tax payments. This involves sending in IRS Form 1040ES, along with a check, once per quarter (oddly enough, the due dates are the first business day after April 15th, June 15th, September 15th, and January 14th.) That's pretty easy, just put a reminder in your phone.
The only complicated part is figuring out how to estimate your quarterly tax amount to put on the form and check. There are three goals with this process. The first is to avoid having to pay any penalties for underwithholding. The second is to avoid giving the IRS an interest-free loan. The third is to avoid being surprised come April with a big tax bill and not have the money to pay it.
How to Estimate Quarterly Taxes
The easiest method to avoid penalties is to simply take what you owed last year on your taxes (see line 33 on the 2019 and 2020 1040), multiply it by 27.5%, and pay that amount each quarter. This will ensure that you are in the “safe harbor” to avoid penalties, but it may or may not be anywhere near what you actually owe in taxes. You could still be over or underpaying. If you wish to be more accurate, you will actually need to estimate what your tax burden will be, divide it by four, and pay that. It gets even more complicated if your income varies dramatically between quarters, but even with some variation, I would still just try to make even quarterly payments to minimize your tax preparation hassle.
The best way I have found to make sure I have enough money set aside to pay any amount due in April above and beyond the quarterly payments is to find my effective tax rate for the prior year and multiply that each month by what I made that month and set it aside for taxes. Quarterly payments are made out of this account and there should be about enough extra in there to make up the difference in April. If that effective tax rate changes for the next year, I adjust.
Some states may also require you to make quarterly estimated taxes. I was pleased to see that Utah does not; I am allowed to pay the whole lump sum in April without penalty. That does, of course, require a little bit of discipline to make sure I don't spend it.
If you incorporate (or declare your LLC a corporation for tax purposes) there will be other tax forms that must be filed.
#4 1099 Health Insurance
If you've never been self-employed before, you may have never purchased your own health insurance and likely will dramatically underestimate what it costs. Health insurance is expensive, ranging from a few hundred dollars a month for a bare-bones plan for a single healthy person to $3000 a month for a better plan for a family.
You may qualify for some kind of a group plan through a professional association, or perhaps your spouse's plan if your spouse is an employee, but most docs will end up simply buying it on the open market. That doesn't necessarily mean going through the ACA exchange. Most of the time there is no point in doing that since you will earn too much to receive a subsidy. You might as well go through a local health insurance broker to help you decide. The policy won't cost you any more than buying it directly from the insurer and you'll be offered several different options and get some advice on what is best.
You might also consider a Christian health sharing ministry to save money, but realize that this is not exactly insurance, so READ THE FINE PRINT. If you end up buying a High Deductible Health Plan, be sure to invest in a Health Savings Account.
Additional Information:
Health Insurance Options for the Self-Employed
#5 Disability and Life Insurance
Sometimes employers provide other benefits beyond health insurance. Two common ones are life and disability insurance. These life insurance policies are usually way too small to be anything other than a minor supplement to your main policy. Group disability policies also have significant limitations. At any rate, if you're in business for yourself, you'll need to take care of all of your life and disability insurance needs on your own. Not a big deal, just buy them from an independent agent.
#6 Retirement Accounts for Self Employed
Another common and important benefit often provided by employers is a retirement account. If you are self-employed, you're on your own for this. There is both good news and bad there though. The good news is you get to choose the plan. The bad news is that you have to pay for the plan. There won't be any employer match. This, along with having to pay both halves of the payroll taxes and all the other benefits, is an important reason why you should be paid more, perhaps 10% more, as an independent contractor than as an employee.
However, many doctors PREFER being able to choose their own retirement plan. Costs are quite low for single person plans like a SEP-IRA, an individual 401(k), and a personal defined benefit/cash balance plan. No more ticky-tacky fees. No more “advisors to the plan” ripping you off with another layer of fees. No more crummy loaded, high expense ratio funds in the plan.
One word of caution here though. While a SEP-IRA is a little easier to open and run than an individual 401(k), the 401(k) is ALMOST ALWAYS the right plan for the independent contractor physician. You max it out on less income because $19,500 of the $58K (2021) is an “employee contribution”, so you only need approximately $190K to max it out rather than approximately $285K to max out a SEP-IRA. In addition, using a 401(k) instead of a SEP-IRA preserves your ability to do a Backdoor Roth IRA because it avoids the pro-rata rule.
#7 1099 Deductions for Physicans
Another nice aspect of being an independent contractor is that it is far easier to take business-related deductions. Anything you spend on your business including scrubs, white coats, shoes, computers, phones, CME materials, licensing fees, subscriptions, mileage and more can be placed directly on Schedule C (assuming sole proprietorship, but the process is similar for partnerships and corporations) as a business expense and is deducted from the business income before any taxes, including payroll taxes, are paid on that income. It is super easy.
An employee, on the other hand, is hosed here. They were pretty hosed before 2018 because the employee had to attempt to deduct these sorts of expenses as an unreimbursed business expense on Schedule A, where it was subject to a 2% of income floor. 2% of a physician income represented the loss of a big deduction, and maybe the entire deduction. Starting in 2018, this deduction is gone completely for employees. So a 1099 doc pays for CME with pre-tax dollars and a W-2 doc pays for CME with after-tax dollars. As I tell my kids, “Life isn't fair”. If you're in this situation, you might want to lobby your employer to provide a “CME Fund” as one of your benefits for these types of expenses.
#8 EIN and a Business Bank Account
You're in business now, so you need to act like it. You should keep the finances of your business separate from those of your personal life.
That means getting an Employer Identification Number (EIN) from the IRS and providing it to your clients on the W-9 form instead of your Social Security Number. You don't have to, but it is good practice to do so and perhaps even provides a bit of identity protection. It is also free and super easy by going to the link above.
You should also open a business bank account and run all business income and expenses through it. Then you pay yourself periodically by transferring money from the business bank account to your personal bank account. This practice will make tax preparation much easier and look a lot better in an audit. Trust me, just do it. You'll be happy you did.
#9 Corporations Don't Need W-9s and 1099s
If you do decide to go the S Corp route, your tax life mostly becomes a lot more complicated. But there is one aspect in which it becomes less complicated. Your clients no longer need to issue you a 1099 for any payments of $600 or more. That means you shouldn't have to provide them a W-9 either. Of course, lots of people don't understand this and continue to request them, even if you insist they don't need to send you a 1099. It's not a hill worth dying on, just send them the W-9 and let them send you a 1099. The important thing is you report the income on your tax return even if they didn't have to send you a 1099.
#10 PSLF Implications of Being a Self-Employed Physician
Public Service Loan Forgiveness (PSLF) is a program where someone with qualifying direct federal loans in a qualifying payment program (IBR, PAYE, REPAYE, Standard 10-year repayment plan) who makes 120 monthly, on-time payments while directly employed by a non-profit company (501(c)(3)) has whatever is left after those 120 payments forgiven tax-free.
This program is NOT AVAILABLE to the self-employed, even if they contract with a 501(c)(3) hospital. So independent contractor docs ought to just refinance their student loans and pay them off rapidly by living like a resident. Unsurprisingly given all the issues with PSLF, there is some controversy here, but I wouldn't risk this one if I were you. I think the law is pretty clear in this regard. But there are some smart people who disagree with me and I've been wrong before. If you're in this situation, best to read up on it, make a decision, and for heaven's sake be sure to keep a PSLF Side Fund, just in case the program and your life don't work out as planned.
#11 The Pass-Thru Business (199A) Deduction
Starting in 2018, some self-employed doctors will be eligible to receive a rather large deduction, up to 20% of the income from their business. This subject is ridiculously complicated but worth knowing about. Doctor income is only eligible for this deduction if your total taxable income (including your spouse's income if filing MFJ) is less than $164,900 ($329,800 married). Don't be surprised if you don't qualify for the whole deduction, most won't due to some of the complicated rules. Still, it makes being self-employed a little more attractive than it used to be and certainly complicated the decision about whether to elect S Corp status or not.
Being in business for yourself is exciting and empowering, but does come with taking care of a few things on your own that your employer used to take care of for you. But if you work through this list, you'll be up to speed with those of us who have been self-employed for a long time.
What do you think? Did I miss anything new 1099 docs need to know? Are you 1099 or W-2 or a combination? Comment below!
Helpful post, Jim.
Last year was the first year I had 1099 income of any significance. This was in addition to my W-2 income. While I am not thrilled with the idea of having to jump through all the tax hoops, it is good to learn and I think will be beneficial. Keeping my expenses separate – as you suggested – in a business bank account will make the process a whole lot easier, because I know exactly how to figure out income and expenses (i.e. deductions). Getting the EIN and opening the bank account were not hard at all.
TPP
Really great post even by WCI standards.
I think some docs are intimidated by 1099 jobs and prefer being W2 employees so they don’t have to handle the extra tax, insurance and retirement plan implications. Luckily there are sites like WCI to demystify it.
I prefer to mix the best of both worlds – a stable W2 job with maximum benefits and 1099 side gigs for extra cash. Just like mixing traditional, Roth and taxable accounts gives you maximum flexibility, combining W2 and 1099 jobs gives you plenty of options. Thanks for all the great resources.
I agree. W2 plus 1099 is a great combo for me. I don’t do quarterly estimated tax payments – I just have extra withheld at my w2 job to cover my taxes on 1099 work. It’s automatic! And I just adjust it each year after doing my taxes. Don’t assume you need to incorporate. Everyone seems to think you should, but unless 1099 is generating over $100,000 in distributions per year, it probably isn’t worth it.
There is generally no “need” to incorporate. It is a matter of which is more tax efficient. If you will exceed the SS maximum wage base (2019 = #132,900) in your primary W-2 job, you should never elect an S-Corp unless you exceed the QBI taxable income threshold and are not an SSTB.
Here is a good case study of W-2 verses 1099 done by a tax expert who is a CPA, tax lawyer: https://myfinancialcoach.com/portfolio/1099-vs-w-2-tax-planning-for-1099/
Do employed physicians who receive a small % of their income from surveys still have to pay quarterly taxes or is that only for people who make the bulk of their money via self employment?
If you’re having enough withheld from your W-2 job you don’t need to do quarterlies. You just need to have enough withheld or paid quarterly to stay in the safe harbor.
https://www.whitecoatinvestor.com/estimated-taxes-and-the-safe-harbor-rule/
I learned all this stuff on my own over the last year or so while forming my own S-corp. Sure do wish I had this post in 2017. A few more points:
– Some people seem real scared of buying health insurance on their own, but for me as a mid-30s healthy man this was a no brainer. I just went w/ LBMC/Physician Solutions. It’s a HDHP w/ family premium ~$1100/mo and you get access to the entire national Blue Cross network.
– A huge additional benefit of picking your own benefits as a 1099 is that you can set up a cash balance plan (CBP), which lets you save an additional vast amount of money pretax, kind of like a 401(k). (Actual amount depends on your age but for me is ~$90K/y.) The “downsides” are that (1) IRS requires you to pay an actuary ~$1K/y to tell you exactly how much you can save each year and (2) this will reduce your max 401(k) contribution somewhat (from $50s to about $32K in my case). Before I found out about the CBP via WCI I was never offered it as a benefit in any job.
– Google was not my friend re how exactly to do my taxes as an S-corp, ie which numbers go on which lines. And in addition to quarterly withholding you also have to file periodic FICA+SS tax via EFTPS. My understanding is that TurboTax (for Mac at least) cannot handle this. I’m doing it for 2018 right now and hope to post exactly how to do it in the forums once I check it over with a CPA.
– A ~subtle point about the 199a deduction is that if you are the sole employee of your S-corp, you *cannot* use your salary in this deduction. You can only use your distribution. (Yes, I am oversimplifying.) My understanding is that if you are sole proprietor OTOH, you can deduct your entire earnings (what would be salary+distribution as an S-corp). So it probably makes sense to do the math and see which way, S-corp or sole proprietor, saves you the most taxes, after you take into account (as WCI mentioned) that you wouldn’t pay SS+Medicare+additional Medicare on your distribution. I never did this math though.
Thanks for the health insurance tip. I’ll have to look into that next year.
I agree that S Corp taxes are a step above and beyond filing as a sole proprietor. You’re right that Turbotax Home and Business can’t do it. I did mine by hand last year. It wasn’t too bad for a simple corporation like most doctors would be.
More info on the 199A deduction and figuring out exactly how much to pay yourself in salary in order to optimize the deduction vs saved Medicare taxes (I did do the math):
https://www.whitecoatinvestor.com/s-corporations-what-you-need-to-know/
LBMC/Physician Solutions is a great offering for 1099 Physicians looking for health insurance. There are 3 options of a national Blue Cross HDHP with plans for individual, individual + spouse, or family. You can also enroll at any time during the year, not just during open enrollment season.
Website: http://www.physiciansolutionslp.com
I have used turbotax Corporate to do my S-Corp taxes for a few years now. It is obviously more expensive than doing it by hand, but it is nice how it imports the previous years info, prompts you for everything, and even compares how you did the previous year.
I may have to try that this year. At $160 it’s a fair bit more than even the “Home and Business” Turbotax but it’s still way cheaper than an accountant.
And one more thing: some people think that a new CA Supreme Court ruling, Dynamex v Superior Court, will make it a lot harder for companies to use independent contractors (vs making them W-2s):
https://www.californiaemploymentlawreport.com/2018/10/new-decision-reviewing-independent-contractor-test-dynamex/
I don’t know enough law to understand whether this thing has legs, and in particular whether it has the potential to go to a national court. Would not be in my best interests for the reasons above.
We’re already seeing the effects of this with a lot of locums tenens companies. Within psychiatry and telepsychiatry groups with a large presence in California, such companies have converted a lot of their formerly 1099 self-employed contractors to W-2 status or are paying them through the physician’s S corp. It has admittedly made me look towards other non-clinical 1099 and self-employed income streams.
Unfortunate; hadn’t heard that this has affected jobs in my field (EM) yet but see no reason why it won’t if psych is going that way. Oregon is looking mighty pretty these days…
Great post! Lots I still have to learn and fix. Couple questions as this is first time at 1099.
1) Do most people have business checking and savings? Was thinking of just checking and then transferring excess to personal account.
2) Should health insurance premiums be paid out of the business checking account? What about the quarterly tax payments for safe harbor? I’m assuming everything out of the business account as opposed to personal account but wanted to check.
My goal for 2019 is to setup a business checking savings and credit card. Thanks for everything WCI!
1. I think most do what I do- just checking.
2. Depends on business structure. Sole proprietor it certainly doesn’t have to be. I’ll have to read up on that one to really give you a definitive answer of when it has to be and when it can be written out of a business account. Yes, your taxes should be paid out of the business account.
I had a business checking only for a few years and later opened a Business savings account linked to the checking account. No law against that except the funding was directly from the checking and is post tax. It offers the discipline of capital building since most business expenses are from the checking account.
1. A sole proprietorship does not need separate financial accounts. However, it is recommended, especially with a single member LLC. An S-Corp must use separate financial accounts for all business transactions.
2. As WCI pointed out, it depends on the tax structure and circumstances. With a sole proprietorship, both health insurance premiums and tax payments are personal liabilities and should be paid out of personal accounts. With an S-Corp, payroll must be paid out of S-Corp accounts, personal tax liabilities must be paid out of personal accounts, any S-Corp tax liabilities (not profits) must be paid out of S-Corp accounts, health insurance premiums and HSA contributions can either be paid out of S-Corp accounts or out of personal accounts and reimbursed from S-Corp accounts. Both employee and employer contributions to an employer retirement plan must be paid from the respective business accounts of either tax structure.
I see no true benefit from a business account for a sole proprietorship. It might look more official but the IRS isn’t going to care what account you charge but they are going to care what expenses you charge to your business.
It will help you keep better track of business expenses and revenue too. If it’s more than a handful of checks in and a handful of expenses out each year, I think it’s worth it for that reason alone. It costs nothing to open a business checking account and get a business credit card. What’s the big deal?
No big deal but for someone who makes nearly all income through a sole proprietorship with minimal legitimate business expenses it is just not worth the paperwork hassle and having your money in 2 places.
Hi
I am starting a job as a Psychiatrist and am going to make approx. 600,000 per year.
God Forbid If a patient was going to sue me and my malpractice limits are 1/3 M, what if I am a Sole Propreitor and the judgment amount is 5 M (just as an example), wouldnt having a S Corporation protect my personal assets?
I am 46 and was diagnosed with Prostrate Ca 4 years ago now in remission, where can I find decent health care insurance?
Also, in California, how much taxes will I end up paying if I pay myself a salary of 15 k per month?
Thx
No. Malpractice is always personal. The good news is California has a cap ($300K I believe) on pain and suffering which should hopefully limit the likelihood of an above policy limits judgement.
I would consult with a health insurance broker in your state.
Not enough info to answer your tax question except to say “a lot more than in Nevada.”
Can you please clarify your sources about the limits of judgment on malpractice insurance?
Why does CA require minimum of 1/3 M coverage
It’s a great blog just want to clarify my doubts
What tax benefits would S Corp offer in my situation?
There are no limits in judgments. If you injure Mark Zuckerberg the claim is going to be above policy limits just because he lost one day’s salary. But some states have limits on pain and suffering. I believe California has a $300K limit on that. That tends to help keep judgments down, usually below policy limits.
Here’s a source: https://www.shouselaw.com/personal-injury/pain-and-suffering
It says my recollection is wrong, the pain and suffering cap is $250K.
I don’t know why CA requires a minimum of $1/3M coverage. Ask your legislator.
An S Corp allows you to not pay Medicare tax on part of your income. More details here:
https://www.whitecoatinvestor.com/incorporating-to-reduce-liability-and-to-save-taxes/
The limit on “general damages” in California is $250,000.00
That’s basically pain and suffering. That’s in addition to any actual losses like lost earnings.
Great post.
I too am looking at 1099 money this year and have to set up everything listed in this article. One of the things I also have to do is come up with a business name. What do most people do as a sole proprietor with 1099 money?
John Smith
John Smith Consulting
John Smith Cardiology
Cardiology Consulting
Something else entirely that doesn’t include the name
Also, is it easy to switch the name for your EIN, business credit card, i401k if you don’t like the name later on or decide to change it for other reasons?
You don’t even need a fancy business name or an EIN. You can just use your name. That’s what I would do for moonlighting.
In California there are rules for alternate names for a practice and a requirement to obtain a “Fictitious Name Permit.”
You’re saying a sole proprietor can’t use their own name in California? That seems odd. Can you cite a source?
Thanks so much for writing such a great post! I am a W2 employee and have a side gig as an individual contractor. For an individual 401k, my understanding is one can contribute ~ 20% of the post tax income as an employER. However, I haven’t been able to figure out how much of the income one can pay into the i401k as an employEE? For example, if I make $10k in one year in 1099 income, can I put the whole amount (less all SS, medicare, income, and state taxes) into the i401k? In other words, how much of the hypothetical $10k can I contribute into an i401k for the employee/elective contribution? (For simple mathematics, let’s make my w2 employee contribution $0, though this is not the case in real life). Thanks in advance!
Yes, 2019 401(k) employEE contribution limit is lesser of $19K or 100% of your W-2 salary after SS and Medicare. (Unless your 401(k) plan has an additional limitation written in, but most do not.) So you could contribute the entire $10K after you pay SS+Medicare on it, but before state (except PA) and federal income taxes. The IRS pages are not super clear about this but this retirement benefits site lays it out pretty well in the footnote:
https://us.axa.com/axa-products/retirement-planning/articles/make-the-most-of-your-401k.html
It’s important to understand that you only get one $19K employee contribution per year. So if you use it at your W-2 job, you can’t use it again in your individual 401(k).
Hi,
One thing that’s often overlooked in the solo – 401k vs sep-ira is that the 401k has to be funded by dec 31 of the tax year; while the sep-ira can be funded all the way up to april of the following year. This is relevant because a lot of the time; total calculations/contributions/income and taxes won’t be figured out until the following year. Also, the sep-ira is easier to set up. I for one, max out my 401k with my employer; and use a sep-ira for my 1099 earnings. Mainly because I missed the deadline to setup the individual 401k when I first started my 1099 gig; no regrets so far. The backdoor roth is not something I plan on doing secondary to the ‘hassle’ as well as me having nearly a ZERO tax bill during retirement.
The hassle is pretty minor, especially if you’re eligible to open an i401(k) to roll that SEP-IRA into. You do have to open the i401(k) by the end of the year, but you have until the end of January to put in the employee contribution and until mid March to do the employer contribution. That should be plenty of time to figure out your earnings for the previous year. In your case, the contribution is exactly the same, but for others who don’t have an employer 401(k) too they can actually get more money into an i401(k) than a SEP-IRA, or at least max it out on less income. As far as your argument about already having a low tax bill, it’s not like you’re paying extra taxes now to use a Backdoor Roth IRA instead of a taxable account. There’s really no cost to doing this. It’s not like converting pre-tax dollars. But even if you don’t need the tax benefits, you also get asset protection benefits on getting money into an IRA instead of a taxable account.
I think you ought to take another look at it. You still may decide it isn’t worth the very minor hassle for you, but you haven’t put up much of an argument for skipping out on a Backdoor Roth IRA.
This is not necessarily correct;.
“One thing that’s often overlooked in the solo – 401k vs sep-ira is that the 401k has to be funded by dec 31 of the tax year; while the sep-ira can be funded all the way up to april of the following year.”
A sole proprietor must make an employee elective contribution “election” by 12/31, but they have until their tax filing deadline (~4/15) including extensions (~10/15) to make both the employee elective contribution and the employer contribution. The same as a SEP IRA.
It is only a W-2 employee that must have their employee elective contribution deducted from payroll with a pay date on or before 12/31. The employer as until their tax filing deadline (~3/15) including extensions (~9/15) to make the employer contribution.
OK, I stand corrected about the deadlines to fund the i-401k; but i was right about the times in terms of opening it; when i started my 1099 gig; i lost out on the dec 31 deadline to open and thus funded the sep-ira instead after january 1st.
1. so my option is to convert the sep-ira and open a i-401k before the end of this year; i can roll over the sep-ira into the i-401k; this will give me options if i ever leave the w2 job…………..
2. i know you are right about the backdoor roth; i’m not in retirement now; i just plan on being in the 0% tax bracket in retirement; the reason i said ‘hassle; was i actually opened the backdoor roth a few years ago when i started reading this website; but i screwed up the forms and i had a whole IRS mess to go thru; so it’s more of a personal fear due to that event with the IRS……………..you are right; it obviously doesn’t hurt it’s post tax dollars anyway………….
Thanks for the great article. I feel like I made a big mistake last year, should have kept sole proprietor instead of starting an S corp. One important thing I did not know and not mentioned above…some cities like NYC where I live extract a corporate franchise tax that applies to S corps. I had to pay $4500! My CPA says you are less likely to get audited with my level of income as a S Corp rather than a sole proprietor. True? She also extracts a fee for setting up the S corp , does the taxes, payroll for me so does have a benefit of me doing the S corp.. Can you be more specific on your calculations of 100K distributions for 10 yrs for setting up an S corp, some folks had told me 250K income as a way to think about it and I wound up being below that after expenses .Thanks…and your posts encouraged me to do the solo 401K last year instead of the Sep IRA, was able to save more.
I have the exact same issue. Just ran the numbers both ways and realized I’d probably save about $6K on total taxes in 2019 filing as sole proprietor instead of my 2018 S-corp thanks to 199a. So I’ll fill out the paperwork to recharacterize if my actuary doesn’t think it will weaken my CBP contributions for some reason.
In our defense, there seemed to be a ton of confusion on the Internet and even from one CPA I talked to this fall about how exactly 199a worked, whether S-corp salary was eligible, and how even to calculate QBI. Glad there is more agreement now.
I have NYC S corp income, and that amount seems high.
A quick Google reveals:
https://www.nolo.com/legal-encyclopedia/new-york-state-business-income-tax.html
For New York S corporations, the corporation franchise tax generally is based on the fixed dollar minimum (FDM) tax as described above (a tax on the S corporation’s New York receipts). New York manufacturers and QETCs have a separate tax table.
As of 2018, the tax table for most S corporations is as follows:
receipts not more than $100,000 = $25
receipts more than $100,000 but not over $250,000 = $50
receipts more than $250,000 but not over $500,000 = $175
receipts more than $500,000 but not over $1,000,000 = $300
receipts more than $1,000,000 but not over $5,000,000 = $1,000
receipts more than $5,000,000 but not over $25,000,000 = $3,000; and
receipts over $25,000,000 = $4,500.
I think you are referring to the NY state tax (unfortunately another). I paid both. I paid $300 for the state but then $4500 to New York city ( s corps get no special status in NYC to exempt).I had not considered that when setting up the S corp
((https://www1.nyc.gov/site/finance/taxes/business-general-corporation-tax-gct.page)
https://www1.nyc.gov/assets/finance/downloads/pdf/tax_rates/general_corp_tax_rates.pdf
this is from the link you provided…
$175 due if you make less than 500k
$500 due between 500k and 1M
I’m still a little confused
So if he’s paying $4,500, I guess we should say “Congratulations!”
I don’t know if S Corps are audited less or more often than sole proprietors. Good question. Dr. Google says your CPA is correct, by a factor of 4!
https://www.legalzoom.com/articles/sole-proprietors-are-you-at-risk-for-a-tax-audit
where do SEP iRA contributions come from?, the S corp business bank account or the personal checking account as an employee?
also how much are the FTB in CA if income above 600 k?
SEP IRA contributions are employer contributions. So they should come from the employer, not the employee. I do not know what FTB is.
Business. I don’t know much about the California Franchise Tax Board but it looks like they’re the authority that collects personal and business income taxes. So are you referring to a business or a personal income tax?
So payments come out directly from business checking account
In Solo 401 k you contribute from business checking and personal checking right?
I am worried about coming long of funds
I make all my solo 401K contributions from the business account.
Arent you supposed to make 20% from the business account and 19000 from your personal checking?
Making all contribution from Business checking would that constitute co Mingling of personal and business finances?
1) there are no employee contributions to a SEP IRA. Do you have a SEP IRA or a 401k?
2) where funds come from doesn’t really matter for a sole proprietorship, separate accounting is not mandatory, the person is the business, so employer and employee contributions can come from the same place
3) entirely different as an S corp. All contributions come from the business account because
a) employer contributions must come from the employer, and
b) employee contributions have to come from funds not already received by the employee, rather the employee contribution is deducted from payroll and the contribution is made from the employer account
To contribute from self-employed income to a solo 401k account, do I need to pay any state taxes or just self-employed taxes? Thanks!
You pay the same taxes whether you contribute to the 401(k) or not. If it is a pre-tax contribution, that income doesn’t count toward your taxable income for the year, so I guess that deferred federal and state income taxes. Doesn’t affect your payroll taxes at all, and self-employment tax is just payroll tax.
Just a quick point on earning 1099 and some of the deductions available to those types of earners. With proper structuring and proactive tax planning, one can save dramatically on taxes. A couple interesting deductions are as follows:
1. Rent your home to your business for up to 14 days for a great business deduction. The income is considered di minimis (ie. You don’t pay taxes on it).
2. Pay your kids. The IRS has lost challenges down to 7 yrs old, so that’s the starting age. Just like the home rental above, you need a justifiable job that is worth the money they are being paid. Each child could earn $12,000 for a nice business deduction, which of course, they don’t have to pay tax on (you could even then stuff that income into a
Roth IRA for them for a pretty crazy loophole).
3. Business deductions can be extensive and usually, if you have a company resolution/minutes discussing a purchase (or rental or hiring) and follow up with an agreement, you have quite a bit of protection and documentation in the rare case of audit.
It’s worthwhile to have proper advice when being aggressive with taxes and although many docs do taxes on their own, I have always used a solid team with tax attorney, tax coach and CPA. With a 67,000+ page tax code, I think there has been a lot of value in my professional career by using a team of professionals. To each their own, and I think a physician doing taxes on their own is akin to a tax attorney trying to practice medicine. They might be super smart, but it’s not what they have trained 10 years to do at an expert level.
My two cents and best to all!
I don’t see why 7 years old needs to be the starting age. If the kid is doing legitimate work at a legitimate rate of pay, you can pay them. Yes, under 7 or so the IRS will send your business a letter each year asking what the employee is actually doing for that money. You know how I answered it for my 1 year old? “Model.” Figuring out a way for your kid to earn $12K though, that might be tricky. Even at $100 an hour, that’s 120 hours during the year. At minimum wage of $8 or so, that’s 1500 hours, or full time.
Agree 100%. My son has been on TV several times so that’s the argument I use, and we do employee him for all kinds of other work.
The IRS lost a case about an employed child who was seven years old and was employed by his family. So that’s where the precedent is currently set.
Typically I would recommend that people have a job description written up, an employment agreement, and a company resolution for each of their children.
There are so many other great deductions out there for 1099/OBI workers. Documentation is key, and although the audit risk is much lower for business entities then for people/personal/schedule C, especially with regards to hobby loss, proper documentation and legal structuring is important.
There are many great online resources for deductions, on this website and other places, and it’s worthwhile to spend your time researching what you can do.
What’s a company resolution? I did all the required paperwork (even checked ID) to hire them and have an ongoing job description, contract, and timesheet. I think that will be adequate. But I don’t pay them anywhere near $12K a year for their modeling services. I don’t even pay them enough to max out a Roth IRA.
A corporate (or organization, or business) resolution is basically just a document momorializing a decision. Would be signed by the board / shareholders / managers / owners.
Interesting. Never bothered doing that, but I guess it would be pretty easy to do.
Thanks for the post. I currently have an LLC where I provide practice management consulting services to pediatric offices. Later on this year I plan on doing some locum tenens job at various practices. My question is can I use the same account for both businesses or do I have to create another LLC for the locum tenens work? Does it matter if the checks are made payable to my name for the locum work or does it have to be made payable to the LLC? Thanks again.
If it is one business, you can use one LLC. That’s what I’d do. I’d ask them to make the checks and the 1099 payable to the business with its own EIN.
More info at http://www.1099md.com to be found as well.
Welcome to the physician financial blogosphere.
Re: #10 above; does anyone know if being a sole proprietor in ADDITION to being an employee at a 501c3 makes you eligible for PSLF? I, like many others I assume, have been moonlighting and doing consulting work as a sole proprietor throughout residency and fellowship. I’ve also been an employee throughout this time as both my residency and fellowship programs are 501c3 organizations. There is so much skepticism out there about this and the actual wording on the promissory note is so vague that it makes me concerned. Thanks!
If you are a full time employee of the 501(c)3 and you make on-time payments in a qualified program, then your payments should count. It doesn’t matter if you are also an IC there. But if you are only a part-time employee, no dice.
I am a graduating resident and am considering working as an independent contractor, however it’s very overwhelming. Thank you for this article. Do you happen to have an article for the new independent contractor that gives advice from the start?
That was the intent of this post. I guess I didn’t make it basic enough. Maybe I’ll try again at some point. Sorry.
Side gig covering call for a hospital. Can I deduct ER or hospital consults for patients I can’t bill for due to insurance issues? If so, would you just estimate the charges and deduct as expense?
I do get a set stipend per call but usually will bill secondarily on top of that.
No, you can’t deduct income you never received but should have. That’s already been “deducted” from your income. In fact, you can’t even donate the value of your time to charity for a tax break.
Thanks for posting this article, as it provides a nice framework for us starting out in 1099 work. I have a question about #8 above. I am a pediatrician W2 employee, but I also do some 1099 work that makes up about 25% of my gross income. I agree with the point of keeping finances separate in a separate checking account to keep track of “business expenses” like scrubs, medical licensing fees, CMEs, etc. However, would a second personal checking account (as opposed to opening a business checking account) work for these purposes? For example, I would have Personal Checking Account A be my W2 account, where I keep track of personal expenses. I would have Personal Checking Account B (opened at a different bank), where I receive 1099 income and keep track of business expenses.
Does my checking account need to be a “business” checking account for any particular reason (for example, do I need a business account in order to contribute to a Solo401K; FYI I have already obtained an EIN from the IRS)? When I read about business accounts, it seems like they have higher fees to maintain with stricter requirements to open without much added benefit for my purposes of just being an independent contractor.
Any information would be greatly appreciated!
You don’t HAVE to have a business checking account, so obviously you could do what you propose. I wouldn’t, but you could if you want. Take a look at a credit union. Mine doesn’t have any higher minimums or fees for business accounts.
Thank you so much. I’ll look into my local credit union. From what I read about business checking accounts, I see the following advantages, but I’m not sure if they would apply to my situation:
-Multiple authorized signers (as I’m doing this myself, I would not anticipate needing to add anyone as a signer for checks)
-Being able to use a professional business name on checks (I’m using my legal name with the groups I contract with)
-Being able to accept credit card payments (wouldn’t apply as I get paid via direct deposit)
-Being able to demonstrate cash flow in order to obtain a loan for the future (I’m not anticipating this in the foreseeable future.
Are there other advantages I should be thinking about (maybe you could do a blog post or podcast segment comparing pros/cons of business checking accounts vs having a second personal checking account for independent contractors)? By the way, thanks for the podcasts. They have been great!
No. I think you’ve thought it through well.
Great article.
WCI – I was curious who you use for your business checking account (#8). I have all my personal accounts with Ally but they don’t have a business checking account option. I was wondering who you particularly use for your business checking that you recommend. I’m an IC with no employees as a sole proprietor – does it even matter having a dedicated “Business” account or can/should I just create another personal checking account under my name but actually run all the business expenses through it. Thanks.
I haven’t found a great one yet. I use a local credit union but would love to have something that paid some interest.
Yes, I’d use a dedicated business account but it isn’t technically illegal not to for a sole proprietor, it just makes accounting easier.
I’m starting my first EM 1099 job fresh out of residency in a few months, and I’m losing my mind over the intricacies of setting everything up. Thanks be to Heavenly Father, the gig pays big numbers. Since I’m still poor, I have no other guide than WCI (for which I am grateful)! Would it be reasonable for me to open with my newly-established EIN a business credit card (Chase most likely) for all business-related expenses, but keep everything else in my interest-bearing Ally accounts???
You mean open a business checking account? Sure, that seems smart. If you want a card too, that’s fine. Just set it up to auto pay each month out of the business checking account.
Thanks for the great article. Active duty doc here who is about to start moonlighting as an independent contractor. Quick question which I can’t seem to find a good answer to. My first month of work will be Dec 201o, but I won’t be paid until Jan 20 2020, after quarterly taxes for Dec 2019 are due. I found a note that says I could be exempt from quarterly taxes for the end of the year 2019 if I’ve already paid 90% of my taxes for the year. The catch is I was deployed for much of the year and have paid very little in taxes this year. Should I go ahead and just pay the taxes before Jan 15th, with a reasonable estimate of what I would owe? Or should I wait until I’ve been paid?
If you’re not paid in 2019, you don’t have to pay taxes in 2019, even if you did the work in 2019. It would probably be worth asking them to pay you in 2019 if they can given your low tax bracket of course.
And yes, you’re probably in the safe harbor anyway.
This is a really great, comprehensive article. I’ve been a freelancer writer for close to a decade now, and I’m still learning the lessons you’ve outlined here. On the tax side, though, I ended up getting myself an accounting software, and the process has been much, much easier (If there are any other full-time contractors out there, this is the one I use: https://www.1099-etc.com/software/w2-and-1099-forms-filer/). That said, tax software doesn’t cover health insurance!
How many 1099 doctors out there hire an accountant to manage this stuff? I find it overwhelming but wonder if I’m just making a big deal out of nothing. I am thinking of going from w2 to full 1099 soon.
I’d say most doctors use an accountant for tax prep at least.