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!
Thanks for all the great info!
I am W2 with a side income 1099. I am an employed physician in my main job. I am a sole proprietor in the side gig.
Thanks to this posting I got my EIN and business checking. I recommend Azlo due to cost (free). I’ve been with them a few months and am happy
I max out social security taxes due to my income in my “main” job. Should I expect to have to pay additional SS taxes due my 1099 income?
No. If you were an S corp, that would be different.
OCMD101,
Do you mind sharing what type of psychiatry business model you have? I would imagine private practice?
Thank you so much for this exceptionally informative article and for all the information you have provided through WCI!
I just started doing locums in July 2020 in addition to full time employment. I am just now learning about SEP IRAs and quarterly estimated taxes and I have a few questions:
1) I already have a 401k through my employer and maxed out a traditional IRA and then converted to Roth. Am I correct in my understanding that I can still fund a SEP IRA as well? And can I max the SEP IRA to 25% of my 1099 earnings, or do I need to subtract $6000 since I already invested that much into the backdoor Roth?
2) Is there a way to now pay the estimated taxes I owe from the past 2 quarters or will they somehow be included in my annual state/federal taxes?
Thanks again for all your help!
I’m considering dissolving my S-Corp to simply my taxes so I can fire my advisor and CPA . I’m an EM doc in Texas and have very few business expenses. I earn between 500-600k/yr with around 70% 1099 and 30% W-2. Can you see any obvious downside to going sole proprietor? What might I be overlooking?
Paying more in Medicare taxes?
https://www.whitecoatinvestor.com/incorporating-to-reduce-liability-and-to-save-taxes/
I actually did the exact same thing when I was living in TX a couple years ago. The S-corp payroll/taxes were a headache and in the ~500k regime, the ~5k I saved in payroll taxes vs sole proprietor were taken by my CPA, actuary, etc to actually do all the paperwork. There were no downsides for me to doing this while I was living in TX. It was a great relief to me in fact.
So, probably there is no downside for you.
Now, to complexify this a bit, there may be an emerging political issue with hospital-based docs staying sole proprietor. I recently moved from TX to CA and started to work as a sole proprietor. Then my new SDG got acquired by a Really Big CMG, who gave us a choice: go W-2 or get an S-corp. There was no sole proprietor option. So I went with the S-corp to retain my prior pay.
The reason Big CMG gave was that the CA gov’t doesn’t necessarily buy that ER docs (and others) are “really” sole proprietors, in the sense that we control our own work environment. But if we have our own S-corp, then we are (our own) employees. So we get more legal protection from ourselves, or from the CMG, or something.
Long story short, watch the emerging politics here before you cut the S-corp, especially if your current job is less than stable.
I am a self-employed physician looking to refinance federal student loans late this summer/early fall. I have started the process and see that some of the refinance companies require two years of business tax returns before they will consider lending to me. Any advice on the best student loan refinance company for my situation – ie one which will allow an independent contractor to refinance with 1 year of business income?
Good question. I’m not sure, but if you don’t mind shooting me an email after you apply to a few of them maybe I can turn it into a blog post.
You’ll find the same issue when you go to get a mortgage, including a doctor mortgage.
Hey Jim,
I was discussing #9 Corporations Don’t Need W-9s and 1099s in the facebook group pointing out that, as an S Corp, it is not necessary/required to get a 1099.
Then someone responded with the following:
1. “Payments to corporations are generally exempt from 1099 reporting. However, you must report payments made to legal corporations for attorney’s fees or settlements made to another party’s attorney. You must also report payments to corporations for health care, medical or fishing boat services.” I will post the link below but it sounds to me like a 1099 would still be generated from the payor contracting with your S Corp.
https://smallbusiness.chron.com/need-issue-1099-company-provided-service-64848.html
2. https://www.facebook.com/photo.php?fbid=1225961471569471&set=p.1225961471569471&type=3
3. https://www.facebook.com/photo.php?fbid=1225961511569467&set=p.1225961511569467&type=3
These postings do seem to suggest that a 1099 would be required for an s corp contracting in the medical / healthcare field.
Can you please clarify for us?
Are you talking about MY S Corp? Because my S Corp doesn’t do medical. So I’m not affected.
But what you’ve posted does suggest that a typical doc running an S Corp for medical services would have to be issued a 1099. Not a big deal though. We still get 1099s every year. We ignore them. If you’re reporting all your income, you can too.
Hello
For the meals and incidental expenses from the GSA website can one use that for weekends and holidays that you are living in the away lodging but not working on those days for example 3 month assignment and you cannot fly or travel home but you are away from your tax home where you have a business. So we talking about a locums assignment on the days you are not working but have to live in the lodging. To make it clearer, you locum Monday through Friday for 6 months in another state and you live in a hotel or apartment set up by the locum company and want meals and incidentals deducted on the weekend as well
Thank you
I would.
Hi! Thank you for this super-comprehensive post. I’ve loved your work for a long time but this is my first time asking a question. It’s about #8 regarding the EIN. I’m doing some 1099 work for the first time this year, but have had an EIN for a sole proprietorship under my legal name for several years (we had obtained and used the EIN to pay our nanny when I was a resident, but now haven’t had a nanny or otherwise used the EIN since 2020). When I filled out my W9 for my new job, I gave them my EIN rather than my SSN, following your general logic above that it was more “professional”. However I just went to re-enroll in EFTPS (my enrollment had lapsed) to pay my estimated taxes, and the enrollment guidelines (form 9779) seemed pretty clear that “if you are a Sole Proprietor business, without employees, you need to enroll as an Individual and use the primary Social Security Number as your Taxpayer Identification Number”. So should I go back to my employer and ask if I can re-file my W9 with my SSN instead of the EIN so that everything matches up?
Also, how critical do you think the business bank account is? My 1099 work is my only job, but it’s infrequent and I don’t expect more than 15-20k in income this year. I hadn’t been planning to deduct my expenses (is this dumb? there aren’t many) and have been keeping pretty careful track of income/taxes etc in a spreadsheet. (The background here is that I’m staying home with our young kids and just trying to do enough work to keep my toes in medicine in case I want to come back someday. My husband is a non-MD W2 employee, if it matters)
It doesn’t matter what you use here really as a sole proprietor. You can use your SSN or an EIN. I don’t think I’d use the old nanny one though. I’d just get a new one. It’s free and takes 30 seconds online. But the IRS/Form 9779 says that if you’re just going to be a sole proprietor without employees it’s probably best to just use your SSN. If you think you might become another entity or hire an employee later go ahead and get the EIN. So yes, go ahead and do another W-9 with the company you’re contracting with (it’s not your employer, you’re the employer).
I do think the best practice is to have a separate business bank account. Can you legally get away without it? Sure. But I wouldn’t recommend it. It’s not that big of a hassle. If you go without make sure you keep very careful records.
I own a sole proprietorship, LLC. I am hiring a 1099 physician. I am confused with the W-9’s for insurance companies that we fill out for her. Would I use her social security number or my EIN? I am paying her on an RVU basis. Any advice appreciated.
Hi Jim,
Thank you for the post, could of thoughts/questions; (maybe you address these in some other posts)
1. The self-employment tax is based out of the net income prior to 401K contributions
2. How do you calculate the quarterly payments if filing jointly with one spouse in w2 and one is an independent contractor ?
Thanks
1. No it’s not
2. You guess. 🙂 Seriously, you just do the best you can. There is no “calculation.” You “estimate” and then square up with the IRS come April. If you overpaid, you get a refund. If you underpaid you pay the tax plus probably some penalty and interest. It’s hard.
You can see what was withheld for the W-2 last year, subtract that from the tax bill from last year, divide the remainder by 4 and pay that, but that only works if your financial situation ends up being very similar this year to last year. If you’re making more, better pay more or at least have it saved up to pay in April.
Hi Dr Dahle,
Thank you for your insightful content. I have been reading several articles from your Blog post and had a few questions that I haven’t been able to fully understand.
I am finishing residency this June and will be completing a fellowship for a year starting this July. I have set-up a 1099 IC moonlighting opportunity during the year that I should gross about $144,000 for the “academic year” July 1 2024 – June 30, 2025. I had first considered forming an LLC or S-corp, but now reading your content it appears that there may not be as much benefit as I originally thought and instead just paying quarterly tax payments and being a sole proprietor might be the simplest and smartest way.
At what point does the LLC or S-corp (and it sounds like S-corp is better for IC income) help with making a big dent on the medicare taxes or SS taxes? Am I past that threshold with income around $144k? What if I were to make closer to $200k as an IC would I then consider an LLC or S-corp?
As always, thank you for your advice and help.
You can run the numbers yourself, but as a general rule a doc isn’t going to save any SS taxes so it’s all about Medicare. I think a decent rule of thumb is that if you’re not going to have a distribution of at least $100K it isn’t worth the hassle. But I guess you have to decide that for yourself. Run the numbers and ask yourself if it’s worth it. Medicare tax savings is typically a little over $2,000 per $100,000 of distribution.
Thank you for a great post! I have a unique situation where I live in WA but work out of MN. I’m currently a W2 employee with my job that I really do love, and get benefits such as health insurance for our family, 401k with match, HSA, etc. However, because I’m W2, I can’t write off plane tickets, travel, etc. I’m wondering if I were to pick up locums work as a 1099, and do an ER shift on the front and tail end of each trip, how that would look for “writing off” plane tickets, and even on our vehicle that we leave in MN, including mileage and insurance on that vehicle? Would it be something like a 30% write off, above-the-line deduction, or how can I get an idea of the tax advantages before I commit to locums work? Thank you so much!
If the primary reason for travel is for your business (i.e. 1099 work) then you can write off the expense of travel as a travel expense. I think the IRS may use a 50% rule for this….more than 50% of the purpose of travel was for work (i.e. the business, not the employed job). Those expenses are only going to offset the additional income from the business though.
It seems if you live in WA and work in MN, adding MORE time in MN away from home might not be a great idea. If you really just want to be in MN, maybe consider moving there? That would save all that travel expense and you could probably buy twice the house for the same money.
You might also be able to go from employee to independent contractor at that main job too.
I am a New York based teleradiologist I have been offered a 1099 position that pays on an RVU basis. I would be working for a Florida based practice working from New York and covering hospitals in Ohio and eventually Louisiana. I was told that the Ohio base practice would be covering my personal malpractice insurance, but that it would not ensure my New York based LLC or PLLC I feel concerned because can’t someone sue the PLLC or LLC? If so, wouldn’t I have to get separate insurance to cover the LLC? Also do you feel that a W-2 position has more malpractice protection for the physician as opposed to when you work as a 1099 physician? that is my biggest concern for not wanting to take the 1099 position. Also, I’ve heard that independent contractors may be sued and not covered by their malpractice policy and I much rather take a W-2 position and not risk that as it seems like the risk of malpractice is lower working as a W-2 employee. However, I really would enjoy the deductions one can take as a 1099 employee. So should I be concerned about an increased risk of the LLC being sued if the positions only going to cover me personally with malpractice insurance but not my LLC?
Malpractice is always personal. They’re not covering your business. They’re covering you. If you need business insurance (there’s a good chance you don’t) buy that separately. A one physician sole proprietorship, LLC, or corporation doesn’t get sued. You do. Personally. Now, if they’re telling you that they will not cover YOU because your business entity is a New York LLC, no big deal, just form an LLC in Ohio or if the LLC isn’t even needed (and it probably isn’t if you’re a one doc business with no employees) just operate as a sole proprietorship.
I don’t think a W-2 job provides more than a 1099 job necessarily just because of the business structure. Make sure you’re paid more as a 1099 than a W-2 because you’ll have additional expenses of course.