1099 Taxes for Doctors: What You Need to Know with Stephen Lee

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
Welcome back to the White Coat Investor podcast. What you really need to know, and I know what you’ve all been hanging around out there wondering, is how I did in my half marathon against my daughter and my son-in-law. Well, despite our employee number one leaking this information six days before the race, they didn’t really have any more time to train anyway, and I actually beat both of them, despite them being 30 years younger than me.

I’m very proud about that. I beat my son-in-law by 22 minutes, and I beat my daughter by about a half hour. My half marathon time was an hour and 36 minutes, which I was very proud of. I ran very hard. Now, to be fair, this is a very downhill half marathon. I think there was 200 feet of elevation gain in the entire thing, and then lost like 1,300 feet, but it was perfect.

I had breakfast at 04:00 o’clock in the morning, and then a half hour before the run, I drank a protein shake and took all my performance-enhancing drugs, like 800 milligrams of ibuprofen, 1,000 milligrams of acetaminophen, and 200 milligrams of caffeine. Slurped all that down, and I tell you what, I felt pretty good during the race.

Now, since then, I haven’t felt too good. I’m still hurting. We’re recording this four days after the race, and I still got a lot of pain, but I guess that’s what you get from trying to run so fast.

The moment I was most proud of, though, was when I finally caught the 11-year-old kid in front of me. It took me seven miles to catch his mom, and it took me over 12 miles before I could finally pass him. He’s got quite a running career ahead of him, but I was pretty impressed with what he was able to accomplish at the young age of 11. My 11-year-old had no interest in running that half marathon, I can tell you that.

All right, we have a great guest today. We’re going to be talking about all kinds of interesting stuff for 1099 docs. You independent contractors out there, those of you doing locums out there, or with the side gig out there, we’re going to talk about how to do that. How to do quarterly estimated tax payments, and how to decide what kind of investing, or not investing, but what kind of business entity to have, and to figure out your payroll, and your bookkeeping, and which retirement accounts to use, and those sorts of issues that I know a lot of you wonder about. So, stay tuned for that.

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I want you to know that we are running the White Coat Investors Champion Program. That’s both the classic champion program where we try to give free books away to students, and the resident champion program. That’s all going on this winter. We’ve got to get it out to you before the resident year ends, and especially before the school year ends, which generally ends before residents graduate from residency.

So far, 64 schools have had a champion apply, and so we’ve sent out like 4,300 books already. So we’re excited about that, but our goal is to get this book into the hands of every first-year medical, dental, and other professional student.

All the champion has to do is give us your mailing address, and we’ll send you the books, and then all you got to do is pass them out. That’s it. That’s the whole role of the champion. You don’t have to do anything else. Thanks so much for those of you who have done that.

We’ve actually had another 20 schools fill out an application, but we’re waiting on about 20 of you to return your form. So you got to do both parts. Not just email us, but when we send you the form, you got to fill it out. It’s got things on there like your mailing address. We need that to send you the books.

For the resident program, we’re excited about this year. We just finished the White Coat Investors Guide for Residence book. We’ve had 36 residency programs so far apply, and I think they’ve received something like 400, 450 books. Again, we’ve had 101 applications filled out, but we need you to actually return the form and send it back to us.

If nobody in your residency program has handed you the White Coat Investors Guide for Residence, you should apply to be a champion. Just go to whitecoatinvestor.com/champion or whitecoatinvestor.com/residentchampion, and we’ll get those to you. This is literally just a book giveaway. We want you to be financially literate and hopefully financially disciplined from the very beginning of your careers. You’d be amazed how much better compound interest works when we can give it 25 or 30 or 40 years instead of 12. We want our docs to know this stuff from the very beginning of their careers so they can put money in its proper place, turn it into a tool instead of a source of stress, and hopefully by mid-career, it becomes irrelevant to your life. You don’t actually have to consider money when you make the important decisions in your life.

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from Sir John Templeton, who said, “Buy at the point of maximum pessimism, sell at the point of maximum optimism.”

Well, market timing’s actually kind of hard, but keep in mind, at least don’t sell at the point of maximum pessimism. Keep buying, just keep buying. Really, that’s the name of a book written by one of my friends, Just Keep Buying, and it’s pretty amazing how well that works over the long term.

Okay, once more on this podcast, it’s time for our classic segment I call Fixing All the Stuff I Got Wrong. This is our Corrections and Clarifications segment, and guess what? This is not entirely my fault. I cannot keep up to date on all of the tax laws of all 50 states all the time, and apparently I misspoke about Washington’s estate tax rate. It is no longer 35%.

As of last summer, this summer, it’s now 20% is the top rate. So, you pay 40% to the feds, you pay 20% to the state of Washington. It’s still really high. It especially feels high because the exclusion in Washington is only $3 million.

The only good thing about Washington compared to the feds is you burn through all of the lower federal estate tax brackets like a million dollars of estate value, whereas at least it takes about $9 million to blow through all of the brackets in Washington. You go from about a 10% rate to a 20% rate over the course of about a $9 million estate, but it starts way before the federal limit. The federal exemption starts at $15 million. The Washington exemption is only $3 million.

So, lots of White Coat Investors in Washington are going to be paying Washington estate tax unless they wisely move before they die. Not a great state to die in these days. Oregon’s not much better if you were thinking about just going across that border. You’re probably better off going a little bit further east if you really want to save on estate taxes. Other ways to get around it, of course, but it’s going to require significantly more complexity in your financial life to do that.

Also, one other thing that this listener corrected me on is it’s interesting because you can’t just add the federal and state tax rates together. Obviously, the Washington rates are graduated. The federal ones technically are too. The top rate only applies to the portion within that bracket like any other tax bracket, but interestingly, your state estate taxes are deductible when you calculate your federal taxable estate. So, that does reduce the tax pain a little bit.

So, hopefully, that’s helpful to you as you plan your death in the great state of Washington. Between that law and what was the other one they had? I think it was the special tax for long-term care insurance, wasn’t it? Yeah, Washington, it’s a beautiful place. Even if you can only drive 35 miles per hour on every single road in the entire state, it’s a beautiful place to visit, but not a great place to die.

Thank you for what you do out there. It’s not easy work. We’re grateful for it. This is why you get paid well, of course, but that doesn’t make the work any easier. So, if nobody said thanks to you today, let me be the first. We have an awesome live event coming up that we call Multi-Millionaire in Medicine, a crash course.

This is November 17th at 06:00 P.M. Mountain, and we hope as many of you as possible can come. If you sign up at whitecoatinvestor.com/millionaire, that’ll get you signed up for it. Even if you can’t attend live, you’ll get a recording of it, but we want as many of you as possible to come live.

And so, in general, we’ll even bribe you to come live. One person who joins is going to come to WCI Con for free, and five more are going to get our flagship online course, Fire Your Financial Advisor, absolutely for free. So, we’ll bribe you to come live, but you have to be present to win that particular contest.

But really, what is this night going to be about, this event about? Well, you can earn $400,000 a year and still be broke. I think you’ve worked way too hard to be stressed about money, and I also believe that financial security will make you a better physician, partner, parent, and friend.

On November 17th, 06:00 P.M. Mountain, we’re going to have this free virtual class, and I’m going to walk you through the simple path to becoming a multi-millionaire in medicine. Getting out of debt and building wealth is closer than you think. You just need a game plan. We’ll help you make yours.

I’m going to be joined on this live event by Dr. Tyler Scott, the president of Financial Planning at White Coat Planning, and his team’s even going to be answering your questions in the chat as we go. This is all totally free. So, here’s a chance for you to get some portion of your financial plan done totally for free. We’re going to answer as many of your questions as we can. Again, Tuesday, November 17th, 06:00 P.M. Mountain, sign up at whitecoatinvestor.com/millionaire.

GETTING STARTED AS A 1099 PHYSICIAN: UNDERSTANDING YOUR NEW BUSINESS

Dr. Jim Dahle:
Our guest today on the White Coat Investor podcast is Stephen Lee, CPA. He’s the founder of the Locum CPA. He is a sponsor at our WCICON. Even before he was a sponsor, he was a speaker at WCICON. It’s actually fairly prestigious to speak at the Physician Wellness and Financial Literacy Conference. I think his presentation is virtual this year, but keep in mind that 80 percent of the people that applied to speak at the conference were turned down. They’re not speaking in person. They’re not speaking virtually. They were just turned down. So, we’re excited to have you as a speaker there. We’re excited to have you today on the podcast. Welcome to the podcast, Stephen.

Stephen Lee:
Thank you, Jim. Glad to be here.

Dr. Jim Dahle:
Our subject today is we’re going to be talking about something that’s near and dear to both of our hearts. We’re going to be talking about 1099 Physicians. We’re going to be talking about S Corporations. We’re going to be talking about LLCs and PTATs and multi-state taxation and all these kinds of things that so many doctors deal with, if not with their primary job, with a side gig whether that’s locums or whether that’s just being at another hospital or whether you’re an independent contractor at various hospitals.

These are all issues that are very confusing and frightening and overwhelming for new docs who have never been in business for themselves and were employees as residents.

And now, all of a sudden, not only are they having to practice medicine by themselves, they’ve got to figure out how to run a business without any business training whatsoever because none of that happens in the majors that most docs do. In undergrad they don’t learn any of this. In med school. Maybe slightly more of it’s in dental school, but not even much there. And they’re certainly not learning it in residency and fellowship, so it ends up being self-taught or taught by professionals they engage with.

But let’s get into this. Your talk, Stephen, at the conference is called “The Complete 1099 Physician Tax Playbook: What Should You Actually Do?” What made you inspired to submit that talk to the conference?

Stephen Lee:
Yeah, that’s a great question. Over the last couple years, I’ve noticed an uptick in regards to physicians who had 1099 income. In the past I had some clients that had some 1099 income, and when I say some, it’s not really material, and I would say maybe south of $50,000 a year.

But over the last couple of years, that number has gone up and has kept going up, as well as I’ve started to meet physicians who have come out of med school, out of residency, and they’ve gone straight into 1099, rather than taking the traditional route of being a W-2 employee and then getting a little bit of 1099 income on the side.

But there are a lot of younger physicians that I’m meeting these days that have gone straight to locums or 1099. So, that’s why when I saw that your conference is coming up, I submitted the proposal for the presentation, just knowing that what I’ve seen out in the wild, there’s just an increasing number of physicians who have this issue of 1099 income and what to do about it.

Dr. Jim Dahle:
Let’s define the terms really quickly for those for whom this isn’t a second language they’re very familiar with. When we say W-2, this is an employee. They’ve got a boss.

They give them a paycheck. They probably provide some benefits. They pay the employer half of the payroll taxes. And at the end of the year, they send them a tax form called W-2. So, that’s an employee. Employee, W-2, same thing.

1099 is a tax form that is sent not by an employer, but by somebody that paid you, one of your clients that paid you money. So, when you are paid on a 1099, you are an independent contractor. And you’re in business for yourself. You don’t have an employer. You are the employer, technically, but you have clients. And it might just be one client. So, you only get one 1099. Or it might be 20 different clients. And you get 20 different 1099s and have to enter those into your tax forms when you’re filling those out.

The other thing that sometimes comes into this category is a K-1. And this is a partner. If you are a partner in a partnership, the tax form you get at the end of the year. And when I say end of the year, they usually come late. But it’s probably March or April by the time you get it. The form you get is a K-1, which is different from a 1099. These are not coming from your clients. This is coming from your partnership.

So, I think it’s really important as we throw these terms out there, just from the beginning, let’s define those so you understand what we’re saying. A W-2 is an employee. A 1099 is an independent contractor. They’re running a business.

All right, Stephen, let’s start at the beginning. Somebody comes out of training or whatever. They’ve got this 1099 job. Maybe they have a W-2 job. Maybe they don’t. But they’ve now got their first $100,000 plus of 1099 income. What happens next?

Stephen Lee:
Yeah, I think first thing is there’s a mindset shift here. Correct me if I’m wrong here, in this scenario, Jim, they don’t have any other source of income?

Dr. Jim Dahle:
Yeah, let’s start with that. They just came out and maybe they decided, “I don’t know what I want to do with my life. I’m going to do locums for a few months.” So, they get a “locums” job. And now they’ve earned whatever. For the second half of the year, they came out of residency. They’ve made, I don’t know, a couple hundred thousand dollars in 1099 income. And they’re like, “Oh, what am I supposed to be doing with this?”

Stephen Lee:
Yeah, the first thing is you have to confirm that you are an independent contractor. You want to look at the contract that you have with the hospital, or the locums agency, or the intermediary. And then you have to have that mindset that you are now a business. You are the owner. You are the employer of a business. And with that there comes several responsibilities.

And this has nothing to do with entity setup. I’m not saying go out and run and start an LLC or an S Corp or anything like that. This is just having a mindset shift that now you are operating a business. And I think a lot of physicians, they kind of stumble into this, or they’re not really aware that they are a business owner at this point.

And what does a business do? What should a business do? They first need to separate the finances from the business and the personal. And what that means is you want to open up a separate bank account and start to establish bookkeeping.

Bookkeeping is where you keep all the records of all the finances, the money that comes in, the money that goes out as expenses. That’s what bookkeeping is. You’re taking a record or an account of all the money coming into the business and leaving the business, in the form of expenses.

Also one big point is when you are an employee, like Kim said, the taxes are typically taken care of for you. What does that mean? If you ever had a part-time job during when you’re a student, high school, college, med school, wherever that is, you’ll notice that when you were on that part-time job, most likely you were an employee. You probably weren’t paying 1099, you were an employee at that time, and taxes were withheld on your behalf. You notice that even though your hourly rate was $15 an hour, you might at the end of the day, when you see what comes into your bank account, being only paid $12 an hour, $11 an hour of that $15 that was promised to you when you first started working there.

And that net difference is the taxes. There’s Social Security taxes, Medicare taxes. There’s all these taxes out there, income taxes on the federal level and sometimes on the state level. Most times on the state level, because there are only a handful of states out there that don’t have state income tax.

Dr. Jim Dahle:
And every now and then on the local level too. All these poor Manhattan docs.

Stephen Lee:
Right, right. There are some cities that do tax at the local level. As a business owner now, you are now responsible for those taxes as well and that means that you have to start to track and submit quarterly estimated taxes. We’ll get into that a little bit later on, but you have to really start to wear this new hat of being a business owner. Submitting federal taxes, state taxes, submitting on a quarterly basis.

And then also thinking about how do I minimize these taxes legally. And that’s a little bit more complex. Because when you’re first starting off, you’re just trying to wrap your head around being a business owner, setting up that bank account. Getting maybe a business credit card of some kind and submitting the taxes. And it usually takes, I would say a good six months to a year for a lot of new locum physicians to really get their mind or head wrapped around all the things that go into this. Because it’s so new to them and they don’t have any formal training going into this.

Dr. Jim Dahle:
Yeah, for sure. You got to realize the business is not you. Even if you decide to, and we’re going to talk about entity selection in a moment, even if the entity you choose is a sole proprietorship and you call the business Jim Dahle MD, the business is not you, it’s separate. It needs its own bank account, needs its own credit card it needs its own set of books. Whether you’re keeping that in a very simple form or whether you’ve hired out a bookkeeping service or whatever, it’s different from you are. Very important, very important to understand.

One of the first questions that I think comes up to anybody doing this is entity selection. Should I be a sole proprietorship? Should I be a partnership? Should I form an LLC? Should I be a corporation? Should I be a C corporation or an S corporation? Talk to us a little bit about entity selection.

Stephen Lee:
Yeah, that is the first question that comes up and it’s a valid one. And out there, you’ll probably see a lot of language on things like an S corp. And S corp is sometimes always prescribed if you have any 1099 income, but I disagree with that.

Dr. Jim Dahle:
Totally, totally. I’m with you. I’m with you. It is not right for everybody with 1099 income.

Stephen Lee:
Absolutely not. So I think the first step, honestly, and when it comes to liability issues, anytime you start a business, irregardless if you’re a physician or you set up a convenience store at the corner. Whatever type of business you are, there are liability issues that come up by being a business.

Jim, you know this better than I do. There’s male practice insurance and then there’s liability insurance for the business, which is going to be very different. And the LLC only protects you on the business side, not the male practice side. It doesn’t provide that type of insurance. It doesn’t provide any kind of assistance. So many times I do see a valid reason to create an LLC of some kind, some type of entity that will give you some liability protection. And once again, we have to emphasize this is not male practice insurance. Those are completely different. Some type of liability insurance to really protect your personal assets from the business itself. Something that you might do in the business.

We don’t want to jeopardize the personal side of things. Your personal accounts, your personal assets. So definitely an LLC is something that I think is very valid to look into. A lot of states, depending on the regulatory, you have to research something. There’s something called a PLLC. A professional limited liability company versus an LLC, limited liability company. That P, in some states, if you are a licensed professional under certain types of industries, you need to open up a PLLC, not an LLC to be compliant.

So you really have to look into that. And what I would say honestly, on that front is a lot of younger physicians or people who are entering locums or independent contractor work, they go into legal Zoom or they input into ChatGPT like “What should I be?” That will take you only so far. But honestly, what I would recommend is you want to talk to a living, breathing human licensed attorney that is in your state. And I think it’s well worth the hourly rate just to get their professional consultation for your case. To say, “Hey, yeah, you need a PLLC. You don’t need an LLC.” And help you set it up the right way.

All of my clients, I never tell them or ask them to go to legal Zooms and business to set this stuff up. I actually tell them, you want to talk to someone that’s qualified and you want to really get good advice here. And it’s worth paying for. If you want to do this the right way, start the right way. And set it up the right way and get that advice and what type of legal entity to set up.

Dr. Jim Dahle:
Yeah. Entity selection, we can go all day. A few things that are pretty easy. First of all, if it’s only you, you can throw the partnership out. It’s not going to be a partnership. It’s only you. And let’s be honest. If the entire business is just your clinical work, there’s not a lot of business liability there. There is not much there. When we’re talking about business liability, certainly if you start having employees, you’ve got some business liability. If you have a place of business, you have some business liability, but for a doc who’s doing some locum’s work. There’s not a place of business outside of the clinic or the hospital or whatever. There’s probably no employees.

The message I’ve told people a lot is it’s probably okay to be a sole proprietor. You are not reducing your malpractice risk whatsoever by forming an LLC or a corporation. And let’s be honest, that’s 99.9% of your risk. When we talk about liability for you as a doctor, as a 1099 doctor out there doing locum’s or doing your side gig or whatever, the business liability piece is not big. So, if you do choose to go out and buy some business liability insurance, you shouldn’t be paying very much for it. Because the liability just is not very high.

Now an LLC. All this stuff’s governed by state law. So an LLC in Utah is not expensive. You go start one for $70. It’s not complicated. You may even feel comfortable not doing it without an attorney. And then it’s $15 a year. It’s literally $15 a year to maintain this thing. It costs nothing. So if you want to be an LLC, be an LLC. Now you go to California, it’s going to cost you a little bit more. I want to say $800 a year or something like that. And so, it’s a little more significant. And at that point you start going, “Well, is reducing that tiny piece of business liability I have actually worth my $800 a year?”

You might say no. And I wouldn’t think you’re crazy to say no for this little side gig, 1099 locums work you’re doing. Obviously you got to have malpractice for it. And if the business contracting with you is not providing the malpractice, you got to go out and buy malpractice insurance. I’m not saying go bare on malpractice, but I don’t think you’re crazy if you go bare on your business liability insurance there, nor if you choose not to form an LLC.

And in fact, one of the coolest parts about forming the LLC that I really do like when you do it is when you do choose to file taxes as an S corp, you don’t actually have to form a corporation. You can be an LLC and pay taxes as an S corporation.

So I love that aspect of it, but I don’t know. Clearly not everybody has to be an S corporation. I would argue, not everybody even has to form an LLC, not that that’s a huge deal and it’s not that expensive in most states, but without significant business liability, employees place of business contracts where you think you could be involved in some litigious aspect of the contract. It’s hard to get too excited about doing a lot of asset protection kind of stuff with regards to that.

Stephen Lee:
I completely agree. And you’re right. It’s not one size fits all. It’s not blanket advice that you need an LLC, you need business, you need liability protection because it’s definitely not. And it’s always case by case. Like you would always say, just like taxes are, it is always case by case.

Dr. Jim Dahle:
Absolutely. WCI is an LLC that files as an S corp. When we started, we formed the LLC and we’re like, okay, we have some business liability. That’s when we formed it. So, I’ve been on both sides of this and I think there’s great merit to that structure.

We haven’t actually had to use in any sort of an asset protection situation, but I think there’s great merit in having, like I said, it’s not that complicated. It’s not that expensive, but for just a doc that’s just going in and working anesthesia shifts or whatever, your liability is malpractice. And I think it’s important to keep that in mind.

But an LLC, of course, can file taxes as a sole proprietorship. It can file taxes as a partnership. It can file taxes as a corporation. You can’t actually file taxes as an LLC. As far as the IRS is concerned, there’s no such thing as an LLC, really. That’s governed by the state law and the IRS doesn’t care about your LLC.

I think the really big question here is, “Do you file as an S Corp?” Whether that’s an LLC filing as an S Corp or whether you form a corporation and do an S-Election and then file that as an S Corp, I think that’s worth spending some time on. Let’s talk about when that’s worthwhile.

Stephen Lee:
Yeah. And before we dive into, and like I said in the very beginning, there’s just so much advice out there that automatically says you need an S Corp as a business owner or as someone who has independent contractor work. And like you and I agree, Jim, I don’t agree with that advice, that blanket advice.

And the reason for that is let’s go back to what the purpose of the S Corp is. Why do people recommend an S Corp? What is it? It’s really saving on two things. One is employment taxes. That’s the social security of Medicare that we talked about. There is a way where as a business owner, if you have an S Corp, you can choose to take money out via salary. That’s the first way. And the second way is something called distributions.

And the salary portion, that first part that I talked about is subject to employment taxes, social security, Medicare, on top of income taxes. So let’s always remember that. Income taxes will always play, but on the salary portion, which is necessary if you are an S Corp, I just have to say this. If you are going to operate as an S Corp, you need to take a reasonable salary. And we’ll dive into what reasonable means.

And like I said, the second way to pull money out from your business is something called through distributions, which is not subject to employment taxes. So that’s where the savings really is. And depending on your situation, there might not be much savings. If you, let’s say you have another W-2 job or your reasonable salary that we just talked about, makes up the entire portion or majority of portion of the income that you’re bringing in from your business or your independent contractor work.

Really the savings is on the employment taxes side. And sometimes the savings can be significant. But sometimes the savings aren’t significant, which means that if the savings aren’t significant enough, then I would recommend to not form an S Corp or not elect S Corp status to run your independent contractor business.

Dr. Jim Dahle:
Yeah. I think that’s exactly the calculation that has to be made. And for most docs this is not the case for every business out there. There’s a lot of businesses where maybe the business in total only made $80,000 a year. So if you’re an S Corp, you might be saving a significant amount of social security tax.

For most docs, that’s not the case because the reasonable compensation you have to take as a doctor, you’re probably maxing out your social security taxes anyway. So, all you’re saving is Medicare tax. That’s basically 2.9% of the amount you call a distribution.

If you make $400,000 and you call your salary $300,000 and you got $100,000 in distribution, basically you’re saving $2,900 in Medicare tax. And you got to weigh that against the additional hassle and costs and the tax return of the S Corporation. And you may go, “Eh, it’s not really worth it. I’m paying $2,000 in additional costs and hassle, and I’m only saving $2,900 in Medicare tax. This isn’t worth it. I’m just going to file as a sole proprietorship.” That’s the calculation.

And so, of course, the key is to get as big of a distribution as you can justify. And so, everyone’s like, “Well, if I made $400,000, I’ll just say my salary’s $20,000. And then we’ll say I had a $380,000 distribution and then I won’t have to pay Medicare tax on that and it’ll be huge, right?” Okay. So, what’s the problem with not choosing reasonable compensation and how can you really determine what that is?

Stephen Lee:
Yeah, there’s several factors that go into reasonable compensation, that calculation. And I’ll go over what those factors are. The first one is your specialty. What is your specialty as well as where do you practice. Because an ER doc practicing in Manhattan is going to be different than an ER doc practicing in Des Moines, Iowa, the rate, the market rate for an ER doctor. There will be a difference based on where you are geographically.

Dr. Jim Dahle:
Yeah, the one in Iowa is going to make more money in case anybody isn’t aware of that.

Stephen Lee:
Yeah, there’ll be more left over, we’ll say at the end of the day. But when it comes to reasonable compensation, you have to factor in specialty as well as geography. Where are you earning? Where are you practicing? Another one is actual hours worked and the clinical duties. What goes into your role as let’s say an independent contractor working at a practice or a hospital.

And this is where it gets interesting, Jim, because there’s something called the many hats rule. And reasonable compensation, there is strategies out there I would just say that instead of the entire reasonable compensation being comprised of just the specialty, there are advantages or ways, strategies to examine what are all the roles and responsibilities that this physician has in their role. And to try to basically reclassify portions of the hours worked based on the roles and the responsibilities.

And this is something that gets kind of lost and this is a little bit of an art. And a lot of physicians are unaware of this many hats rule because when we do reasonable compensation for other specialties or other occupations, other business owners. Most business owners do wear many hats. Especially if you’re the only operator of the business.

Physicians are different. They’re service professionals. However, there is some administrative duty sometimes that goes or is involved. Sometimes the administrative duties can be very heavy in regards to what they’re doing for the hospital or the practice. And we want to weigh that in there. Because to reclassify portions of the hours or the portion of the work towards the administrative duty, we can actually bring down what the reasonable salary is for the physician.

Dr. Jim Dahle:
So, here’s the deal. Reasonable compensation, at least theoretically, would be an amount you could get another doctor to come do the work for. Well, at a certain point you go, “Well, what in the world? Why would anybody pay me more than what they get another doctor to come do it for?” And so, from the very beginning, justifying that some of this salary should be distribution, it’s a little bit of an uphill battle the whole way, isn’t it?

Stephen Lee:
It is, it is. And what I can say is from experience, it’s the docs that have unreasonably low salary. And once again, this is only an issue if you’re operating as an S Corp. This might be another reason why you don’t want to operate as an S Corp because salary, if you operate not as an S Corp, but as a sole proprietorship, then you are not required to take a salary which means that you’re not required to justify a reasonable compensation if the IRS ever comes looking at your return.

So like you said, Jim, it is an uphill battle. However it is something that the IRS does scrutinize very heavily. And I would say more than anything, if it’s unreasonably low, there’s a higher chance versus if it’s reasonable. And there’s no percentages out there. There’s no guidance in terms of it has to be 50% of revenue. It has to be 60% of revenue. They don’t tell anything. They don’t tell us anything about that.

And what they’ll do is they’ll usually take the NAICS code, which is basically kind of like the industry average. To see, “Hey, how much W-2 is this physician taking on on their S Corp return, and is it within the range of other physicians in their specialty, in their geography working similar hours,? Is it within that range?” The IRS is very tight lipped about that. What are they really looking for? They won’t say there’s nothing out there.

Dr. Jim Dahle:
The good news is that S Corps don’t get audited very often, number one. But when they do, I suspect this is probably the biggest issue when they look at it, is, “Did you pay yourself reasonable compensation?” You better have an argument prepared to use in the event of an audit. A salary survey for your specialty would be very helpful.

Stephen Lee:
Yes.

Dr. Jim Dahle:
Now, if you’re paying yourself a salary, that’s not the first percentile in the salary survey, you show the auditor that would be helpful and that you can argue, “Well, it might’ve been 10th percentile salary, but it’s within the range”, maybe you can argue that’s a reasonable salary.

But the point is, if you’re an emergency doc and you’re trying to argue that your salary is $120,000 a year for full-time work, this isn’t going to work. But if you’re arguing your salary is $280,000 maybe that would work fine. So, you just got to be reasonable. This is classic pigs get fat and hogs get slaughtered kind of stuff. Don’t push it too far or you’ll get burned.

Stephen Lee:
Right.

MANAGING PAYROLL, BOOKKEEPING, AND QUARTERLY ESTIMATED TAXES

Dr. Jim Dahle:
Okay. It’s fun. Enough on reasonable compensation. New 1099 doc. I got to do payroll. I got to do bookkeeping. Should I hire that out? Should I try to do it myself? When do you decide?

Stephen Lee:
Yeah, payroll. Let’s be more specific here, Jim, are we saying they’re sole proprietor or an S corp?

Dr. Jim Dahle:
Well, they’re still trying to decide that. But in the meantime, they’re starting to get checks coming in and they got to set stuff up and they’re like, “Well, if I’m going to do an S Corp, maybe I want to hire somebody for payroll and what should I do about bookkeeping anyway?”

All these questions don’t come in order when you’re a new doc doing this. They all come at once and you got to answer them all at the same time. And some of them are related to the other ones. So give us some advice on some thoughts about how to set up payroll and bookkeeping.

Stephen Lee:
Yeah, payroll is something that you do not want to do on your own. And the reason I say that you want to basically subscribe to a service, there’s a lot of payroll companies out there online. And the reason I say that there are quarterly filings, annual filings, things that you do not want to mess with. Because there are penalties if you incorrectly filed them, you filed them late. You don’t file them at all. There’s penalties. So you do not want to DIY payroll, for example.

If you decide to be an S corp and you need payroll, once again, do not DIY that because it is a headache. I don’t even do my own payroll. And I own a firm and I do not wish that on anybody. You want to utilize. And the subscription services out there are not too expensive, honestly. If it’s just you, just a single employee, you’re looking at probably less than $50 a month. And that is well worth staying out of trouble with all those payroll filings.

Dr. Jim Dahle:
Steven, I don’t disagree with what you’re saying, but I also have to confess that I did this for a number of years. I did my own payroll.

Stephen Lee:
Wow.

Dr. Jim Dahle:
I filed my own corporate tax return. I just want to confirm that what you’re saying is true, that it is a big pain, it is not that hard to screw it up. I had to refile tax forms a number of times. This is what us hardcore DIY-ers run into sometimes. You’re not wrong. I’m just saying it is possible. If you were super hardcore DIY-er, you can do this. You can do this. You probably shouldn’t though. The advice is good that you probably shouldn’t. And you are going to spend more than $50 a month worth of your time doing it. I can promise you that.

Stephen Lee:
And that leads to bookkeeping. Bookkeeping once again, it’s recording the ins and outs of your business. The income coming in, the expenses to operate your business. And depending on your arrangement with the practice, the hospital, the locum’s agency, whatever it might be. If it’s only income coming in and there’s minimal expenses because you’re being reimbursed or they’re paying for everything for you to be there. There’s probably not that many expenses. Then I would say you don’t need a bookkeeper. Really, it’s not very complicated.

So what I would say is depending on your situation, sometimes an Excel spreadsheet or a Google sheet is completely fine to help you track the income, the ins and the outs of the business.

Dr. Jim Dahle:
I agree. Hire a payroll first. Payroll first, bookkeeping second. WCI, you look at the bank account and there’s literally hundreds of transactions every month. It’s money coming in, money going out every day. I’m not going to DIY that bookkeeping. I got better things to do with my time.

But when you are a sole proprietor doctor, you’re getting paid once a month, so there’s one inflow and maybe you can justify a couple of expenses a month, a little bit of CME expense and maybe you had to buy some scrubs and you just don’t have that many expenses. It’s okay to just use a spreadsheet.

Recognize that you can pay somebody to do this, your tax preparation firm often will be the first firm you go to hire that out and it’s reasonable. But bookkeeping for a simple one doctor kind of business is a lot easier to DIY, I think, than DIY and payroll.

Stephen Lee:
Yeah, absolutely. There is a special circumstance that I would say that, “Hey we’ve been talking about DIY most of the stuff. Whether it’s payroll or bookkeeping, it is possible, but one area and we’ll probably get to this as taxes. If you are someone that’s working in multiple states, multiple locations, that’s where it gets a little bit hairy. In regards to tracking the income related to different states, different jurisdictions.

As well as the expenses related to working in those different states or jurisdictions. And that’s where when it’s the more complex the situation, the more transactions there are, like Jim was saying. As well as if you are working in multiple locations, especially multiple states I would really recommend that’s when you really want to work with an accountant or a CPA of some kind to help you track those things.

Because we talked about quarterly estimated taxes. Remember once again, you are the business owner, you are the employer, so you are now responsible for submitting quarterly estimated taxes on the profits of the business. And if you’re working in multiple states, you might need to be submitting state income tax payments to multiple states. And you need someone to help you organize and sort that out.

Dr. Jim Dahle:
Yeah. Worst case scenario, you live in New Jersey. And you’re moonlighting in Vermont and Alabama. I got news for you. You’re going to be filing a state tax return in all three of those states. What finally broke me from being a DIY tax preparer was when I had to file in 12 states and I could not keep track of it all. That was enough to break me.

At a certain point you got to go, “I need a little bit of help” and that’s okay as long as you’re coming out ahead after paying all the expenses, it still may be worth moonlighting in Vermont and Alabama. But it is going to make your financial life a little more complicated.

All right. You alluded to this a little bit, but I think let’s dive in a little more to this. Quarterly estimated payments. Now you kind of get away with this your first year. The IRS turns a little bit of a blind eye to screwing this up the first year you do this. After that, you pretty much need to get it reasonably.

And the problem is once people learn this, they start freaking out about it. If you screw up your quarterly estimated tax payments, you don’t go to jail. You’re not going to jail. You might pay a little bit of a penalty and the penalty is basically more or less what your money would have earned sitting in a good money market fund for that time period.

Because you had the money you were supposed to give to the IRS, you got to pay them the interest on it. That’s basically what the penalty is. But talk to us a little bit about the Safe Harbor and how you decide how much to pay in quarterly estimated taxes.

Stephen Lee:
Yeah. That term Safe Harbor that Jim, you mentioned, there is something in regards to to avoid penalties. And that’s what the Safe Harbor is all about. It’s avoiding penalties for late payment. And what that is, it’s going to be dependent on your income, what that Safe Harbor number is. And the reason I say income is there’s two safe Harbor rules, really. And there’s a subset for the second one. I’ll go over the first one. The first one is 90% of actual taxes that are due for the year. The current year.

Dr. Jim Dahle:
Well, this is for low earners. For higher earners is 100%.

Stephen Lee:
No, no, no, no. So that’s the second one. I’ll go into that. The 90% really is the actual taxes due for the current year. If you’ve paid that much in, you avoid the penalty. That’s the first safe Harbor, 90%. And that’s a little bit harder to calculate. And the reason for that is you need to be tracking your expenses, your income throughout the year and submitting those quarterly taxes accurately. Accurately. And typically if you’re working with a CPA or someone that’s qualified, they’ll help you do that really well.

There’s an accurate number that you should be submitting on a quarterly basis. And as long as by the end of the year, by December 31st, you’ve paid a 90% of what actually shows up on your tax return for that year, you’re okay. 90% or greater. Whatever that current year tax liability actually becomes.

The second Safe Harbor that you were talking about, Jim was either 100% of last year’s taxes or 110% of last year’s taxes. And that number is a lot easier to figure out because all you got to do is look at your tax return to figure out what last year’s tax liability was. And so, let’s say, for example, last year on your 1040, that annual return that you filed, let’s say your total tax was $100,000 or let’s just keep it at an even number $40,000. $40,000. You divide that by four and you pay 10,000 per quarter. That’s the 100% Safe Harbor rule.

But if your income goes above a certain threshold and most physicians, I would say you do not apply. It’s typically 110%. 110% is just play it safe and be conservative and go with 110% of your last year, total tax liability, divide that by four and submit that on a quarterly basis. That probably won’t equal what your current tax liability is, but you do avoid penalties and interest on late payment because you submitted 110% of last year’s taxes.

You will still have to pay the difference. Please don’t get me wrong. Let’s say you owe more taxes for the current year than you actually paid. You still have to submit that when you filed in April 15th or whenever you file your taxes, but you avoid those penalties and interests by following the Safe Harbor rule that Jim was alluding to.

Dr. Jim Dahle:
Yeah, I think this is a really important point. So let’s dumb this down just a little bit. The US federal income tax system is a pay as you go system. You have to pay as you go along. Many states are like that as well. Not all states, Utah is not a pay as you go system. You can write the entire check for everything you owe in Utah state income taxes on April 15th of the next year. You don’t have to pay as you go, but the federal tax system is pay as you go.

So how that works for employees is your employer takes a certain amount of money out of each paycheck and sends it to the IRS. For an independent contractor, you’re making these quarterly estimated tax payments, but that number is not what you owe in taxes. These are two totally different numbers. The amount that was sent in by your employer or by you, if you are the employer is not the same as the amount of money you actually owe at the IRS in April 15.

The process of doing your tax return and sending it in is reconciling those two numbers. If you had a little too much withheld or you pay a little too much in quarterly estimated taxes or the combination of the two, then you get a tax refund. You overpaid your taxes throughout the year.

If you did not have enough withheld, did not pay enough in quarterly estimated taxes, then you have to pay additional money on April 15th and possibly a little bit of penalties and interest, but you’re squaring up with the IRS on April 15th. That’s what you’re doing.

But what you send in the quarterly basis is a total guess. That’s not necessarily true. If you have very steady income, like Steven says, the accountant can calculate it out pretty well and tell you pretty good what you need to pay in your quarterly estimated taxes.

But if you have a highly variable income, it’s really hard for them. It’s really hard for you. It’s guesswork. These quarterly estimated payments I send in every year for WCI. I’m making them up. It’s completely made up. I don’t know what we’re going to make this year.

The most hilarious thing, part of the whole thing is with the extensions we have to file to do our taxes every year. I’m not filing my tax return until October 15th. Three of the four estimated quarterly tax payments have already been made by October 15th. I had make one on April 15th, one on June 15th, one in September 15th. And now the accountants telling me what they should be for next year. Sorry, buddy. Not helpful. I’ve already made three of them.

So, recognize that there’s a little bit of guesswork in this process and you’ll settle up with the IRS next April. Don’t worry about it too much. If you underpaid, yeah, you’ll pay interest, but you also earned interest on that money yourself because you kept the cash. And if you paid a little too much, well, you gave the IRS an interest free loan and that’s not awesome, but at least you don’t have to come up with the cash next April.

So, recognize that this process is not as straightforward as you might wish it was, unless your income is very steady. If your income is very steady, it’s pretty easy to do, but for many doctors, that just isn’t the case.

Stephen Lee:
Yeah. And those are all great points, Jim. And one thing that I want to mention is that avoiding penalties is kind of the baseline. And the reason I say baseline is because by submitting and paying in accurate quarterly estimates, which is not easy, just like Jim said, it’s not easy. It’s a natural mathematical science. You have to really be tracking this.

And if you’re working with a qualified CPA, then they can help you do that. Throughout the year to organically know real time, how much taxes, if the year were to end on, let’s say March 31st or May 30 whatever date that is, they can accurately help you pay those taxes.

But I would say more than anything, it’s peace of mind. For a lot of these physicians to pay the quarterly’s accurately really does provide peace of mind more than anything, because they know what their cash position is. There’s no big surprise come April or October, like you said, Jim, that it gives them a lot of peace of mind to know that, “Hey, the taxes are taken care.” Or the majority of the taxes are taken care of. There might be a true up, like you said, you have to reconcile what your actual tax do is.

But that peace of mind does go a long way for a lot of clients, a lot of physicians that I’ve met. Because throughout the year, they know, “Hey, I have this amount of cash left. What can I do with that? How do I lower this tax bill?”

And that’s the next probably section we’re going to talk about is how do we strategically lower our taxes legally? And in order to do that in a well-informed intelligent way, we kind of know our cash position. We want to know exactly how much cash do I have left before taxes, what is that number and then what can I do with the cash to lower those taxes and then still have enough to pay the taxes that are due after I’ve done all the different retirement contributions and things like that. I think peace of mind is definitely very big.

Dr. Jim Dahle:
Yeah, for sure. And the big mistake here. Everybody makes a mistake because you’re not going to forecast it perfectly. The big mistake is not paying anything at all. Not doing quarterly estimate, not realizing you had to do quarterly estimated and having spent the money. Maybe you sent the money to your student loan lender. Maybe you bought a new truck. Maybe you used it for a house down payment. This is the real problem. If you get to April and now you’re, “Oh, nobody withheld any money for me.” And now you owe $80,000 in taxes and you don’t have the cash. That’s the big mistake. The small mistake is paying a little too much or paying not quite enough. And then you got to settle up with the IRS. That’s not that big of a deal.

But keep in mind that accurately forecasting this is more challenging than you think, because you basically have to be kind of doing your tax return as you go along throughout the year, because it’s not just about your income, it’s also about your expenses. It’s also about your deductions. How much are you giving to charity? And these sorts of things, the accountant has to know in order to forecast what your tax bill is in order to tell you how much you should be paying as you go along. It’s not that easy.

And of course, the IRS doesn’t make it super easy either, because you don’t want my least favorite day of the year is June 15th. You just made a quarterly estimated payment on April 15th and the next quarter is due not three months later, two months later, because the IRS hates you. That’s why I’m convinced they hate you. That’s why it’s June 15th, not July 15th. You get a month for the last quarter. That’s four months. So you get it back, I guess, but boy, June 15th is basically my cashflow crunch for the year.

Stephen Lee:
Yeah.

Dr. Jim Dahle:
For various reasons, but it’s kind of interesting that way.

Stephen Lee:
Jim, a question for you is why do you think they did that? Why June 15th?

Dr. Jim Dahle:
That’s a great question and I don’t have a good answer. It might be worth doing some research. Do you have any idea why that would be?

Stephen Lee:
I’ve never really thought about that. I just knew it was very wonky that they call it quarterlies, but that quarter is just two months, not three months. But the only thing I can really think of is practically most families, I remember these are all individuals working at the IRS. They have summer break. And most schools are out by end of May, early June, for a lot of school calendars. So maybe just as a benefit for the employees that work at the IRS. Do you give them a break?

REDUCING TAXES THROUGH BUSINESS DEDUCTIONS AND RETIREMENT ACCOUNTS

Dr. Jim Dahle:
Yeah, maybe, I don’t know, who knows? I don’t know exactly. All right, tax reduction. Tax reduction one of the best ways to reduce taxes, of course, is to stop working but another great way is to recognize that a bunch of things are business expenses. And you don’t pay taxes on business expenses. They’re subtracted from your business revenue to get your profit, and you only pay on profit. But everybody has a different idea of what legitimate business expenses are. Can you help people understand when a business expense is actually legitimate?

Stephen Lee:
Yeah, legitimacy is a great term. And really, there’s two factors to that. The expense has to be ordinary and necessary to the business. That is the IRS definition. When is an expense actually legitimate? And is that expense ordinary for the type of business that you are operating? And is it necessary for your business?

The very common examples, and a lot of the questions that I get, and we see it on social media all the time, like private jets, heavy luxury SUVs. We’re talking like Escalades like big, big SUVs. Are these necessary for the business? Is a private jet really necessary for your business? Probably not.

And one thing that I always tell a lot of physicians is, just because your friend or your physician down the street is taking the deduction, they were never audited, it doesn’t mean it’s legal. It doesn’t mean that the IRS is giving the A-okay and saying, “Hey that’s okay to do that. It’s okay to be aggressive.”

So really going back to it, is the expense or the deduction ordinary and necessary for your industry, for your business. And what are those types of expenses. We know that there’s a laundry list of them, and I’ll kind of name some of them here. Legitimately for physicians, there’s licensing, credentialing. Different registration fees, professional dues. Male practice insurance. We talked about that earlier. Qualifying CME expenses. You need to be keeping up to date with your licenses, learning, fulfilling your hours to maintain your license and your different qualifications.

Those CME expenses, there’s a lot of benefit, and not only on the deduction size, but also to maybe utilize and mix business with pleasure with the CME. Because sometimes these CME conferences are at wonderful locations like Orlando, Florida. There are these conferences that are held in really nice places around the world typically in the US, but different, nice, warmer climates during the winter months, depending where you are.

Those types of travel expenses related directly to the CME for yourself, not your family, not the entire family, not the uncles and aunts that join you, but just you alone. When it comes to flights, hotels, just for you, the physician who’s attending that conference, that is deductible. Your children, your wife, that is just a bonus there. They’re tagging along, but you cannot deduct those expenses for them their expenses. So, there’s those.

Any type of equipment and technology that you buy that you need to utilize for you, for the business, that’s also deductible. Also, CPA fees, legal fees, bookkeeping, payroll fees that we talked about. Those are all legitimate and typically ordinary and necessary as a physician.

Dr. Jim Dahle:
Yeah, I think the places I see people trying to do a little too much, occasionally in the CME realm, I see them trying to do too much, but a lot of it is things that they need, but they’re also using for personal use. It’s a computer, it’s a cell phone and I don’t know if the IRS really looks at this all that closely, but how much of that are you supposed to be able to deduct of your computer use? You’re supposed to prorate it. How much is business use, how much is personal use.

Stephen Lee:
Absolutely. So it’d be hard to justify that you’re going to deduct 100% of your cell phone monthly bills, as well as 100% use of your laptop for the business. What I would say is, it is really a case-by-case basis. Some physicians buy just a separate laptop for the business. And whether it’s for security reasons they don’t use that laptop. And if that’s the case, if it’s 100% used for the business, you can deduct 100% of it from the business, but typically most physicians aren’t using a separate piece of equipment. They have one cell phone, one monthly bill for that cell phone, one laptop. They’re kind of mixing. What I do is I ask my clients honestly, conservatively, is it 50% business, 40%? Whatever that percentage is, that’s what you can deduct.

Dr. Jim Dahle:
Yeah, I suspect that’s not audited very frequently, correct?

Stephen Lee:
No, it’s such a small deduction, honestly, Jim, it’s not a big ticket item.

No.

Dr. Jim Dahle:
Nobody’s going to fight you on that one. The other one doctors want, is they want to figure out a way to deduct their commuting mileage. They want to say, “Oh, I got a home office. I do a little bit of work there sometimes. And then I drive to the hospital and then I drive to the clinic and then I drive back to my home office. So all those miles are deductible.” Talk to us a little bit about understanding what business mileage actually is.

Stephen Lee:
Yeah, business mileage. The word that you use is right, commuting. Commuting. That is almost defining that you are going from home to somewhere and coming back. Commuting. This is not something that is out of the ordinary. Commuting is more regular. So if you are commuting, going from your home to the hospital and back, that really is not deductible because that’s just commuting. Like Jim was saying.

For locums, particularly if you’re working in multi-state, and that’s what I kind of specialize is the multi-state locums. Those types of trips, where you go out to somewhere that’s not really your home, like you don’t have your weekend closed there, you don’t have health membership there, depending on the term or the contract, you’re there temporarily. All of those transportation costs are deductible. Because that is not your tax home and that’s not considered commuting.

And sometimes it really also goes down to what is the term of that contract that you’re on? If that term of the contract is a year, then things are different. If you’re there for a year that things are different. But if you’re there for just a couple of weeks out of the year, then yes, those transportation costs are out of the ordinary, we’ll say. They’re not considered commuting back and forth from your home. Commuting is not deductible, unfortunately.

Dr. Jim Dahle:
Okay, one of the biggest deductions out there for most doctors, if they know to use them, is certainly very much available to 1099 docs. And that is the use of tax deferred retirement accounts. And I’ve been preaching on this for most of two decades. And people need to recognize that generally what this means for a 1099 doc is a solo 401(k) plus or minus a personal defined benefit / cash balance plan. It’s not a SEP IRA.

Stop opening SEP IRAs out there. It screws up your backdoor Roth IRA. At some income levels, you can contribute less to it. Just use a solo 401(k), it’s not that complicated to use. Do you have any clients that you actually recommend a SEP IRA to them? There’s got to be a few docs that are still an okay choice for them, but most of them I push into solo 401(k)s.

Stephen Lee:
Yeah the SEP IRA is for a new doc, let’s say, and they’re not really going to do a backdoor Roth, like you said, that can complicate the issue. If they’re a sole proprietor maybe a SEP IRA and they’re new can be kind of like the gateway into retirement time.
Dr. Jim Dahle:
It’s your gateway drug of retirement accounts. That’s what a SEP IRA is. It’s not all that good, but it’ll get you into retirement.

Stephen Lee:
Right, right. There are very specific cases we’ll say but if you really want to try to maximize and really try to get a lot and not really mess up any kind of backdoor Roth strategy that you have, then like Jim said, it’s the solo 401(k). There’s a whole system that you really have to orchestrate well here.

There’s an architecture to this, the solo 401(k), your reasonable compensation that we talked about earlier in the podcast, as well as what is your employer contribution for that solo 401(k). They’re all connected. They’re all connected.

So you really want to make sure that you’re working or you understand the rules on how to orchestrate that well. Because you not only as the employee can contribute to the solo 401(k). In 2026 is $24,500. That is the pre-tax maximum that you can contribute as an employee, but don’t forget there’s an employer contribution.

And though you are one in the same, you are the employee and the employer, going back to the start of this conversation, you’re both the employer and employee of your practice, you can also contribute as the employer wearing that hat. And that is capped at what the W-2 salary is, your reasonable compensation.

So you want to make sure, if you really want to maximize the usage of a solo 401(k), you really have to figure that out. What is the reasonable compensation going to be? How much can I contribute? What is the max for the year as the employee? And then what that reasonable compensation is and applying whatever the maximum is, the combination of the two, am I hitting the maximum potential and utilizing the solo 401(k) for all that it’s worth. And getting as much deferral income in there as possible.

Dr. Jim Dahle:
We could spend an entire episode on this topic. We can talk about after-tax employee contributions, A.K.A. a mega backdoor Roth IRA and how this 401(k) interacts with the one at your W-2 job and all this sort of stuff. We’re not going to go any deeper on that topic now. Recognize if this discussion is foreign to you, you need to go to the blog, go to whitecoatinvestor.com and search multiple 401(k) rules and dive in because this is a complicated topic, but you might be shocked how much you can reduce your taxes by really taking advantage of retirement accounts.

All right, our time is now short, Steven. We could do a whole other hour here. I’ve got another hour worth of topics that we could talk about here and maybe we get you back on at some point to have that discussion, but we got to wrap up. This thing’s getting long. If you could leave listeners with one tip that we haven’t yet discussed that might aid their situation as they become a new 1099 doc, what would that tip be?

Stephen Lee:
If there was one takeaway, I would say that S Corp is not always the answer. The tax selection is not a tax strategy technically. And whatever you see out there on the blogs or on social media, you really need to evaluate your specific case and to see what is the best fit for you.

And honestly, a sole proprietorship is probably the best fit for a lot of physicians out there because the administrative headache and the additional costs that come with an S Corp many times don’t justify the tax savings. Because you want the benefit to be greater than the cost always for any kind of decision that you make. So I would say, don’t immediately fall into an S Corp or say that you should open up an S Corp by listening to someone on social media.

Dr. Jim Dahle:
All right, we’ve been chatting with Stephen Lee, the Locum CPA, he’ll be at WCICON. Check us out there, that is the end of February. We’ll be in Orlando this year. We’d love to see you there. It’s going to be fantastic. I keep telling myself I am underselling this conference. It’s really awesome. That’s why people keep coming back to it and say their friends should come to this and they bring their spouse back the next time. It’s an awesome conference. I’d love to meet you at the Physician Wellness and Financial Literacy Conference and I’ll see you there in person, Stephen.

Stephen Lee:
Yeah, Jim, do you play pickleball?

Dr. Jim Dahle:
I do play a little bit of pickleball, now that you ask.

Stephen Lee:
Okay, yeah, I would love to play with you over there.

Dr. Jim Dahle:
Okay, well, I’m told there will be more pickleball than the last time we were in Orlando, which was a little bit limited, but I think they’ve built some new courts this time.

Stephen Lee:
Wonderful.

Dr. Jim Dahle:
I hope you enjoyed that interview. Boy, did we run out of time on that. That could have gone for three hours. We had all kinds of more things to talk about, like the pass-through entity tax. We didn’t even touch on it. Maybe we should spend some time on that on a future podcast.

But come to the conference. We talk about all this kind of stuff. If any of this is new to you, you got to learn this stuff. It makes a difference in your life. You got to understand how your retirement accounts interact and what you need to do when you’re in business for yourself. Nobody’s teaching you this stuff in residency. Nobody’s teaching this stuff in med school or dental school, but we’ll teach it to you. Hang out in this community long enough.

Frankly, 98% of what we produce is totally free to you. Yeah, we have some ads. Yeah, we got to make payroll. We got to have some sort of revenue coming in in order to pay these folks that are helping put all this stuff together.

But 98% of it is totally free to you. Blogs, podcasts, emailed newsletters, the online communities, whether it’s the Financially Empowered Women or the Subreddit or the White Coat Investor Forum or the Facebook group, it’s all totally free to you.

The books are super cheap, whether the books we recommend that other people wrote or the ones I wrote. This stuff just takes some of your time and you can learn it. Tens of thousands of doctors before you have learned this stuff. You’re no dumber than they are. You can learn this stuff too. It’s not that complicated. You can get it and you’ll be shocked. Once you become financially literate and a little bit financially disciplined, it’s like having a superpower. You’ll start looking around the world going, “Why isn’t everybody else doing this?”

But what is everybody else in the world doing? Well, if you look at the data out there, these surveys they do out there, you will see that 40% of people who are making $300,000 plus a year are living hand to mouth. You’re not going to like where that ends up. You’ll end up being one of those docs in your 60s who isn’t even a millionaire. It doesn’t even have $500,000 in network. You earned $12 million and you got none of them left. Don’t be that doctor. You can take care of this stuff. You can make money, a blessing in your life rather than a curse.

And in the meantime, while you’re doing that, spread the word. One of the best ways to do is to leave a five-star review. A recent one came in that said, “Keep going. I appreciate all the hard work. Wonderful and resourceful, always. I love the podcast and blog. I look forward to it every week and I either learn something new or it reinforces that I’m following the course to financial freedom.” Five stars. Thanks for that review.

SPONSOR

Dr. Jim Dahle:
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All right, this podcast went long today. Hope it was worth it for you. Maybe you had to listen to it over two or three commutes. Hope that’s still worth it to you.

Keep your head up and your shoulders back. You’ve got this, we’re here to help. We’ll see you next time on the White Coat Investor podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast. We’re excited you’re here. This is the podcast where we celebrate you and what you’ve accomplished and use what you’ve done to inspire others to reach their financial goals. If you’d like to be a guest on the podcast, you can apply at whitecoatinvestor.com/milestones.

This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or get this critical insurance in place, contact Bob at whitecoatinvestor.com/protuity. You can also email [email protected] or you can call (973) 771-9100.

Join me Tuesday, November 17th at 06:00 P.M. Mountain time for a free virtual class. We call it Multimillionaire in Medicine: The Crash Course. I’ll be walking you through the simple path to becoming a multimillionaire in medicine. One person who attends live will get a free registration to the physician wellness and financial literacy conference and five others will win our best-selling fire your financial advisor online course.

Dr. Tyler Scott, president of financial planning at White Coat Planning, will join me for a live Q&A at the end and his team will be in the chat answering your questions as we go. Tyler and I will answer a bunch of questions at the end as well, so come preparing to interact and enjoy. We’re going to try to answer many of those in the presentation as we go along, but this is your chance to pick our brains. It’s totally free and a really great resource for you.

Getting out of debt and becoming a multimillionaire is easier than you think, but you do need a plan and we’re ready to help you make yours. Register at whitecoatinvestor.com/millionaire.

Now, I have frequently said that the fastest path to financial independence is building a reasonably leveraged portfolio of short-term rental properties. It’s a lot of work. There’s some risk there. You got to learn some stuff about it. You can screw it up, but I think it’s one of the best reliable pathways to rapid wealth.

Today on the podcast, we’re going to talk about somebody who has rapidly become wealthy using a different pathway. I know a lot of you will think about it and go, “That was crazy to do that.” And maybe it was, but it worked. And I think there’s some lessons there that are worth learning as well. So, let’s get into the interview and talk about it. I think you’re going to enjoy this podcast.

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is [Speaker]. Welcome to the podcast.

Speaker:
Hi, Dr. Dahle. Thanks for having me on.

Dr. Jim Dahle:
All right. Tell us a little bit about yourself. What part of the country are you in? What do you do for a living? How far are you out of training?

Speaker:
Well, I’m 39 years old. I’m from Texas. I’m about eight years out of training, but I got my license during residency. I’ve been kind of practicing independently for the past 11 years and I’m a family medicine doc.

Dr. Jim Dahle:
Okay. Well, you have accomplished a rather unusual milestone for a family medicine doc, not even yet to mid-career. Tell us what milestone we are celebrating today.

Speaker:
My milestone is that I reached a $10 million.

Dr. Jim Dahle:
$10 million. This is wild. Megan sends me over the notes before we got you on the line. I’m like, “Something doesn’t add up here.” If we add up all the money you’ve ever made in your career doing family medicine, it’s not even close to $10 million.

Speaker:
Yeah.

Dr. Jim Dahle:
So I’m like what inheritance did he win the lottery? Is he just knocked it out of the park with investments? And I think it’s more of the latter than it, than it is anything else. Correct? There’s no inherited money here. Nobody gave you anything?

Speaker:
No, no inherited money. I wish, but no, it’s all pretty much like getting lucky with investments.

Dr. Jim Dahle:
Okay. Well getting lucky, or maybe you have a functional crystal ball, whatever it is, maybe, maybe it’s hard to tell statistically, which it is, but either way better to be lucky than good, right?

Speaker:
Yes.

Dr. Jim Dahle:
Yeah. Awesome. Okay. Tell us the story. Because there’s more to it. You started working earlier. You’ve saved a ton of your money and then you hit it out of the park with investments. So, tell us the story.

Speaker:
Yeah, just a little bit of a background. I’m a first generation immigrant. I was raised by my mom. My mom was a single parent. She was also a physician, but she wasn’t very successful.

Dr. Jim Dahle:
Now when you say successful, you mean as a doc or you with finances?

Speaker:
Finances.

Dr. Jim Dahle:
Okay. All right.

Speaker:
Yeah. She wasn’t really into real estate and stuff like that. Never really invested. A lot of the investments both her and my dad didn’t really work out. So as a child, I kind of see some of the struggle financials like that they had in some of the investments that didn’t work out. And so, it kind of helped me choose a different path. And then also we struggled with money.

And so early on, I bought to myself that I wanted to be financially independent early on. And so, I went to a college in my hometown to try to save money, went pretty much on grants and people give you money to go to school.

Dr. Jim Dahle:
Scholarships.

Speaker:
Scholarships. And then I went to a medical school in my state to try to save some money. It was a state school in the Southwest.

Dr. Jim Dahle:
So how much debt did you come out with at the end of med school?

Speaker:
I graduated with $140,000 in debt. And then I chose a specialty. Then I changed specialties four times.

Dr. Jim Dahle:
Four times? Which ones have you done?

Speaker:
Initially I did like a year of diagnostic radiology and then did three years of family medicine and then a year of emergency medicine. So I couldn’t really figure out what I wanted to do.

Dr. Jim Dahle:
You just like, “Nope, that one’s not for me. I got to try another one?” Or what happened?

Speaker:
Pretty much. Yeah. I couldn’t find the right fit. Again, I was still very much into the whole financial independence early track. I worked really hard and paid off all my medical school loans within about eight months of finishing residency and the fellowship.

Dr. Jim Dahle:
Wow. Okay. But you were working even during residency it sounds like. You were moonlighting or something.

Speaker:
Yes, I was moonlighting after clinic and then I was doing some surveys, things like that. Yeah.

Dr. Jim Dahle:
What’s the most money you made in a year before finishing training?

Speaker:
Probably like $100,000.

Dr. Jim Dahle:
That’s it. That’s not a ton of moonlighting.

Speaker:
Yeah. And I didn’t pay anything into my medical school loans too. So those loans kind of grew a lot over time.

Dr. Jim Dahle:
So, what was your net worth when you finished training?

Speaker:
$200,000 negative. Yeah.

Dr. Jim Dahle:
You’re still negative when you came out of training.

Speaker:
Yes.

Dr. Jim Dahle:
You had $140,000 in medical school loans. What were the other loans? You have car loans or credit card loans or something?

Speaker:
Yeah. The medical school, I think because of the interest rate just kind of grew quite a bit from $140,000 to $200,000.

Dr. Jim Dahle:
Oh, okay. So it was the loans. All right. So, you’re negative. How many years ago was that that you finished training?

Speaker:
2018.

Dr. Jim Dahle:
Okay. So it’s only been eight years. It’s from eight years, you basically went from broke to decamillionaire.

Speaker:
Yes.

Dr. Jim Dahle:
What’s the most amount of money you earned clinically in those eight years? What was the best year you had?

Speaker:
Probably last year. I made maybe about a million dollars last year.

Dr. Jim Dahle:
A million dollars in what? Emergency medicine or family practice or what?

Speaker:
Yeah. I forgot to mention that. I work primarily in the ER locum. I work in several different hospitals.

Dr. Jim Dahle:
Okay. So it’s locums. You’re only going to jobs that pay a lot.

Speaker:
Pretty much. Yes.

Dr. Jim Dahle:
Okay. So, you’re working hard and what percentage of that money have you been saving the last eight years?

Speaker:
Yeah. The reason why I put together that PDF I gave you, I was talking to a financial advisors recently and they asked me the exact same questions, like “How much are you spending? How much are you saving?” I had no idea what the numbers were. I actually finally went through it like last month and I was saving 65 to 80% of what I take home. And I was just basically putting into the stock market.

Dr. Jim Dahle:
Okay. So, 65 to 80% of your net income is what you’ve been saving for the last eight years. All right. That’s a lot of money for compound interest to work on. Especially if you’re working essentially more than one job, you’ve been working hard, you’ve been saving. I don’t want to say all of it, but it’s almost all of it. How much do you think you spend in a year? Like on you, what do you spend? Not taxes, not retirement savings. How much do you actually spend a year?

Speaker:
Yeah, I’ve actually been very frugal. I would say very little, I spend very little. I spent about $14,000 a month. So, about $160,000 per year.

Dr. Jim Dahle:
All right. That’s a pretty good life. You got a pretty good life on $160,000 a year. That’s more than twice what a resident makes. And that’s not including taxes. So, it’s 2.5X times what a resident makes. It’s a pretty good life. But I think what people really want to hear is this investing story. What have you been investing in for the last eight years?

Speaker:
I don’t want to take all the credit because actually credit goes to a lot of people that advise me at work. I work with a lot of doctors that are in their 60s and 70s. And these are doctors who have gone through a lot, like a lot of booms and busts in the stock market. And I listened to them very closely and they all had one advice, which is basically buy good profitable growth companies and just put all your money in there and just let it grow.

So, couple of years ago, I had a doctor friend of mine. He’s in his 60s. He was really knowledgeable about tech stocks. And he’s seen the tech booms in the 90s, in the 2000s. And so, he encouraged me to invest in semiconductors and it’s just about the time when the AI boom was coming on. I was reading a lot about it. And the potential for a lot of these AI to disrupt healthcare and economy in general. And so, I felt that the chip companies are going to be basically the bottleneck for these things. And it’s going to be the new oil for the next couple of decades.

Dr. Jim Dahle:
So your investments for the last eight years have almost entirely been tech stocks, chip stocks, et cetera.

Speaker:
Yes. Pretty much all the individuals.

Dr. Jim Dahle:
You included your portfolio in this PDF you sent me, let me read through a little bit, the bit of this for the readers, just so they have some idea here.

Speaker:
And you can share them on the video if you’d like. I don’t mind.

Dr. Jim Dahle:
Yeah. We’re talking about AMD is 36% of your portfolio.

Speaker:
Yes. That wasn’t the original plan, but obviously in the past few years, it just kind of grew.

Dr. Jim Dahle:
It’s grown. Yes. Intel is 20%. Microsoft is 7%. Amazon 7%, Alphabet 7%, Micron 7%, Meta’s 6%, Oracle’s 4%, Broadcom’s 3%. This is an incredibly concentrated portfolio. But obviously it’s done really, really well. These are all the best stocks from the last few years. And you’ve held these for years. You didn’t just buy them all last year.

Speaker:
Yes, pretty much. And that’s why I buy my coworker pretty much dinner every single time we work. He’s kind of the reason for all of this.

Dr. Jim Dahle:
Okay. So, if we calculated your rate of return over the last five or six years, it’s going to be something like 25% a year or something.

Speaker:
Yes.

Dr. Jim Dahle:
Okay. Are you concerned about the possibility of a downturn in these stocks?

Speaker:
Very. Yeah. And actually that’s why in the past couple of months, I’ve been interviewing a bunch of investment advisors to try to help me diversify all of this in a tax efficient manner.

Dr. Jim Dahle:
Yeah. That’s going to be challenging, especially with all these changes with 351, these exchange funds popping up that maybe you can’t use those like people thought you could a year or two ago. But there are worse things than paying capital gains taxes. Like not having to pay capital gains taxes because you no longer have the gains.

Speaker:
Exactly. Yeah. But you decided to pick stocks. You’ve done so successfully apparently with some hot tips in the doctor’s lounge is what I’m hearing from you. How come you decided to do that instead of just buying all the stocks, just using an index fund?

I did that the first couple of years. And I think because of the timing, it was during the time when there was a lot of interest rate increases. So, the market was actually all going down. And so I didn’t have very good returns on the ETFs. And so, I decided to switch strategies and do concentrated picks on some of these growth stocks to see if…

Dr. Jim Dahle:
Index is going down. Are we talking about 2020 or 2022? Because those are the only years in the last eight where index funds have gone down.

Speaker:
2022, yeah. And those are really much like when I started making money because I graduated 2018. I put all my money into loans in 2019. So, 2020 to 2022 when I started investing aggressively. And yes, those index funds weren’t doing very well. So I decided to maybe switch strategies. And I’m glad I did. Yeah.

Dr. Jim Dahle:
Yeah. It’s certainly paid off. You look at a record like this and you start going, “I want that guy to invest my money.” You’ve smashed the indexes over the last six or eight years, obviously. Now, whether that’s luck or skill, can be debated. But there’s no doubt that this is what’s happened to you. A lot of people should be taking investment advice from you. If you can maintain this, obviously, stocks are cyclical and trees don’t grow to the sky. And if you expect these sort of tech stocks to have these kind of returns forever going forward, that’s probably delusional. But you can’t argue with the past. This has worked out very, very well for you.

Speaker:
Yes. Yeah. And I’m very aware that there’s probably a lot of exuberance, especially in this individual stock. So there’s potentially some correction, probably in the next year or two.

Dr. Jim Dahle:
What are your financial goals?

Speaker:
I really wanted to retire early. And so, yeah, it’s kind of like what I’m working on right now. Actually, one of the milestones was that last month I decided that I was going to go part-time and possibly retire early.

Dr. Jim Dahle:
You’re spending $160,000 a year. You have $10 million. You’ve got twice as much money already as you need to retire early.

Speaker:
Yes.

Dr. Jim Dahle:
That goal check. You checked that off a couple of years ago, at least. At this point, you could probably stay retired owning nothing but TIPS, treasury inflation-protected securities going forward. Is there some other goal? Are you trying to give $100 million to charity? Or you want to increase your spending dramatically? Is there some other financial goal out there for you that would justify you still taking on this level of risk?

Speaker:
No, actually. It almost became kind of like a game, like a video game. I hate to say it, but it’s like a casino. I don’t actually go to casinos, but I guess this is what people in casinos get, the dopamine high when they’re reaching these highs. But also, yeah, maybe retire early. I’m not really sure what the next steps are going to be or why I’m doing this.

Dr. Jim Dahle:
It seems worth taking some financial planning. And in the words of gamblers, in the words of what someone in a casino might say, “Taking some chips off the table.”

Speaker:
Yes.

Dr. Jim Dahle:
Because you could take half a million dollars out of your portfolio, pay the capital gains taxes on it. That sucks, but it’s not the end of the world. Invest it all in a 30-year TIPS ladder.

Speaker:
Yes.

Dr. Jim Dahle:
And still gamble with the other half million. And probably do fine. It’s awesome what you’ve done. It’s wonderful. But boy, everybody worries about one of those big downturns like we had in 2000 or 2002 or something like that that could really devastate a very concentrated portfolio like yours for sure.

Speaker:
And it’s what I want to try to fix over the next couple of months is try to diversify some of this individual stuff.

Dr. Jim Dahle:
I think that’s a good idea. But looking beyond that. People listen to this, they’re going, “Whoa, that guy’s taking on way too much risk.” But look at what else you did. The reason you could take this risk, you controlled your lifestyle spending, you worked really hard, you saved a ton of money, and that all allowed you to take risks like this.

So what if it all blew up? You were still saving $600,000 a year. So, even if you lost it all, you’re still going to be rich again in a few years. So, let’s give credit where credit is due. You did the things you have to do to be able to take risks like this. You took the risks, they paid off, and now you’re in an awesome place. It’s awesome.

Speaker:
Yeah. And I think that’s the reason why I kind of wanted to get onto this podcast is because I just wanted to let people know that if you just control your spending and you just invest early and I hate to say there was gambling, but if you invest and invest smartly and you take advice from people that you trust, that it can really work out even as a family physician, it’s not impossible.

Dr. Jim Dahle:
Okay. Well, give us your tips. If someone came to you or if you could go back and give yourself advice eight years ago, when you’re starting out on this path with a negative net worth, what advice would you have given to yourself?

Speaker:
Number one would be, I actually saw some of your podcasts a couple of days ago, and I think somebody was talking about somebody opened a brokerage account for a person and that allowed them to become financially independent.

Yes, I think the number one thing is if you just get that hurdle out of the way, which is opening a brokerage account and learning how to invest, I think that’s the number one thing. I think I wish I had done that way sooner because I didn’t really open a brokerage account until I was a fellow, which was a year before I finished training, so I had no idea how to buy stocks. I keep hearing about it on the news and I watch people get wealthy with stocks, but I had no idea how to do it. But I think that’s the number one thing. Even medical students, college students, maybe high school students should have a brokerage account so that they can learn how to invest.

Dr. Jim Dahle:
Okay. So, open an account early, start investing early. What else would you recommend?

Speaker:
The most important thing is, there’s always some trends going on on the news and people probably should just be aware of what current events are. There’s a lot of opportunities that come up, but people overlook it. I think a lot of people overlook AI as an investment opportunity and didn’t get into this bandwagon until now. But some of these investment opportunities can pass if you’re not aware of it.

Dr. Jim Dahle:
Yeah. So, momentum investing, buy the hot stocks and ride them. What about at the far end? How do you know when to drop them?

Speaker:
Oh, yes. Yeah, I think that’s a personal decision. You have to know what is enough for you and then what is enough for you to live on and how much risk can you tolerate.

Dr. Jim Dahle:
Now, this PDF you sent over to me, you included things like don’t day trade, don’t short your winners, avoid speculative bets, avoid leverage, limit derivatives.

Speaker:
Yes, absolutely, yes. The times that I’ve lost a lot of money is when I was trying to do day trade because you’re losing a lot of that capital gains and tax. And then on top of that, when you sell a security, sometimes it’s hard to get back in the market and you can lose some of these really good upsides. You can have one or two days of really good upside and totally lose it. And so, the opportunity cost is there.

Also, I sold quite a bit of securities that had gone up because I sold too early and I lost out on some of those gains. And so, from the very beginning, you should really buy a stock because you really believe in the growth potential or the long-term upside on these and shouldn’t buy anything that you would gamble. So, one of my biggest regret was selling some really good stocks like Nvidia, Micron, things like that. I had more of them. And then leverage would be something I would be cautious about because if a trade goes bad, some of those leverage will kind of catch.

Dr. Jim Dahle:
Have you invested in stocks using leverage?

Speaker:
There were a couple of times where I did margin trades and that cost me a lot of stress because of the interest and also thinking about like what if it, but actually they were profitable, but that’s another level of gambling that I would not recommend to people.

Dr. Jim Dahle:
You’ve got a couple of rental properties, right?

Speaker:
Yes.

Dr. Jim Dahle:
How highly are they leveraged?

Speaker:
The first one I bought with my own money. I paid it off and then I started renting it out. And then the other one, I did take out a mortgage and then I sold some of my stocks to pay off about half of the mortgage on that.

Dr. Jim Dahle:
Yeah. So, those aren’t highly leveraged. One of them is paid off. The other one’s at least half paid off.

Speaker:
Yes. I think it’s about a 2.5% interest rate. So, I wasn’t in a rush to pay it off.

Dr. Jim Dahle:
Well, it’s pretty awesome. Congratulations on your success.

Speaker:
Thank you.

Dr. Jim Dahle:
You have so many options available to you in your life now. And so, yes, I do encourage you to take some chips off the table, do some financial planning, concentrate your investing on your financial goals and all that.

But you deserve a huge pat on the back. You’ve done so many things right. You limited your spending, you worked really hard, you saved a ton of money, you stuck with your plan for years, you took on risk which has paid off. And you recognize that there are times when there’s too much risk and you dialed that back.

When you look at the long list of things you’ve done, you’ve done very, very well. So, congratulations to you. Thank you for being willing to come on the podcast and share your story with others.

Speaker:
Thank you.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. We bring people on the Milestones podcast to celebrate any milestone, no matter how they’ve gotten there. Now, they don’t always get there via a WCI prescribed way.

If [Speaker] had come to me six years ago and told me this was his portfolio, 35% in a single tech stock, I would have told him to diversify it. I would have told him, probably I’d just be buying index funds. The chances of you picking stocks that are going to outperform the index funds are not good. It’s not impossible though. If you look at the data of mutual fund managers, you’ll see that even over 20 years, about 5% will pick stocks better than an index fund. It’s not zero. It’s 5%. I wouldn’t necessarily bet that way, but it is possible.

Now, whether that’s likely due to luck or likely due to skill, I’ll leave up to you. Certainly, I’ve never thought the doctor’s lounge was a great place to get hot stock tips. Did it work in this case? Apparently it did.

And it just shows you there are many roads to Dublin. And if you do the big things, the important things right, how you invest probably doesn’t matter that much. He’d still be probably nearly a decamillionaire if he had invested it all in real estate. He’d probably still be nearly a decamillionaire if he had just put it all into index funds. Because he was doing the big things right. He worked very hard. He got his income up.

I don’t know very many emergency docs making a million dollars a year. The average is like $400,000. So you’re taking jobs that pay more and there’s a reason they pay more. So you’re taking on more risk. You’re seeing more patients per hour. You’re going to places other people don’t want to practice. You’re working a lot of shifts, etc.

And he didn’t spend that much. He’s spending less than 20% of his income. And so, that leaves you a lot of money to invest. You’re basically living like a resident for eight years. And guess what? That works really well to build wealth quickly, no matter how you invest your money.

He messed around a few other things. He invested a little bit on leverage and it sounds like he did a few other things and some of them paid off, some of them didn’t. But the point is he took on some risk. If you just put it all in CDs, that probably wouldn’t have gotten him to worry anywhere near he is today.

And he stuck with his plan. He was conscious of taxes. He used tax advantage accounts where he could. Bought and hold, didn’t day trade once he figured out that wasn’t a great idea. And it’s really paid off for him. So, a lot of lessons to learn there.

Obviously there’s many roads to Dublin. This isn’t one I recommend lots of people jump on. But when you put yourself in a position where you can take a lot of risk, whether that’s business risk or investing risk or leverage risk or whatever, sometimes that risk does pay off. And in this case, it clearly did.

FINANCIAL BOOT CAMP: CHARITABLE GIVING

Dr. Jim Dahle:
Let’s talk for a few minutes about charitable giving. The first question, of course, is, should you bother? Should you bother giving anything to charity? And a lot of people get confused about this. They think this is some sort of a tax play, that they’re going to come out ahead by giving money away to charity. That’s not the way deductions work. It doesn’t make sense to give $10,000 to charity in order to get a $4,000 tax break. Yes, you don’t have to pay taxes on that $10,000 because it’s deductible. But you’d only pay $4,000 of taxes on that income anyway. So, it costs you $10,000, $4,000 of benefit. You’re not coming out ahead. You have to actually want to give to the charity.

If you don’t want to do that, then don’t think this is some sort of savvy financial play that helps you to have more money or to leave more money to your heirs. There are some possible exceptions with charitable trusts, but even then, most of the time, you’re still coming out behind compared to if you just had never given anything to charity at all.

There is some data suggests, however, that is not as true as you might think it is.
There’s data to suggest that givers actually become wealthier. And the reasoning is not clear.

Whether it is divinity blessing you or whether you become a more pleasant person to be around and people want to do more business with you or they trust you more or you become a better person and you’re thus better at your job and better at managing your money. Or maybe because you give away 10% of your money, you actually have to add up how you’re making and you pay more attention to your finances. Nobody really understands why that is. But there’s some data to suggest that givers actually do come out of hit. But it’s not a direct benefit from the tax deductions of giving.

So should you give to charity? Well, I think you should. I think you become a better person. And part of the reason why is you become less anxious about money. Giving money away, whether you’re giving it to charity, whether you’re giving it to someone that can use it more than you, whether you’re giving it to family or friends or employees or whoever, sends a subtle message to your psyche that you have enough.

There’s a lot of value in that. When you have enough money, you quit worrying about your money. You shift out of a scarcity mindset. And I think you are happy. Plus, you bless the world. Most of the time when you’re giving money away, you’re giving it to somebody that can turn that money into a whole lot more happiness than you can. And I think that’s valuable as well.

So while you’re giving to charity, you might as well see if you can get a tax deduction for it. Whether that means you get a little bit more money than you would otherwise have, or whether that means you can give more to charity, that’s a good thing. I’m a big fan of actually paying attention to the tax benefits of giving to charity.

So let’s talk about those. If you’re giving cash, one of the coolest benefits is that $1,000 given to charity each year is completely deductible from your income, whether you itemize or not. If you’re married, it’s $`2,000. People think of this as an above the line deduction. It’s actually a below the line deduction, but you don’t have to itemize to get it.
It was made permanent with the One Big Beautiful Bill Act back in 2025, but that’s the way the tax code is right now is you can give away $1,000 or $2,000 if you’re married without itemizing your deductions, without filling out Schedule A in cash that you give to charity and not pay taxes on that money. So that’s a beautiful thing.

If you want to give more than that, you’re going to have to ask yourself, “Is it worth itemizing?” Of course, whether you use Schedule A or not comes down to whether you have more itemized deductions than the standard deduction. And also back in 2025, the standard deduction went up and it’s indexed to inflation, of course, so it goes up each year, but it’s pretty substantial deduction. It’s over $30,000 for a married couple.

Now that includes for most people, it includes some mortgage interest. It includes charitable giving and it includes $10,000, maybe more in state and local taxes. So if all that adds up to more than $30,000 plus or so for a married couple, then it makes sense to itemize. If it doesn’t, then you may just take the standard deduction.

So, it’s possible you can give a bunch of money to charity. You give $10,000 or $15,000 to charity. And because all of your itemized deductions don’t add up to more than the standard deduction, you might not be getting any tax benefit for that at all. So you actually have to do the numbers there.

Another thing that happened in the One Big Beautiful Bill Act back in 2025 was that there was a limitation for those in the highest tax bracket. Their itemized deductions are no longer deductible at 37%. They’re only deductible at 35%. That includes charitable giving. So the charitable deduction is a little bit smaller for the highest earners than it used to be.

Another limitation is the first 0.5% of your adjusted gross income is not deductible.
So if you make $300,000 a year, 0.5% of that is $1,500. The first $1,500 you give doesn’t have any deduction at all. That’s above and beyond that $1,000 to $2,000 deduction that I talked about earlier that you can do without itemizing. So, it’s a little bit more limited for the highest earners than it used to be, but it’s still quite a substantial deduction. If you’re going to give to charity anyway, you might as well get that.

Now, is that always the most tax efficient way to give to charity? No, there are even more tax efficient ways to give to charity. Once you’re 70 and a half, for instance, you can do qualified charitable distributions. These take the place of required minimum distributions from your IRAs and your 401(k)s. Once you’re of RMD age, but due to some quirks in how the laws were written, you actually get to QCD age before you get to RMD age. So you can do it for a couple of years before RMDs are even due.

But the beautiful thing about that is you don’t have to take the money out of the IRA, pay taxes on it, and then give it to charity and calculate out the deduction and all that and make sure you’re still itemizing and those sorts of things. It just goes directly from your IRA to the charity. You never pay taxes on it. There’s no additional tax break because you never paid taxes on it.

So it’s money you earned 30 years ago, it grew for a long time in a tax protected way, and then it goes directly to charity without you ever paying taxes on it. So it’s a pretty beautiful thing. If you’re 70 and a half or older and you have tax deferred money, that is the best way for you to give to charity, hands down.

Until that time, another thing to consider for those of you who have enough savings that some of it is not inside a retirement account, meaning you’re investing in a taxable non-qualified brokerage account, and you have appreciated shares that you’ve owned for more than one year, you should donate those shares. You should basically never give cash to charity again. You should only donate appreciated shares that you’ve owned for more than one year.

The beautiful thing about doing that is it flushes those capital gains out of your portfolio. You can buy those same shares back the next day. There’s no 30-day wash sale or anything like that. And neither you nor the charity pays those capital gains taxes.

So it’s a really great way to donate to charity. You get the deduction, the size of the value on the day you contributed it, as long as you owned it more than a year. And neither you nor the charity pays any taxes on it. So, that’s pretty cool as well. You can do that via a donor advised fund or DAF, or you can do it directly to the charity.
Either way is fine. It works the same way.

Common mistakes that people make with charitable giving. Well, it’s never a mistake, I suppose, unless you give to a terrible charity that’s wasting your money or that’s spending it on themselves or has too much administrative work. You should definitely evaluate the charities using something like Charity Navigator. To make sure it’s the best charity for the cause you’re trying to support. But other mistakes have to do with not understanding how the tax breaks work for the charitable deduction.

For example, somebody might donate $12,000 a year to charity and not recognize that they don’t have enough itemized deductions to actually take the itemized deduction to actually use Schedule A. They’re just taking the standard deduction anyway.

In that case, what people sometimes do is they bunch their deductions. They give their charitable giving for this year and for next year at the end of December. And then they can take all the deductions in this year. And then next year, they take the standard deduction. And they itemize the next year and standard deduction the year after that. This is kind of a bunching strategy. And that can make sense to do sometimes for some people.

You also have to actually keep some records. If you ever get audited, you have to actually prove that you gave it to charity. This is one of the great things about a donor advised fund. If you just give your money in one lump sum, some appreciated shares once a year, that’s all you have to keep track of. Even if you dole that money out from the donor advised fund to 30 different charities and on 60 different dates during the year, all you have to keep track of is that initial donation to the DAF.

For the most part, though, it’s like anything else in personal finance. You want to pay attention to the complexity. Make sure any complexity you’re adding to your plan is actually providing more value than it’s costing you, both money-wise and time and hassle-wise.

Donating in charity is a wonderful thing. Make sure you understand how the tax deductions available for charitable giving work. There are many, whether you’re doing this directly to charity, whether you’re using a donor advised fund or a charitable foundation or a charitable trust, it’s important to dive into the details. But for the most part, anytime you’re giving to charity, usually you can use it to lower your tax bill at the same time.

Thank you very much, the government says. They want you to support charities.
And so they’re going to subsidize that activity for you, which is wonderful for those of us who are charitable. And I encourage you to be.

SPONSOR

Dr. Jim Dahle:
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I hope you’ve enjoyed the podcast. Again, if you want to be a guest on the podcast, you can sign up at whitecoatinvestor.com/milestones. Until our next one, keep your head up, shoulders back. You’ve got this. The whole White Coat Investor community is here to help you. See you next time on the podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor Podcast Financial Bootcamp, your fast track to financial success.

Dr. Jim Dahle:
Let’s talk about inflation. What does it actually mean when we say inflation is rising? What is this thing, and what is hyperinflation and deflation and disinflation? Let’s talk about all that today.

Inflation in general is a rise in the price of goods and services. They simply cost more dollars, in our case for those of us in the U.S., than they used to. So, if a loaf of bread used to be $2 and now it’s $3, that’s inflation. If a dozen eggs used to be $3 and now they’re $4, that’s inflation. You probably notice it most prominently at the gas pump because the prices are posted out there as you drive down the street every day. But that’s what inflation is, and it is fairly normal in our type of economy to see some inflation.

In fact, the folks in charge of trying to regulate inflation, the Federal Reserve, whose job it is to give us stable inflation, their goal is to set inflation at around 2% per year. Now, there’s nothing magic about 2% when you actually look into this. 1% would probably be fine. 3% would probably be fine as well. There’s nothing magic about 2%. But what our goal is when it comes to inflation is to have it be predictable. We want stability in our economy because when prices are stable, we can make smart, rational economic decisions about our futures. And so, the goal from a federal policy standpoint is to have a stable rate of inflation, and not minus 10% this year and plus 10% next year. We want a stable rate of inflation, and that’s the Federal Reserve’s job. Their job is to regulate that as well as regulate the unemployment rate. Those are kind of their two mandates.

But what causes inflation? Well, there’s lots of different things that go into it. The amount of money in the economy affects it. Fears about inflation can affect it. There’s a behavioral component as well. Interest rates can affect it. Even returns of investments can affect inflation. And so, as time goes on, people tend to get paid more, and goods and services tend to cost more, and that’s the cause of inflation.

So, probably the best measurement of inflation is the Consumer Price Index, and the one most commonly used is the Consumer Price Index for Urban Consumers, or CPI-U. Unfortunately, that’s an average, right? They look at a whole bunch of different things, housing costs and fuel costs and food costs and prices of things we buy, both goods and services, and try to measure inflation. Now, lots of people criticize this measurement of inflation. It’s clearly not perfect, but it is the most robust one out there.

The truth is, the inflation rate that really should matter most to you is your personal inflation rate. You don’t really care if the CPI is 2% a year. If everything you’re buying is going up 10% a year, then your inflation rate is really 10%. Likewise, there are situations where all the things you buy are not going up at the same rate as the Consumer Price Index, and so your personal rate of inflation, which is very, very challenging to calculate, is actually a more important one for you to pay attention to.

But as a general rule, when people talk about inflation in the media and they talk about inflation at cocktail parties, what they’re talking about is inflation as measured by the Consumer Price Index. And obviously, inflation means your money is worth less. So, if you take your money, you make a bunch of money at your job or whatever, and you take it in cash and you put it underneath your mattress, as inflation goes on, your purchasing power is going down. If inflation was 2%, those dollars under your mattress are now worth 2% less than they were a year before. And over many years, that can add up. At 2% or 3% or 5% inflation, that adds up to a lot over 10 or 20 or 30 years, and so it can’t be ignored.

It’s very important for not only your income but your investments to keep up with or beat inflation because if they don’t, it’s going to affect your purchasing power. So, you’ve got to make sure your money is keeping up with inflation. You want to keep it invested, and hopefully, it’s earning the inflation rate or higher, especially after tax, in order to keep up with inflation. But this is the reason why investors don’t just leave all their money in cash, especially cash in a checking account paying nothing. They have to invest it to keep up with inflation.

There are really three big enemies for the investor. There are taxes, there are investment expenses, and there is inflation. Those are the real opponents you’re playing against. You’re not playing against Sam down the street, right? Nobody really cares what Sam’s returns are. But guess what? Inflation and taxes and fees really do affect how much money you’ll have in the future, and what you can buy, and how much financial security you have. So you do need to pay attention to it a little bit.

Not all things are affected negatively by inflation. For example, imagine you have some debt, right? Let’s say you’re one of those fortunate people who refinanced a home at 2.5% a few years ago, and now you’re earning 3.5% in your money market funds, and maybe you’re earning 4.5% or 5% in your bond funds, and maybe you’re earning even more than that in equities and real estate. Meanwhile, you’re paying that mortgage back, that fixed-rate, low-interest-rate mortgage, with dollars that are worth less and less and less every year. So debtors, especially those with fixed-interest-rate debt, actually benefit from inflation because those debts can be paid back with deflated dollars. So keep that in mind.

Investments do tend to respond to inflation. Stocks and real estate, in the long run, tend to keep up with inflation. But there are times when the rate of inflation is higher than the rate of return you’re getting from stocks or real estate or bonds or cash or anything else. So I don’t generally recommend you change your investment portfolio when inflation is high, but you should build your portfolio from the beginning with the expectation that there are going to be some periods of time when inflation is high.

So that means including things that typically will beat the rate of inflation, like stocks and real estate, in your portfolio. If you’re going to own bonds, consider having some of them in bonds that are indexed to inflation, such as Treasury Inflation-Protected Securities or I Bonds, and they can help you to keep up with inflation when it shows up.

You do need to beware, of course, of hyperinflation. Hyperinflation is one of the four horsemen of the apocalypse when it comes to serious threats to your investments. There is confiscation, right? Confiscation is when the government takes your money away from you. Think like Russia in 1918. Devastation, right? Economic devastation like in World War II in Germany. The place was flattened, right? It’s a real legitimate risk to your money and your assets. And then deflation, like we saw in the Great Depression, especially when economic slowdowns accompany it, as it usually does, can be a real risk.

And the last one, and the most common of those four horsemen of the apocalypse, is inflation, particularly hyperinflation. And this has occurred in various countries over the years. Argentina has been kind of notorious for it. Zimbabwe has been notorious for it, but it can happen anywhere. And if prices are going up 10% or 20% or 30% a year, it doesn’t take very many years to devastate all of your wealth. And so, managing inflation as a society is pretty darn important because we don’t want to end up in any sort of a hyperinflationary scenario.

Now, inflation is important to consider when planning for retirement. Any sort of long-term projections for your money need to take inflation into account. So, I think it’s best to use some sort of a lower return expectation when running your numbers, one that’s been adjusted for inflation. I typically say 3% inflation is what we’re going to adjust for. And so, if I’m expecting 8% nominal returns, I might be expecting 5% real or after-inflation returns. And that’s what I run my numbers with. And if I’m not saving enough money to be able to reach my goals while only using 5% returns instead of 8% returns, that would suggest maybe I need to earn more and save more, leave it invested for longer in order to reach those financial goals.

Now let’s define a couple of other terms. Deflation is when the price of goods and services actually falls. So something that cost $100 a year ago now costs $95. Happens all the time with technology, right? Computers are often less valuable in a year than they were today, and so that’s not so unusual. But as a general rule, it’s unusual in all of society for everything on average to be going down in price. The last time it really happened in a profound way across society was the Great Depression. Not great for economic times.

Disinflation, however, is not deflation. And sometimes when people say inflation is going down, this is what they mean. They’re saying the inflation rate went from 5% to 3%, as measured by CPI-U or something like that. That’s not deflation. That’s disinflation. You have a lower rate of inflation. It doesn’t mean prices are lower. Prices actually still went up. They just went up 3% instead of going up 5% like they did the year before.

Okay, so it’s important to keep that in mind when they say, “Okay, inflation’s back under control,” or “Inflation is going down.” That doesn’t mean prices are going back to where they were a year ago or five years ago. That just means they’re not going to go up as fast in the next year as they did in the prior year.

Now, falling prices might sound like a good thing, and it is as long as your money is otherwise worth just as much as it is. But sustained deflation can be harmful, and the reason why is people start going, “Oh, that thing only costs me $90 now, whereas it used to cost me $100. Maybe I should wait another year, and it’ll only cost me $80.” And so they do. They sit on their money, and there’s less economic activity, and the economy as a whole takes a pretty big hit.

And so the stocks and real estate that you own become worth less, and there’s less economic activity, and there’s just less stuff to buy, and your salary is probably cut if you can keep your job as well. And so, sustained deflation can be just as harmful as sustained inflation, especially hyperinflation.

But that deflation will affect not just the prices of the things you buy, but it’ll also affect the value of your investments as well as your debts, right? One of the worst things about the Great Depression is people had these debts, and if inflation is good for debtors, deflation is bad for debtors. Now all of a sudden they’re having to pay back their debts with dollars that are worth more than they used to be when they first borrowed the money, and that can be pretty rough. And it explains why the Great Depression got particularly bad for those who owed a lot of money.

Now keep all this in mind, that there is a federal agency whose job it is to monitor this, whose job it is to manage this. That’s the Federal Reserve. And depending on your view of this, your vision, your thoughts about this agency, you may not think they’re doing a very good job at all. They get a lot of flak, a lot of criticism from both sides of the political aisle.

But in general, they tend to do a fairly good job, or at least have over the last 100 years or so, at managing the inflation rate in our country. It has been far more stable than it is in many other countries, and so we can actually be pretty happy with the job they’ve done so far. And hopefully, in the future, they will continue to do just as good of a job.

The bottom line, when inflation or deflation is in the headlines, you shouldn’t really be changing much about your long-term financial plan. Your financial plan should have been designed from the beginning to deal with both inflation and deflation and shouldn’t require you to do anything about it when those rates change, other than in profoundly significant ways.

Obviously, if we’re going from a rate of inflation of 2% to a rate of inflation of 100%, you might need to make some changes in the way you’re living your financial life. But for the most part, I don’t like seeing White Coat Investors make huge changes in their portfolio just because inflation went from 2% to 3.5% or something like that. That’s just the normal fluctuation in this rate as the Fed tries to put some controls on what is a really challenging thing to control, which is our robust economy.

Hope that helps you to understand inflation and hyperinflation and deflation and disinflation.

DISCLAIMER

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.