Today’s episode dives into a hotly debated topic in physician employment. We are talking about 1099 work. We’re joined by Dr. Tod Stillson, who brings an enthusiastic case for why independent contracting and self-employment can open doors and empower doctors in ways traditional employment often doesn’t. Dr. Jim Dahle offers a thoughtful counterpoint, questioning just how impactful 1099 status really is for most physicians. It’s a friendly, engaging conversation with plenty of respectful debate, and we think listeners on both sides of the issue will find something to appreciate—and maybe even reconsider.
In This Show:
1099 vs. W-2
Jim framed the conversation around self-employment as something that requires nuance rather than blanket advice. He emphasized that while owning your work and having control over your career can be appealing, forming a corporation does not automatically create tax savings or liability protection. His goal is to help physicians understand the tradeoffs clearly before assuming one structure is inherently better than another.
He started by laying out the basic tax classifications physicians encounter. He explained that a W-2 physician is an employee with relatively simple taxes, limited control over work conditions, and an employer that handles payroll and benefits. A 1099 physician is not an employee but a business owner, even if there is only one client. In that case, the physician files a Schedule C and chooses a business structure—such as a sole proprietorship, LLC, or S Corporation. He also explained that physicians paid on a K-1 are partners, which is another form of self-employment, but it comes with shared ownership and more complex tax reporting.
Tod added an important practical distinction by focusing on the W-9 form. He pointed out that this is where classification becomes real, not just a verbal discussion about being W-2 or 1099. When physicians complete a W-9, they are being asked how the IRS should view them, as an individual or as a business. He argued that many doctors default to using their Social Security number without realizing they have the option to present themselves as a business. In his view, this is a key moment for physicians to assert agency and think of themselves as micro-businesses.
Jim agreed in principle but emphasized that the IRS does set guidelines that ultimately matter. He outlined the three broad categories the IRS uses to evaluate classification, which include behavioral control, financial control, and the nature of the relationship. He explained that these factors are intentionally gray, but they exist for a reason. He also stressed that misclassification risk largely falls on the employer. If a physician is treated as an independent contractor but later deemed an employee, the employer may be responsible for unpaid payroll taxes. That risk explains why employers often prefer W-2 arrangements.
Tod pushed back by focusing on physician-specific realities. He argued that doctors who have multiple clients, pay their own malpractice insurance, and contract through a professional entity can legitimately meet independent contractor criteria. He believes that if a physician can demonstrate those elements, employers should provide the option to work as a contractor rather than defaulting to W-2 employment out of fear. He also noted that professionals like physicians are often viewed differently than hourly workers, and that misclassification cases involving doctors are relatively rare.
Both ultimately agreed on the same conclusion, though, even if they approached it from different angles. Jim emphasized that many young physicians ask whether they should choose 1099 work simply because they have heard it is better, and his answer is always that it depends. Tod agreed, stressing that physicians often have more power and choice than they realize. The right decision depends on the details of the role, the compensation, the level of control, and the physician’s understanding of what they are taking on—not the label itself.
More information here:
Why ‘Going 1099’ Won’t Solve All Your Financial Problems
Is 1099 Actually Better?
They moved the conversation to a practical breakdown of why a 1099 role needs to pay more than a W-2 role to truly be a fair comparison. Jim emphasized that self-employed physicians are on the hook for both halves of payroll taxes, and they must fully cover benefits that are often hidden as employees. Health insurance is the biggest blind spot. Many doctors underestimate the cost because employers typically subsidize most of it. When physicians see the full price tag—often $12,000-$25,000 per year for a family—it becomes clear that equal pay between 1099 and W-2 is usually a bad deal.
Tod agreed with this math and reinforced the idea of “grossing up” pay to account for taxes and benefits. Where he leans harder is on the broader issue of business literacy. He argued that physicians are trained to be both financially and business illiterate, which weakens their negotiating power and limits their awareness of available options. He contrasts today’s training environment with earlier generations of physicians who expected to operate as businesses and thought that way from the start.
From there, Tod made the case that forming a corporation should be viewed as a capstone to medical training. After investing hundreds of thousands of dollars in education, he argued that spending a relatively small amount to set up a corporate structure empowers physicians by giving them flexibility in the marketplace. In his view, having a corporation in place allows doctors to choose between being an employee or an independent contractor instead of defaulting to W-2 simply because they are unprepared.
This is where Jim pushed back slightly. He agreed that the cost and friction of forming a business entity are very low, but he disagreed with framing it as a major capstone step. He pointed out that in many states, an LLC can be formed for under $100 and maintained cheaply, and he said that physicians have multiple structural options beyond a formal corporation, including simple sole proprietorships. Both ultimately agreed that the key issue is awareness. Doctors need to understand their options so they can intentionally choose what works best for their stage of life, rather than drifting into a default arrangement without realizing the tradeoffs.
Business Structure Debate: Sole Proprietor vs. LLC vs. S Corp
Jim then argued that many physicians with limited 1099 income and no employees can reasonably remain sole proprietors without losing meaningful benefits. He emphasized that forming an LLC or corporation does not reduce malpractice risk because malpractice liability is always personal. From his perspective, if a physician has little true business liability beyond their clinical work, the practical upside of adding a formal entity can be small. Dr. Stilson agreed that sole proprietorship can make sense at low income levels but framed incorporation as inherently empowering because it creates optionality and reinforces an ownership mindset, even if the structure is not fully utilized right away.
The disagreement sharpened around income thresholds and tax value. Tod argued that once 1099 income reaches certain levels, incorporation becomes more compelling. He suggested that below $30,000 of 1099 income, a sole proprietorship is usually best; that $30,000-$50,000 is a gray zone worth analyzing; and that above $50,000, the economics of an S Corp often favor incorporating. Dr. Dahle pushed back by asking what specific tax savings actually appear at those levels. He argued that the only real tax advantage of an S Corp comes from payroll tax savings, mainly Medicare tax, once Social Security taxes are already maxed out—and that these savings are often modest.
That tax debate continued when they moved to discuss retirement plans. Tod believed that S Corps can expand planning opportunities and allow physicians to retain more income over time. Jim strongly disagreed, stating that sole proprietors can already open and fully fund solo 401(k) plans and defined benefit or cash balance plans without incorporating. He noted that in some cases, S Corp rules can actually limit contributions because of required salary levels. He also pointed out that the cost of filing a corporate tax return often offsets much of the projected tax savings, making the outcome close to break-even for many doctors.
Asset protection was another area of disagreement. Tod argued that a corporation or professional LLC creates a meaningful separation between business activity and household assets, which he sees as valuable even when risks are not obvious in advance. Jim countered that asset protection only matters if there is real business liability and that most solo 1099 physicians have little exposure beyond malpractice, which the entity does not shield. He acknowledged there may be narrow edge cases where an entity helps but questioned whether that benefit alone justifies the added complexity. Both agreed that if liability protection is the goal, an LLC often provides similar legal protection to a corporation under state law.
Where they ultimately align is on motivation and mindset. Tod argued that incorporation and self-employment can meaningfully improve autonomy, agency, and identity as an owner, which he believes plays a major role in reducing burnout. Jim agreed that ownership and control matter and that self-employment often leads to greater career satisfaction, especially later in a physician’s career. But he remained unconvinced that simply adding a corporate structure provides additional benefit beyond being self-employed in any form. Their shared conclusion is that entity choice should be based on individual circumstances, real numbers, and personal priorities, and it should ideally be tested through side-by-side analysis with a qualified professional rather than assumptions or rules of thumb.
More information here:
The Wealth-Building Lessons That Doctors Can Learn from Dentists
Final Thoughts from Jim
Jim walked through follow-up points from the interview, focusing on what forming a corporation actually does and does not get you compared to staying a sole proprietor. He explained that many commonly cited “corporate perks”—like accountable reimbursement plans, family payroll, and fringe benefits—are often overstated or available in a similar form to sole proprietors. Some deductions are a little cleaner or easier inside a corporation, but for small side gigs or modest 1099 income, the extra complexity usually outweighs the benefit.
He pushed back hard on the idea that forming an S Corp magically allows much larger retirement contributions. In most cases, retirement contribution limits are driven by actual profits, not entity type, and corporations do not create extra money out of thin air. The only time corporate structure really matters for retirement is at very high income levels, especially when someone is considering a cash balance plan and already earning well into six figures. At that point, an S Corp usually makes sense anyway, largely because of Medicare tax savings.
He added that a very practical downside of 1099 work is financing friction. Being self-employed can make refinancing student loans or getting a physician mortgage more difficult, especially early on, because many lenders want one or two years of tax returns. The takeaway is balance and realism. Corporate structures can help in the right circumstances, but they are not a shortcut to massive tax or retirement wins for small or moderate 1099 income. And while self-employment offers flexibility and tax-planning opportunities, it can also create extra hurdles with lenders that physicians should be prepared to navigate.
If you want to learn more from Dr. Tod Stillson, you can check out his website. He provided further information after the interview that you can read here and here, and he also wanted to share his ebook with white coat investors free of charge.
To learn more from this conversation, read the WCI podcast transcript below.
Sponsor
This podcast is sponsored by Bob Bhayani at Protuity. He is an independent provider of disability insurance 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 to get this critical insurance in place, contact Bob at www.whitecoatinvestor.com/protuity today, by email [email protected], or by calling (973) 771-9100.
Milestones to Millionaire
#255 — PA Becomes a Millionaire and Finance
Today, we are talking with a PA who has become a millionaire. This PA has a great story. He is in his second career, and he is having tons of success. He lives in a high cost-of-living area, but he is not letting that slow him down. He got his education paid for with the NHSC scholarship, and he has zero debt. Now that his career is cruising, he has taken up his passion project of becoming a children's book author.
Finance 101: Backdoor Roth IRA Process
The Backdoor Roth IRA is simply a workaround that lets high earners get money into a Roth IRA even though they are not allowed to contribute directly. Before 2010, high earners could not deduct traditional IRA contributions and could not do Roth conversions either. That changed when Roth conversions became available regardless of income. That single rule change made the Backdoor Roth possible. The idea is straightforward. You contribute to a traditional IRA using after-tax dollars, which is allowed at any income level as long as you or your spouse has earned income. Then, you convert that money to a Roth IRA.
Because the original traditional IRA contribution was not deductible, the conversion itself usually has little to no tax cost. In effect, you end up in the same place as if you had contributed directly to a Roth IRA. The main thing to watch out for is the pro rata rule, which comes into play when you have other traditional, SEP, or SIMPLE IRA balances. When you file your taxes, Form 8606 asks for the total balance of those accounts at year's end. If that number is not zero, part of your conversion becomes taxable. Many people avoid this by rolling those IRA balances into a 401(k) or by converting them so the year-end balance is zero.
In practice, many people do this early each year by contributing to a traditional IRA and then converting it shortly afterward. If a few dollars of interest show up before the conversion, you can convert that too and pay tax on a very small amount. You can also make prior-year contributions up until Tax Day, though that adds a little paperwork since the contribution and conversion may be reported in different tax years. While it sounds technical, the forms are manageable if you follow them line by line. For high earners who are already maxing out workplace plans, the Backdoor Roth IRA is one of the most efficient ways to keep retirement savings growing tax-free instead of spilling into a taxable account.
To learn more about the Backdoor Roth IRA process, read the Milestones to Millionaire transcript below.
Sponsor: Goodman Capital
WCI Podcast Transcript
INTRODUCTION
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:
This is White Coat Investor podcast number 452 – The Case for Self-Employment.
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 you just need to get this critical insurance in place, contact Bob. You can do so at www.whitecoatinvestor.com/protuity. You can email [email protected] or you can call (973) 771-9100.
Welcome to the new year. It's a new year, new you. It's time to set your new year's resolutions. I hope one of them, at least one of your new year's resolutions, is financial. Please do something this year to improve your financial life. Maybe it is simply to get a financial plan in place.
We can help you do that. Go take our Fire Your Financial Advisor course. Get yourself a financial plan this year. If you need to go hire a professional, hire a financial advisor and get your plan in place, whatever it takes. Maybe you need to simplify things. Maybe you need to get rid of an investment or an investing account or something this year.
Whatever it is, set one goal, one resolution this week to do. It's also about that time of year when a lot of White Coat Investors are doing their backdoor Roth IRA process. Please don't screw it up. It's not that hard not to screw it up, okay?
Here's a really easy way to do it. Make your contribution into a traditional IRA. Then the next day or the next week or whenever they allow you to do it, go ahead and move that to a Roth IRA. In the meantime, just leave it in cash. Don't invest it in that traditional IRA. Just leave it in cash. It'll make a couple of bucks of interest. You might have to do a second rollover into the Roth IRA and you'll actually owe taxes on that couple of bucks of interest, but that's it. Once it gets into the Roth IRA, you can invest it as per your investing plan.
The only thing you can screw up really, if you'll do that, is by having some other IRA, whether it's a traditional IRA or a rollover IRA or a SEP IRA or a simple IRA, but not an inherited IRA, not a Roth IRA, with money in it at the end of the year you did that Roth conversion step in. Then it gets prorated. Don't do that, okay? Make sure you clean those accounts out by either converting them all to a Roth IRA or by rolling them over into a 401(k) or a 403(b) to avoid that pro rata thing.
But otherwise, just because you're a high earner doesn't mean you can't contribute to a Roth IRA for yourself and for your spouse. You just have to do it via the backdoor process. And this week is probably the best time to do that for 2026.
Okay, some changes on the podcast you need to be aware of. We call them Boot Camp. The Boot Camp podcast. This is different from the Financial Boot Camp email series that we started many years ago. It is different from the White Coat Investor's Financial Boot Camp book.
Now, I know we're using the same name, so I hope this isn't confusing to anybody, but the idea behind them all is the same, is try to get people up to speed as quickly as we can, get them the very basics, and help you to catch up to the rest of the White Coat Investor community if you're just finding us and get you going.
But we recognize that everybody learns a different way. Some people like getting emails. Some people like reading the book. Other people do not, especially people listening to this podcast. They often do not like reading all that stuff. They want to listen to podcasts.
So, for you people, we have decided to do a Boot Camp podcast, and it is now live. It has its own separate feed. So, you can just subscribe to that and listen to all the Boot Camp podcasts. There's at least 10 of them up there right now. By the time we're done with this, later in the year, there will be 80 or 90 of these.
They are short, bite-sized podcasts, less than 10 minutes apiece. They are aimed at beginners. This is where you can start. So, you can sign up for that. You can go to whitecoatinvestor.com/bootcamppodcast. Now, if you just go to /bootcamp, or /financialbootcamp, you're going to sign up for the emails. That's different. I think you ought to do that, too, if you've never seen those. But it's Boot Camp podcast. And that'll sign you up for them. And so, when the new ones come out, you'll be able to listen to those.
But the idea is not that we're going to do this podcast forever and have a new thing dropping every week. It's that we're going to put together 80 or 90 of these basic podcasts that somebody can listen to. You can re-listen to them, I suppose, if you want. But that someone can listen to and kind of get up to speed. It's the basics podcast.
Now, it is going to replace this one-on-one stuff I've been doing at the end of each Milestones to Millionaire podcast. So, we're just going to insert one of these 10-minute segments or whatever into the Milestones podcast each week. And it'll take you two years to run through them. So, you're not going to be hearing them all the time. But that's what we're going to do on that podcast.
But these podcasts are all on their own feed. So, if you just want to listen to those, if you don't like listening to the interviews we do with Milestones, this is a way in which you can separate those out. The URL is whitecoatinvestor.com/bootcamppodcast. Hope that helps.
1099 WORK AND SELF-EMPLOYMENT
Dr. Jim Dahle:
Okay. We have got a great discussion today. It's going to be all about being self-employed, why that might be a great option for you, some of the intricacies of being self-employed. And I've got Tod Stilson coming on. He's a doc. He also founded a Physician Entrepreneurship Academy. And we've been having a little bit of a debate, mostly on the blog, actually. I wrote a blog post that I think was partially at least in response to something I read that he'd written. And he submitted a guest post as well. I think that guest post doesn't run for a couple of months.
But it's a little bit of a debate about the merits of not just self-employment, because I'm obviously a big fan of doctors owning their jobs, but of some of the forming a corporation kind of stuff to save money and on taxes and to decrease your liability and maybe the limitations of what that can really do for you.
There's a little bit of debate. There's a little bit of disagreement in this podcast. But for the most part, we agree with most of the discussion we're going to have. And we hope you find it very useful. So, let's get Tod on the line here.
My guest today on the White Coat Investor podcast is Tod Stilson. He's a doc, a rural family doc, and the founder of the Physician Entrepreneur Academy, where he inspires and coaches docs who want to move into the self-employment space and want to take control of their lives and their practices and their careers. Tod, welcome to the podcast.
Dr. Tod Stilson:
It's great to be with you, Jim. I've been a fan for many years and I'm excited to talk with you a little bit about 1099 work.
Dr. Jim Dahle:
Okay, this is our subject for today is 1099 work. And we're going to try to talk about everything with regards to 1099 work. We're going to have to start out, I think, defining our terms a little bit and bringing people up to a reasonable level of education so they can follow the conversation.
Then we'll talk about some of the things we agree about. And hopefully, we'll spend a good amount of time debating a little bit and maybe discussing some things we don't necessarily agree with.
Dr. Tod Stilson:
This sounds like a good plan.
Dr. Jim Dahle:
Yeah. I wrote a post that was published in September titled, “Why Going 1099 Won't Solve All Your Financial Problems.” And Tod did not like that post. And as we often invite people who don't like something we publish on the website, we invite them to write a guest post. Well, he did. He wrote one, submitted it to us, and I think it runs. Do we know when it's running yet, Megan? We don't know. We'll let you know, hopefully, by the end of this podcast recording.
But I think this podcast will drop, I think it's our first one of the year. So this is a great subject to start the year out with. And we'll follow it up, I think, with your guest post. But let's talk about this to start with. I think we got to define terms.
DEFINING THE BASICS: W-2 VS. 1099 VS K-1
Dr. Jim Dahle:
Most docs are paid on one of three types of tax forms, meaning at the end of the year or the beginning of the next year, you get one of these three forms. One is a W-2, which means you're an employee, you have an employer, you work for somebody else, and you're an employee, you get a W-2, your taxes are pretty simple, your financial situation's relatively simple, the amount of control you have over your job is not very high, you're an employee.
The second type is a 1099 form. And this comes to you when you are an independent contract. And some people use the term 1099 employee, but that is not a technically correct term. Because when you are paid on a 1099, you are not an employee, you're in business for yourself, you're running a business. And maybe you only have one customer, one client, that's possible and actually pretty common among docs, but you still own your own business, you're running your own business. You generally file a Schedule C every year. And you can choose your various business entity, whether you're a sole proprietor, or you're an LLC, or you are an S Corporation, or even a C-Corporation. But you're in business for yourself.
And then the third thing that lots of docs are paid on is a K-1. And this is when you are a partner, you're in a partnership. And yes, it's a type of self-employment, but there's more than one boss, it's not just you, there are other people who are involved in the partnership. And that can get a little bit more complicated as well, when you're filing your taxes.
Okay, that's the basic terms when we talk about independent contractors and 1099s. So Tod, what else would you add to the basic terms?
THE W-9 FORM AND WHO GETS TO DECIDE YOUR CLASSIFICATION
Dr. Tod Stilson:
I just want to pull forward a little bit the W-9 form, because this is where the real water hits the wall, so to speak, is a physician, when they're getting ready to work from somebody, is given a W-9 form. It's not just a verbal conversation of, “Do you want to be 1099 or W-2?”, you're given the W-9, which is basically the IRS's way of saying, “What are you? Are you an individual? Are you a sole proprietor? Are you a business?”
All the things that you just described, and then they want you to either place your tax ID, i.e. your social security number for most doctors, or their EIN, if they are a business, in that W-9 tax form. And quite honestly, if you're not used to looking at that, it can be a little intimidating. And I think a lot of physicians just by default, put their name in, and put their social security number in, and don't even think twice about it.
That little form, W-9, I think, brings forward the idea that you have the power as a doctor to be a business, to consider yourself a micro-corporation. The IRS is literally saying that to you. How do you want us to look at you? You could be one or the other. And it doesn't have to depend on the employer telling you what you are. You get to decide what you are.
Dr. Jim Dahle:
Yeah. Well, that is kind of true. Because the IRS does give some guidelines of what an employee is, and what an independent contractor is.
Dr. Tod Stilson:
That's true.
IRS RULES, MISCLASSIFICATION RISK, AND EMPLOYER INCENTIVES
Dr. Jim Dahle:
They're pretty gray. I'll admit, they're pretty gray. But they do give guidelines. For example, they say there's three main categories. There's behavior, there's financial, there's type of relationship. The behavior things you should be thinking about, or does the company control, or have the right to control what the worker does, and how the worker does his or her job.
The financial aspects are the business aspects of the worker's job controlled by the payer, things like how the worker's paid, whether expenses are reimbursed, who provides the tools and supplies. And then there's a type of relationship. Are there written contracts? Are there employee type benefits like pensions and insurance and vacation pay? And they ask, is the work performed a key aspect of the business?
And so, those are the things the IRS wants you thinking about when you're deciding, are you an independent contractor? Are you an employee? They even give 20 factors you're supposed to go through about whether you're an independent contractor or whether you're an employee.
But the truth is, the real risk here is not to the employee. The risk is to the employer. Because what can happen is if the employer calls you an independent contractor and says, “No, no, no, they're in business for themselves, they're an independent contractor.” And a few years down the line, the employee comes back and says, “No, no, no, no, no, I was not an independent contractor. I was an employee. And I had to pay all these extra taxes that the employer should have been on the hook for.” And the IRS comes back and makes the employer pay the other half of the payroll taxes.
The real risk is for the employer. And so naturally, the employer doesn't like that risk. And they prefer not to run that if they can. And that's why sometimes they're a bit incentivized to have people be employees if they can, not only because then they get to tell them what to do, but they also don't have that particular risk.
Dr. Tod Stilson:
Yeah, that's a great point and some risk management features that employees will take. But let's pause for a second and think about this for a minute. Number one, I'm all about empowering physicians with information that allows them to determine what they want to be. Let a physician have the power to decide.
Now, if I were to say to a physician, if you have multiple clients besides one, that meets the behavioral control. You're not just having one employer that you're working for. If you carry your own malpractice insurance and you do your own benefits, that demonstrates financial control over what you are, independent contractor employee. And if you have a professional corporation, a PC or a PLLC that is in the contract, not you as an individual, again, you demonstrate relationship control. You own a business.
If a doctor knew those three pieces help qualify you as an independent contractor heading into that relationship, they might say to themselves, “Oh, I can check those boxes. I can do that. I would prefer to be an independent contractor.” And then the employer who does have due diligence in this, if they were to say, Jim, “We could make you an independent contractor or we could make you an employee. But if you want to be an independent contractor, you have to do this, this and this. Can you demonstrate that to us?” And if you and if you as a doctor go, “No, I can't really demonstrate that to you.” I fully agree that employers should say, sorry, you're going to be an employee.
But if that employer or that company knows that you could be an independent contractor, if you meet those qualifications, I think it's incumbent upon them to provide you the opportunity to do that.
And listen, we're not talking about people who work at the peanut factory. We're talking about professionals. The same is true for lawyers, engineers, architects, doctors, dentists. The IRS looks at us differently. We have a power that's unique to be considered both an individual as well as an individual micro business, so to speak.
That's something we've earned. And when we enter into these relationships, it's time for us to exert our agency and say, I've earned this. I can bring this to the table and say to you, Mr. Employer, “Yeah, I can do that.” So it's not just about the employer and their risk management. I think if you went back into case law and you begin to look at and see how many doctors were “misclassified”, how many employers were sort of penalized for “misclassifying” doctors, you'd find it be extremely small. That's the reality. So the fear is more about the fear. The reality is much different, Jim.
Dr. Jim Dahle:
Yeah, I suspect you're probably correct on that. Now, the big problem here, here's the big problem. Because I get these emails, I get these emails all the time, usually from a young doctor, not very far out of residency. They're not terribly financially literate. They realize they have this option or they're being given this option. They're like, “What should I do? I heard it's good to be a 1099. So should I do that?” Well, the answer to that question is always it depends.
Dr. Tod Stilson:
Yes, it does. That's correct.
IS 1099 ACTUALLY BETTER?
Dr. Jim Dahle:
Because you have a few more expenses when you're in business for yourself. If you're getting paid on a 1099 instead of a W-2, you need to be paid more by the person paying you because you've now got to pay both halves of the payroll taxes, the Social Security and the Medicare.
Dr. Tod Stilson:
And you pay for your benefits, if indeed, if it's apples to apples.
Dr. Jim Dahle:
Right, you got to pay for all your benefits. What's health insurance costs? A lot of people don't realize this.
Dr. Tod Stilson:
About $25,000 at least for a family.
Dr. Jim Dahle:
Yeah, yeah. They think health insurance is like their cell phone bill. In reality, it's more like their mortgage. I don't know, $25,000 grand is an average, but certainly $12,000 plus is what you're going to be paying for a family.
Dr. Tod Stilson:
Now, if you have a family, yeah, it's not unusual.
Dr. Jim Dahle:
Yeah. And people don't know that because their employer has been picking up 80% or whatever of the cost. They don't realize how much health insurance costs. The bottom line is if they're going to pay you the same as a 1099, as they're going to pay you on a W-2, that is not a good deal. And you've got to recognize that.
Dr. Tod Stilson:
No, you're exactly right. I tell physicians this all the time in my coaching. It's not apples to apples. I call it grossing up. You need to gross up what the pay is. And we do a lot of coaching with that.
But I want to come back to a fundamental point here. Number one, I love the fact that you champion financial illiteracy. Guess what? I champion business illiteracy, and they run in parallel with one another with doctors. When you talk about these young doctors today, gosh, I sound old when I say that. And my son's a young physician.
But the fact of the matter is this, Jim, is that they don't know any business understanding. And if we went back about 30 to 50 years ago, doctors coming out of training, they saw themselves as a business. They actually recognize I'm going to go into business and they're going to have a business hat on. They're going to think about all these things.
In today's world, those young doctors are conditioned to be business illiterate and financially illiterate. And it puts them really in an impaired position when it comes to knowing what their options are.
When I speak to residents, here's what I like to tell them. You just spent $350,000 to get your medical education to become a doctor, to get the MD or DO and go through your residency, et cetera. So, what would it cost you to put the icing on the cake? I call it the capstone by forming a corporation as you complete your training and saying, I'm going to enable myself with the options that I've been empowered with. That is to consider myself a micro corporation, whether I use it in the marketplace or not, it doesn't matter. I want to go ahead and put that capstone on this educational journey.
And the answer is it's just a couple thousand dollars. You take $350,000 to get all the way through this and you fall short by not being aware that for a couple thousand dollars, you could be considered a micro corporation. You've had a big swing and miss when that's the case, Jim.
Dr. Jim Dahle:
Well, I think you're overestimating the cost. I can form an LLC here in Utah for $70, then it's $15 a year to maintain it. You don't have to spend even thousands. It costs literally nothing. I don't know that I'd view it as a capstone, but you're right that the cost is very low.
Dr. Tod Stilson:
No, it is very low. And I use $2,000 just to overestimate so people aren't have sugar stock. You can spend more too if you wanted, but the reality is that what you do when you get that corporation, just like your MD or your DO, just like your license, just like your board certification, now you are credentialing yourself to enter the marketplace and you're empowering yourself, Jim, to choose if you want to be an independent contractor, i.e. a corporation, or be an employee, i.e. a W-2 worker, 1099, W-2.
And if you don't have that in place and an employer says, “What would you like to be, 1099 or W-2?” And you're like, “I'd like to be 1099.” And they go like, “Okay, do you have a corporation?” And you're like, “Uh, uh, uh”, and you don't know because you don't know. And the reality is then you're just going to lean right towards W-2. Boom. That's just how it goes down. Because you just don't know.
And what I try to say to doctors, and I think the point here is that you have more power than you realize. You have more agency than you realize, but it's been removed from us in the process to make us think we don't have it. And the reality is that we do. Whether you act on it or not, it's up to you. Listen, I told you before we got on the call, I've spent 15 years as a W-2 employee. I've spent 15 years as an independent contractor. I love the latter the most. I love being an independent contractor more.
However, I would not go back and change what I did with the W-2 because at that moment in time with what was going on in my life at the time, a W-2 was the right simple answer to collect a paycheck and do the work I needed. And for a lot of doctors out there, that is the right answer. But for a lot of doctors as well, Jim, they don't know what their options are. And that's what's important in this whole communication and conversation about 1099 versus W-2. You do have more options than you think.
Dr. Jim Dahle:
For sure. And I've had experiences on every end of this. I've been a W-2 employee. I have been an independent contractor paid on 1099. I have been a partner paid on a K-1. I have started partnerships. I have employed employees. I have contracted with independent contractors. I've been on every angle of this.
And this is one of the things, when you decide to be self-employed, one of the first things you have to do is decide on a business structure. I think you're lumping it all together and calling it a corporation because you have lots of options here. You can be a sole proprietor. You don't even need an employer identification number, an EIN from the IRS, which is totally free and takes 30 seconds to get. You don't even need that. You can put your social in there and still be a sole proprietor and paid on a 1099 and file a Schedule C with your tax return every year. That's probably the most basic thing.
BUSINESS STRUCTURE DEBATE: SOLE PROPRIETOR VS. LLC VS. S CORP
Dr. Jim Dahle:
And honestly, for most docs that have no employees and might not have very much 1099 income, that's probably fine. You're not reducing your liability at all because forming a corporation or LLC doesn't reduce malpractice. Malpractice is always personal. And you don't really have any other business liability. So I wouldn't feel like everyone's got to get a corporation. Sometimes you can be self-employed without a corporation.
Dr. Tod Stilson:
First of all, getting a corporation is empowering to you. It gives you options. It just puts in play the assets that you've earned and now you can choose to use it or not use it. But you're right about the sole proprietorship. And I've done the math on it. The math is this. If you're at $30,000 plus in income that's flowing through your 1099 work, probably makes sense to consider incorporating. If it's below $30,000, yeah, sole proprietorship probably is your best model.
But once you start getting above that $30,000 mark, that's when the wheels need to start turning. When you get above $50,000, for sure, the economic structure of that corporation definitely provides you with some tax advantages that allow you to retain more of your income. That space. Below $30,000, I say, eh, probably not worth it. $30,000 to $50,000, probably worth it. Above $50,000, definitely worth it in terms of the incorporation.
And you know this because you teach about trust and asset protection. Sole proprietorship does not protect you as a physician from a lot of risk that you have when it comes to your assets. So, be careful if you choose the sole proprietor route because it doesn't provide you the protection that probably you need as a high income earner. There's some space there.
Dr. Jim Dahle:
All right, I got to push back on this. What savings do you see yourself getting when you have 1099 income of $30,000 or $50,000 and you decide to form a corporation? First of all, are you talking about a corporation where you're making an S election? An S Corporation?
Dr. Tod Stilson:
An S election, that's correct. It's a pass-through.
Dr. Jim Dahle:
Okay, the real tax savings is payroll tax. That's the only tax savings you're making by forming that corporation.
Dr. Tod Stilson:
You also are increasing the possibilities of what you can place in your retirement funds.
Dr. Jim Dahle:
No, you're not. You can set up a solo 401(k). You can set up a personal defined benefit plan. All is a sole proprietorship. You don't need a corporation to do any of that.
Dr. Tod Stilson:
No, you can. You're right. But you have more options and opportunities when it comes to that in terms of the amount that you put into it through the S Corporation than you do through the sole proprietorship.
Dr. Jim Dahle:
No, you don't. In fact, sometimes at some income levels, you can put less in because you have to pay yourself more as a salary than as distribution, which is where the real savings are on an S Corporation. I don't see that you can put more money in because you formed a corporation. I've never found anything that suggests that to be true.
Dr. Tod Stilson:
Well, I think that it is possible in terms of a cash balance plan for you to put more in when it comes to the 401(k) with cash balance plan than you can just through the 401(k) alone.
Dr. Jim Dahle:
I don't think that's true at all, but we'll allow you to send in a source if you can find one.
Dr. Tod Stilson:
Yeah, sure.
Dr. Jim Dahle:
We'll include it in the show notes.
Dr. Tod Stilson:
Yeah, let's do that.
Dr. Jim Dahle:
Because that's great. Like I said, it's easy to form an LLC and elect to be taxed as a corporation and to make an S election. None of that is very hard. None of that costs very much money. And if that lets you put another $50,000 into a retirement plan, I'd be all for it. And I'd publish it widely on the website. But I've never seen anything that allows you to do that just by forming a corporation.
Dr. Tod Stilson:
I'll make a note and then share that with you afterwards. And maybe we can have some additional dialogue about it. But I have a case study that breaks it down. And I would agree with you that sole proprietorship in terms of what is opened up with that versus the S Corp, what is opened up with that are pretty similar, but there are some advantages. The tax code is not the same for sole proprietors as it is for S Corps. And so there are some opportunities that exist in that space that don't exist for the sole proprietor in addition to the asset protection that you get through a corporation.
Dr. Jim Dahle:
And we'll get to the asset protection next. Let's finish the tax advantages first.
Dr. Tod Stilson:
Yeah. Again, I want to bring this back around to something, and this is where you and I do agree. I agree that to choose to incorporate simply for financial or economic purposes is probably not the best choice alone. I actually think the most important reason to incorporate is so that you, A, have greater autonomy, B, have greater agency, and three, have greater identity as an owner of a business than you do as an employee.
Dr. Tod Stilson:
I really believe passionately that that is one of the secrets to unlocking the whole stupid burnout crisis that exists for doctors as employees. And so I'm for it more because of that space. I think there are some financial advantages. I do. I definitely do. But I don't think that's the sole reason to do it. And that's where you and I agree that it depends on your case whether or not the financial and tax benefits are hugely there. But I think when it comes to the autonomy and agency that you gain, it's definitely there. Your sense of well-being, your sense of thriving, your sense of being in control as a doctor are enormously higher than when you're an employee.
Dr. Jim Dahle:
Now, I'm a big fan of ownership. You know this and regular long-term listeners know I'm a big fan of ownership. I like when people own stocks. I like when they own real estate. I like when they own businesses. I like when they own their job. I like having that control. I think that control matters. I do think it reduces burnout. I think it matters a whole lot more by mid-career.
When you are self-employed, when you own your business, I think you can do things that control your work environment, that control your schedule, that lead to less burnout. I'm a big fan of all of that. I guess I just don't buy that there's some additional benefit by putting ink after my name. Versus being self-employed, whether that's a partnership or whether that's a sole proprietorship or whether I've bothered with an LLC or a corporation. I feel like all of that is more or less the same to me, no matter what the business structure is, by being self-employed rather than being an employee.
Dr. Tod Stilson:
Again, I think it depends on the situation. It really does. But I think there is a continuum there in terms of how much money you're putting in versus, again, talking about the $30,000 below, the $30,000 to $50,000, and the $50,000 plus. Even the $50,000 plus person, it bears working with a professional, i.e. a CPA usually or somebody who understands these things.
I always encourage a doctor when they're considering this, especially if they've come out, they've been a W-2, now they're looking at being a 1099. I like to do what I call an as-is versus as-if analysis. And a good CPA can do this. They can literally take what would this look like if you were a W-2? What would this look like if you're 1099? And then if you're 1099, what would it look like on your taxes next year if that income came in as a sole proprietor, an S Corp or a C-corp?
You can do the analysis. It's kind of a forward-looking than a retro-looking process. And when you do that, that's going to inform you in your own specific situation what is best for you, okay? And it does vary because it's not just the job, there's other assets and other things that come into play.
I think from a financial standpoint, working with a CPA, which by the way, this is a good time for you and I both to declare, I am not a CPA. I am not a tax professional either. I'm not an attorney. This is for your information and education and enjoyment. However, working with a professional does make a difference with this and I would lean into it. And that's what I encourage folks to do when I'm coaching them, is we connect them with people who can really help them make wise professional decisions about these things and not just guess.
Dr. Jim Dahle:
Yeah, I agree. Analysis is a good idea. Running the numbers is a good idea. If you need professional help, hiring that professional help, also a good idea. But let me push back a little bit on this. Do you have a CPA that files your corporate tax return?
Dr. Tod Stilson:
Yes.
Dr. Jim Dahle:
About what do you pay for that a year?
Dr. Tod Stilson:
I pay less than $10,000 a year for bookkeeping, everything, kind of what I call white glove service.
Dr. Jim Dahle:
Okay, not necessarily, not exactly sure what the corporate return is. I pay between $2,000 and $2,500 for my corporate return a year.
Dr. Tod Stilson:
That's reasonable.
Dr. Jim Dahle:
That's what it costs, it's a reasonable price. It's certainly might be able to get it for less, somebody might pay a little more, whatever, that's what it is. When we think about the tax savings for being a self-employed physician and deciding to form an LLC elected to be taxed as a corporation, do an S election, so now you're filing taxes as an S Corp. You could have been a sole proprietor, you've chosen to be an S Corp.
And you make a whole bunch of money, let's say you make $200,000 or $300,000, and you call $100,0000 of it distribution instead of salary. The tax savings on that for most docs, because they've already paid themselves enough in salary to max out their social security taxes, is the savings is really only Medicare taxes. 2.9%, half of which is deductible, so really we're talking about something like 2%-ish, 2.2%-ish, something like that, is what's actually being saved.
If $100,000 is distribution, maybe we're saving something like $2,000 in taxes for having formed that corporation. Well, that's amazingly similar to the cost of filing my corporate tax return.
Dr. Tod Stilson:
I'd push back on your math, I would say a doctor making $300,000, that might be more closer to $10,000, not $2,000.
Dr. Jim Dahle:
$10,000 in what? Where are you finding the $10,000?
Dr. Tod Stilson:
Again, I can give you the math after the call in real time, but it basically comes back to the fact that it's part of the shared tax efficiency that runs through retaining your own money that you've earned. And so, I would say this is closer to $10,000, so if $2,000 is what the actual cost of doing the taxes is, the net gain is still positive. And so again, that's what my experience is.
Dr. Jim Dahle:
It's not positive once you pay for the tax return, it's about breakeven at that point.
Dr. Tod Stilson:
You call it breakeven, I would call it closer to a positive gain for you if you're incorporated. But again, I'll share some case examples with you afterwards, and we can look at that.
Dr. Jim Dahle:
Okay, because the other taxes are all the same. You're going to pay the same ordinary income tax rates on the income, whether it comes in as business income, whether it comes in as employee income. You're going to pay the same amount of Social Security tax because you're maxing out the wages on it. The only savings left by forming thiS Corporation is the Medicare tax.
Dr. Tod Stilson:
Yeah, and again, we'll look at the math on that, okay?
Dr. Jim Dahle:
Okay. All right, we can look at that in more detail later. Let's turn to the asset protection aspect of forming an LLC or a corporation. And in some businesses, there's business liability. For example, the White Coat Investor is an LLC, it is elected to be taxed as a corporation, and it's made an S-election. So, it's an S Corp for tax purposes, because it has some additional liability.
If I end up getting sued for defamation or something, or an employee decides to sue me or something, there are benefits to being an LLC or a corporation. Essentially, they can't sue me personally, they have to sue the business. And all that can be lost is what the business owns. There's some serious asset protection there for a business that has liability. But for a doc who has no employees, no other significant business relationships or liability, who's almost all of their professional liability is literally professional liability, it's malpractice liability. There's no real asset protection benefit there to forming an LLC, or a corporation, I would argue. What asset protection benefit are you seeing in that sort of a situation?
Dr. Tod Stilson:
I think the asset protection is getting to your own personal assets, not the corporate assets, not you as a doctor's assets, but your family, your household assets. That if you have a corporation, you're going to create a sort of a veil or a space that separates you from those two, between your household and your corporation. And when you're still proprietorship, you don't have that separation.
Dr. Jim Dahle:
Okay, I agree there's a separation there. And I agree there's a theoretical asset protection there. But there's got to be liability. Something's got to be able to happen that induces some sort of liability where you need that protection. And it just doesn't exist for a doc that's a 1099 hospitalist with no employees.
Dr. Tod Stilson:
Well, I hear you talk plenty about malpractice cases that go for greater than the amount of what the case go for, it's an overage, if you will. And then, where's that going to come from? Is that going to come from you personally?
Dr. Jim Dahle:
Yes, it is. Because malpractice is always personal. The corporation doesn't give you additional malpractice protection.
Dr. Tod Stilson:
Some corporations carry malpractice for the corporation as well. I've carried a corporate malpractice, a small amount, but a corporate malpractice policy in addition to my personal one for years. And so, that's just liability protection.
Dr. Jim Dahle:
You're buying more insurance?
Dr. Tod Stilson:
Yeah, basically.
Dr. Jim Dahle:
You can always buy more malpractice insurance, but the corporation itself isn't providing some additional malpractice protection. That's my point.
Dr. Tod Stilson:
I think that you're probably right about that in terms of what the amount is that you would be protected from. But in essence, that corporation protects your household assets. I mean, like from anything, any bad thing, you're driving to work. And going to the hospital, do your hospitalist work, and you run into somebody, you have an accident. I know your auto insurance is going to cover that. But again, if you're doing it for the corporation, are you going to be protected from your household from what the outcome of that is, or is your business going to take it on?
Dr. Jim Dahle:
I guess if the business owns the car, and you're functioning as the business's employee, you could make the argument that the business is on the hook. But I think that'd be a tough case to win if you're just commuting into the hospital.
Dr. Tod Stilson:
Well, I think a lot of self-employed doctors do. They don't mean corporately owned cars, and that's often not uncommon.
Dr. Jim Dahle:
I guess you could make that argument. Maybe there is some possible savings there. If you're arguing that I'm functioning as my corporation when this accident occurred, and just because you've cleaned out my $300,000 in auto liability and my million-dollar umbrella policy, now all you can take is the corporate assets, which is only $20,000 in a bank account.
Okay. All right. Maybe you can get a little extra protection there. I don't know that I'd form a corporation just for that. Can you think of any other liability that could come to the corporation as a result of, I'm talking one doctor corporation, any other liability they could face?
Dr. Tod Stilson:
I don't think of a lot that come to my mind right away. I just think it's wise for us with our usually larger net worth to do what we can to create barriers that allow anybody to get to it for any reason at all. If that corporate veil does provide a bit of the protection that's needed, even for things that are unforeseen or that you're blind to. I can't think of anything specifically right now that would fit in that box, but inevitably there are things that fit in that box because they do happen. We are a target.
Dr. Jim Dahle:
Right. The issue with complicated asset protection schemes, of course, is they come with added complexity in your life and they come with additional costs and sometimes other downsides. Trust me, I've looked into trusts and overseas, trusts and corporations and all this kind of stuff. I mean, I wrote a book on asset protection. I've looked into this stuff and there are situations where you can come up with, “Oh, that might help to have this be in Delaware or Nevada or Wyoming” and those sorts of things.
But for the most part, a doc who's working as a 1099 hospitalist or 1099 GI doc or whatever, the amount of business liability there is not very much. Most people do not go out and buy even a business liability policy for their 1099 corporation.
Dr. Tod Stilson:
I think given the why and again, I wouldn't become a corporation just because of liability protection or just because of asset protection. But if you are doing 1099 work and you're given the choice of being a sole proprietor or a corporation, I would choose the corporation because it does provide a bit more extra layer, a kind of tapping of the brake compared to the sole proprietor where you're really wide open.
Dr. Jim Dahle:
Yeah. Well, there's a step in between there. You don't have to hassle with a corporation just for liability protection. You can get that from an LLC. Now, this is all governed by state law for sure. But for the most part, your protection as an LLC is exactly the same as your protection as a corporation.
If all you want is that additional protection from driving into work or whatever, and you're going to have the LLC own the car, I think you can get that with an LLC and just have it passed through for tax purposes to your return. You can still file a Schedule C, no need for a corporate return, et cetera.
Dr. Tod Stilson:
I think you're exactly right about that. And again, just for your listeners' sake, as they hear you talk about LLCs, this can be confusing to them. It's really, in most states, a professional LLC, a PLLC. That's what their states usually require, either a PC or a PLLC, depends on the state you're in, but not a general LLC that, say, you put real estate in or other sort of business assets in. Just a small nuance there. It's different. It is truly an LLC, and you're right, it is a bit different that way. But I just want to make sure your listeners connect the dots to that form of an LLC.
Dr. Jim Dahle:
Yeah, and that is state-specific. Some states do require you to be a professional LLC or professional corporation if you're a physician or an attorney or an accountant. Not all states, but some do. And obviously, if you're in one of those states and you're forming an LLC to be a doctor, you got to have a professional LLC. But legally speaking, there's really no difference. It's the same.
Dr. Tod Stilson:
That's exactly right. They're very similar, and in fact, in most instances, they're going to choose an S classification in either case, and they're very similar.
Dr. Jim Dahle:
Yeah. Now, for the most part, the ability to deduct business expenses is also exactly the same between a sole proprietorship or an LLC or a corporation, et cetera. But basically, if it's a business expense, you can write it off. It's a deduction from your income before you have to pay taxes on it.
Dr. Tod Stilson:
Again, relatively speaking, they're similar, but they're not exactly the same. The tax code is a bit nuanced between a sole proprietorship and an S Corp, and there are a bit of differences there.
Dr. Jim Dahle:
Let's talk about them because there are a couple, I view them as relatively small trivial differences, but let's talk about as many of them as we can.
Dr. Tod Stilson:
Well, I think one that I see especially self-employed physicians take advantage of, I don't know how you feel about it, is like the Augusta Plan. That's where you rent your own home for 14 days a year to your business to do a business meeting. And there's a lot of documentation and other elements to support that.
But I'm reasonably certain that a sole proprietorship is not able to do that without the corporate documents to support it. And that's a big shift in terms of untaxed income that you can shift into your home through a corporation.
Dr. Jim Dahle:
Okay. That's a good one. I'm going to give you that point because I think it's a great deduction that I take every year.
Dr. Tod Stilson:
Me too.
Dr. Jim Dahle:
And you can't do it as a sole proprietor. I'm going to give you that one. I think that's a good point.
Dr. Tod Stilson:
Yeah.
Dr. Jim Dahle:
But what other ones do you got to be a corporation to take? And obviously, you don't have to be a corporation to take that, but you can't be a sole proprietor.
Dr. Tod Stilson:
That's right. You can't be a sole proprietor for that.
Dr. Jim Dahle:
I think isn't there a health one, a health insurance one or something?
Dr. Tod Stilson:
Yeah. Yeah, a health reimbursement plan is also another, an accountable plan. You have some accountable plan that fit into a corporation that don't fit into sole proprietorship. Again, I think the tax laws change things. It is dynamic. And that's why working with professionals is really important. But when it comes to a number of assets, like the accountable plan in healthcare, you do have some more opportunities.
Dr. Jim Dahle:
All right. So there are some other deductions. I would guess the Augusta rule is probably the biggest one.
Dr. Tod Stilson:
I would guess it is. I think it's significant.
Dr. Jim Dahle:
It still might be hard to take. If your business is just your doc paid on the 1099 and you work as a hospitalist, to use the Augusta rule, you have to rent your home out to your business.
Dr. Tod Stilson:
You do. Because you have. Yeah.
Dr. Jim Dahle:
And so the IRS doesn't require you to make smart business decisions. That much is true, but you've still got to have some reasonable use for your business to rent the home. And it's a little hard for me to say just completing charts in the evening or something is a reasonable use.
Dr. Tod Stilson:
Yeah. Well, no, that doesn't count. No, that doesn't count. Nor does dinner with your wife and kids count, even if they're employees in your micro corporation. It really involves having an uninterested business party there. For a physician that means, think of a physician peer. Think of another hospitalist that you're taking call with, that you bring over to your house for dinner and you talk shop. But doctors don't talk shop when they get together, okay? It's business. Those are business purposes. Those are business developments. Now you got to take the notes. You got to support while you're there.
Dr. Jim Dahle:
But you still got to say this to an auditor with a straight face that, “Yeah, we rented my house out so I could have a chat with my colleague about a call schedule.”
Dr. Tod Stilson:
Jim, that's the case for the Augusta plan all day long. And really, to do it properly, you do have to comply with certain elements of it. So I don't want your listeners to, again, take your eyes, chat about this and take it the wrong direction. Work with your tax professional, do it the right way, document it. But when you do and you do do it properly, there is an opportunity there. And if you're 1099 or not, there's the opportunity there.
Dr. Jim Dahle:
Yeah. It can be a huge deduction. If you look up what it would cost to rent your house, if it were an Airbnb, it might be $500 or something for the night. And you multiply that by 14 and that's a $7,000 deduction over the course of the year.
Dr. Tod Stilson:
Yeah. It could be even higher depending on your location, the size of your house. It could be $2,000 a night. Who knows? I'd have to look it up. That's what we do with it each year is we look up what would it cost to rent my house in this time period, this time of year.
And then you document it and you work with your CPA to document that. And you both agree. And that's how that works.
Dr. Jim Dahle:
All right. Okay. Let's talk about a couple other things that people should be aware of. And this is not necessarily specific to whether you form a corporation or an LLC. But one of the bigger things that trips people up is when you become self-employed, there is no longer somebody else taking money out of your paycheck to send to the IRS. You are now required to start making what the IRS calls estimated quarterly tax payments.
And it's really not a great name because you don't pay them once a quarter. You pay them in April and then your next one is due just two months later in June and then in September and then in January, four months later. So it's not quite even when you make those payments. But it's important that you know about this change and that you have that money to make the payments. How do you coach people when you're helping them become self-employed? What do you tell them when it comes to quarterly estimated taxes?
Dr. Tod Stilson:
Well, first of all, my general advice to physicians who are looking at corporations is I encourage them to develop a team and a team of professionals to support them. And there's a small percentage that are do-it-yourselfers. And you have a lot of people in your audience that are do-it-yourselfers. But lean into professionals for this. Your bestie is always going to be your CPA. That's who you choose. You're going to work with and organize with them. And they're going to help you with that.
The other members of your team that are often very helpful, financial planner, wealth manager, etc. I know how you feel about those. And a legal consultant. Periodically, you may need a legal person. And then I always think of business coach. What we do with PEA. It's an important element to help you grow in terms of your own business skills and knowledge.
But your core person is going to be your CPA that you work with. You can calculate it yourself. And you have had ample posts and ample podcasts walking through that detail by detail with doctors. You can look it up. I'm sure you can include it in your show notes. But I encourage doctors to lean into their tax professional, their accountant to help them plan this, organize it, and pay it.
The point that you're making that is very important is you can't not be ignorant about it. You can't just put the money in the bank account and be unaware that you need to pay the taxes.
Dr. Jim Dahle:
Well, better to put it in the bank account than to spend it. At least if it's in the bank account, you can write the check next April and pay the interest on it.
Dr. Tod Stilson:
That's a solid point.
Dr. Jim Dahle:
That's not the end of the world to do that. I much rather have it be in the bank account than down at the boat dealer.
Dr. Tod Stilson:
I would agree with you. And then you automate it right into the right account. But yes, I agree with you totally.
Dr. Jim Dahle:
This is harder to calculate than you might think. I'm paying somebody to do my taxes. But guess when my taxes get filed every year? They get filed about October 15th. By the time my taxes for the prior year filed October 15th, and it's hilarious when I get this every year because I get this as part of my tax paperwork after filing my taxes, they suggest what I ought to pay for my quarterly estimated taxes for this year. Well, it's October 15th. I've already made three quarterly estimated payments. It's useless.
Dr. Tod Stilson:
Yes, it is.
Dr. Jim Dahle:
It's a little crazy.
Dr. Tod Stilson:
To be honest, when it comes to 1099 income for doctors, a lot of times it's highly variable, if you take extra shifts. So, you are kind of predicting what that income is going to be is not always as easy as it would seem because it is highly variable. You do your best you can. But as you know, the IRS does allow for a little bit of a fudge factor. Their expectation is that you overestimate rather than underestimate. That's just a fact.
Dr. Jim Dahle:
Yeah, there's no penalty for overpaying. All you lose is the opportunity cost on that money. But actually, the payment for underpaying is actually not that bad. You're basically just paying interest on the money. And if you have the money invested anyway, it's not quite a wash, but it's relatively close to a wash.
Dr. Tod Stilson:
It's a funny thing. The first time that happened to me, I'm a real follower, and I get that little shrill in the back of my neck, like, “Oh, I'm in trouble from the IRS and I have a penalty or I didn't pay enough.” And my accountant talked me off the wall and was like, “No, no, no, no, it's okay. These things happen. You're not going to pay. You're not paying this huge penalty. You're not in IRS jail. It's just part of how it goes down. And we underestimated. You pay it, period.” And it's really just the interest that you're paying on what you should have given them in the meantime. It's not a huge amount of money, is the bottom line, Jim.
Dr. Jim Dahle:
Yeah, I think right now it's around 7%. It varies with interest rates, but it's around 7% on the money you should have paid. So if you should have paid $10,000 last April and you're paying it this April, well, it's been 12 months. You're going to owe 7% of that $10,000. Your penalty is going to be $700. That's what it is.
Dr. Tod Stilson:
Yeah, and I think the word penalty is what throws people off. It's not like you're not being penalized. You're just really paying what you owed.
Dr. Jim Dahle:
Yeah, you're just settling up with the IRS is all you're doing.
Dr. Tod Stilson:
Yeah, that's it. That's it.
Dr. Jim Dahle:
Another big thing that throws people off as they move into the self-employment world is similar to what throws people off as they move into the retired world. It's health insurance. People have never bought their own health insurance and it's a total mystery to them how to buy their own health insurance. What do you tell people when you're coaching them about this?
Dr. Tod Stilson:
Yeah, that's a great question. It's funny. It is one of the great fears that doctors have when they're talking about making the transition. Like, “Where do I get health insurance?” It's like, “Come on, dude, you're a doctor. You know how this goes.”
But the reality is that there's a lot of options that range from the marketplace. Every state has a marketplace option that they can choose from. A lot of states, their state medical association may provide options for them as well as a self-employed doctor from getting it. Some of their professional medical societies provide options for it.
And then there's what I call the health share plans, which are, again, the alternatives to insurance. And a lot of self-employed doctors may choose health share plans because they're similar in space. And I think there's opportunities. I frankly use the health share plan and like using it.
Dr. Jim Dahle:
Because it costs about half as much.
Dr. Tod Stilson:
It does, it does.
Dr. Jim Dahle:
That's what attracts most people to them.
Dr. Tod Stilson:
Yeah, and the claims process is a little bit different, a little wonkier. But at the end of the day, it does cost less. But that's not the sole reason for doing it only too. But anyhow, the point is there's options and you can find them. There are a few companies that are growing nationally that are for physicians and sort of almost like a clearinghouse for physicians. I'm trying to remember if it's called RISE, is one of them that allows physicians to acquire health insurance on a national scale, no matter what state you're in. Kind of put you in a large group, so to speak, with them.
But at the end of the day, between what it costs for the actual premium and what it costs for the high deductible and what it costs for the HSA that I would encourage you, as you know, you're very aware you want to have an HSA typically in these.
And then your out-of-pocket expense, you need to account for, for a family, $20,000 to $25,000. The premiums, the out-of-pocket, the deductible, and the HSA is going to be about $20,000 to $25,000. That's the real number. And there's some sticker shock that comes with it. But again, I remind doctors in this moment, it's a business deduction for you in most cases, depending how you construct it.
Dr. Jim Dahle:
Yeah, that's almost all pre-tax money for sure. It's very interesting to me though, that people don't realize this. You can just Google “Health insurance broker in Salt Lake City” and you'll get 10 things pop up and you can call them up and you can just go there and buy health insurance from them or call them up on the phone and buy health insurance. You don't have to get it through an employer. You don't have to get it through some sort of specialty association. You can just call somebody up and buy this stuff. It's not that complicated, but it is expensive.
Dr. Tod Stilson:
That is correct.
Dr. Jim Dahle:
That's what you need to realize is it is expensive stuff.
Dr. Tod Stilson:
Yeah, I have several eBooks that I've created for physicians that are independent that kind of deal with this and break it down for them and walk them through their options because it is a very common scenario.
Dr. Jim Dahle:
Yeah, okay. Now you've alluded to a number of times, but let's get into this a little bit more. Your thoughts on why being self-employed in particular and forming a corporation as well helps doctors to have more agency, to have more autonomy, to have less burnout. I want to hear your spiel on this. I want to hear you convince us that it is worth it for more doctors to be self-employed.
Dr. Tod Stilson:
Yeah. First of all, I think I'm not selling anything. What I'm telling is my experience. That's what I want to start with. 15 years working as an employee versus 15 years of work as an independent contractor. And it's heads above working as an intimate contractor in the sense of my sense of wellbeing, my sense of control, my sense of autonomy and agency of my place in the marketplace.
I see this over and over again with doctors that I coach when they transition into independence. Mentally a shift happens in their identity as an owner begins to form. And they began to see the world through eyes that are more in the business mind. And I see them over and over again. The demand for physician services is so high.
The opportunities are so huge that they begin to see opportunities that exist for them to do what I call job stacking, which is like not just one job in one location with one person. It's multiple jobs in multiple locations that are often virtual. And so, you begin to have control. You begin to build the life and the lifestyle that you want when you're independent and the marketplace is such a high demand for your services.
And Jim, frankly, when you have control, most of us feel better about ourselves. Most of us feel better about our life. So, let's use as a reference, the most recent Medscape self-employment survey that was done. They clearly indicate in their 2025 survey, which by the way, I've served as a commenter in that just as a disclosure, that self-employed doctors are happier. They thrive and they like their professional life much better than doctors who are employed. That's not rocket scientist to any of your listeners. That is just what you intuitively know. And Jim, I would have to say, probably from your own experience, you would say you enjoy ownership and independence over if you've ever been a pure employee, you prefer that as independence as well.
And so, what's most important is for doctors to begin to see that they do have the opportunity in the marketplace today to not just blindly become an employee and expect a great outcome. You'll get paid well, but you're also going to go through all the hazards associated with being an employee.
Nothing wrong with that. A lot of people, that's their best rodeo. But if you have any desire to sort of protect your autonomy and preserve your agency in the marketplace, I think choosing to be independent and maybe choosing to incorporate yourself to maximize that or to consider yourself a micro corporation, whatever model you choose is really the best way for you to circle the wagons.
We have lost our sense of agency in today's market and it's sad, it breaks my heart. When I think about Jim, the burnout rate is still nearly 50%, depends on your specialty. Literally one out of two doctors that are in the employment world today are burnt out and don't love their life. That's a sad truth after 14, 15 years of education and loss of debt and loss of effort to get there. And we deserve better. We should be living a life that allows us to thrive and enjoy life.
That's my take on it. And I think independence does have its proof. If we look at the evidence, the evidence shows that independent doctors who are self-employed enjoy life more than employed doctors.
Dr. Jim Dahle:
Yeah. Now I think in general, I think that's true. As I said, I'm a huge fan of ownership. I'm a huge fan of having control. There are unfortunately statistics and trends that suggest we are not moving in that direction. I think currently about 75% of docs are employed. And when I talked to our sponsors that review physician contracts, they're telling me 80% now of what they're seeing. This might be young, new, young docs that are having their contracts reviewed, 80%.
The trend is still not reversed. And there's a number of reasons for this. The main one though, is the consolidation of healthcare. You just have bigger and bigger organizations and doctors become smaller and smaller cogs in these organizations. And it becomes very hard for them to have the same sort of negotiating power with a payer, whether that's Medicare insurance company that they might have, if they're banded together with 400 other docs or a thousand other docs or a huge hospital system or whatever.
And so, a lot of times I see people selling their practice to a hospital corporation or even just closing it and taking a job with the hospital because they're literally getting paid more to do that because the hospital can afford to pay them more because it's collecting additional fees. It's collecting facility fees.
This is the reason why surgeons like to go open their outpatient surgical centers because not only do they get the physician fee, but they also collect this much larger facility fee. And of course, there's expenses that go along with those fees. But in general, they do well by doing that, by owning that. And that's what's working against the doctors, being self-employed.
Dr. Tod Stilson:
There's a hidden cost, though, to that, taking that deal, so to speak. Oh, we're going to make it simple for you and we're going to give you a salary. And it's not just that. There's a lot of things hidden underneath that, that it takes about three to five years for you to figure out. This isn't the best deal. This isn't a good choice. This is killing me. I need to make a change. And this happens to doctors over and over again. On one level, it seems simple and easy, but on another level, it's not easy.
One of the things, and I just want to bring this forth, this is part of my rural family doctor sort of world. It’s not just doctors, it's patients. Patients are cogs in the wheel as well. And what you're seeing in the medical economic world is doctors and patients alike are revolting.
That's why we're seeing 10% penetrance of direct primary care, cash-only practices. A lot of patients, they're just paying cash to get what we might call alternative or integrated care. There's all flavors of these things, personalized medicine, you name it, direct-to-consumer care. All of these things are going on because consumers are tired of it. Doctors are tired of it.
So, what's the response? We're going to cut out the middleman. We're going to just make it between me and you. That's the way it should be. That's the way it was always meant to be, all right, in the corporatization of medicine that is not going away. The government and the corporations and the insurance companies are going to control the market, but we don't have to stand for it. And you can choose independence and not play in the system. Doctors are doing this over and over again because patients are looking for solutions and you can be independent.
Now, what I'm saying in that is that the traditional private practice, if you will, which is the alternative to employment, still some places that that can thrive. There's still opportunities for that. But what I see is this third space is developing, which is a little more outside of the system, maybe cash-based, patient and doctor only, a little more a micro-business, if you will, or even independent contracting, which again has a lot of the missing a lot of the hassles and independent contractors doing telemedicine all over the country.
There's a lot of opportunities that exist for doctors that they don't have to just say, “I'm going to be like the 80% and have to fall into the system and do exactly what those employers tell me to. We have options and opportunities.”
That's the message that I like to communicate to doctors. It's not for everybody, but I want those young doctors coming out. This is where it breaks my heart. They don't even know it's visible. They can't even see it. In fact, they've gone through training and they've not even seen models of what it looks like to be independent. They don't even know any independent doctors.
Think about it. They're practicing in a hospital and in a training environment where everybody's employed. That's all they know. That's all they get to see. And so, unless they have some mentor that showed them there's an alternative path, they don't even know what their options are. That's why they're all getting funneled into the same place.
And so, my job, one of my passions, is to let people know that there are other options and opportunities to pursue besides traditional employment. And in fact, the studies show you'll like your life a lot better if you choose that path.
Dr. Jim Dahle:
Yeah. Love it. Love it all. One of the things that a lot of people don't realize too is they get into a practice. Maybe they're a surgeon and they own their own practice and they feel like because of so much overhead, they're locked into it and they basically have to practice full time until the day they're done.
And I hate that for them because so many shift workers like emergency medicine that I'm in, it's so much easier to gradually cut back over the last half of your career to control which shifts you work, to have more control over your life and your career and your income and all that kind of stuff. And that is available for surgeons.
Now, obviously, you have to sell the practice before you can do this, but they wouldn't believe how many opportunities there are for locum surgeons because all your peers, they want some time off too, but they need somebody to come in and cover them. And that's what you would do as locums, but maybe you only work two weeks out of every three months. And so, there are these opportunities to transition out to be part time, even if you're in a crazy surgical kind of practice.
Dr. Tod Stilson:
And Jim, we haven't even talked about what, honestly, I did for a decade, which is what I call the employment light model, which is a hybrid between employment and private practice. It's literally being a long-term independent contractor embedded within an employment model, so to speak.
Over a decade ago, I transitioned to that type of contract where I formed my corporation. I formed a professional services agreement with my hospital that I was formerly employed by. And now I work in the same clinic doing the same work with all the requirements for me to be considered an independent contractor that we talked about at the beginning of the show.
I worked for them for a decade in that model. To the community, it looked like I'm wearing the same team jersey doing the exact same work. But behind the scenes, from a business standpoint, I was not getting paid the same. I wasn't kind of forced to comply with the employee compensation program.
I got to negotiate an independent contract with them because there's a two or three year rolling contract. And I had my independent. It was a mixture of both. And that model's called the employment light model. There's a lot of people around the country that do that. And again, did I work also as a contractor doing nursing home directorships and other sort of things at the same time? Absolutely.
And that really helped me to see that there are other opportunities out there. There are other options. And so again, that's called employment light. And there's, again, the COCA group, it's a law group in the Midwest that has done a lot of work in this, on that employment light model. And there's just a lot of variation and opportunity that exists there. So, that's a hybrid. That kind of looks like employment, but it's not employment because you are independently contracted within an employment environment.
Dr. Jim Dahle:
A little more control, maybe a little more pay.
Dr. Tod Stilson:
That's correct. Yeah, it's both. I got paid.
Dr. Jim Dahle:
You get to go out and pick your benefits. Just make sure they're paying you enough more that you can afford benefits and the other half of the payroll taxes.
Dr. Tod Stilson:
When I made the transition, the net was about $200,000 more a year. A, I got paid more.
Dr. Jim Dahle:
Which is dramatic for a family doc. That's a dramatic increase in income.
Dr. Tod Stilson:
It is dramatic. Now I did OB, surgical obstetrics. I did a lot of stuff. It is an outpatient family medicine. You know, rural docs do it all. But the reality was that's what the translation was. And I have a case study about my story and actually a book that I wrote about it that unpacks it all. But the reality is that you can do okay in that model too. And that's a hybrid model.
Again, there are options out there besides traditional employment. That's the message. And that involves 1099. When I worked at employment light, what did I get from my employer? A 1099 slip. Every year that I was part of my taxes. I was a 1099 worker. But to the rest of my community, I look like an employee of the hospital. I wasn't though.
Dr. Jim Dahle:
All right. Well, Tod, it's been wonderful chatting with you. Thank you for being willing to come on the White Coat Investor podcast and sharing your views. Thank you so much for your time.
Dr. Tod Stilson:
Yeah, Jim, it's been great to talk with you. Thanks for having me. And I'll look forward to hearing from your listeners about this as well.
FINAL THOUGHTS
Dr. Jim Dahle:
Okay. I know we just finished that interview. I'm recording this a few hours later. Tod has subsequently sent me some emails that we're going to talk a little bit about and we'll link to his PDFs he's put together in the show notes. But I thought I'd go through them on the podcast briefly first.
The first one is about business deductions you can make with a corporation that you can't make as well with the sole proprietorship. So, let's go through a few of these. We talked about the Augusta rule. Yeah, don't do the Augusta rule as a sole provider. If you're able to have your business rent your house for 14 days or fewer a year, it's worth forming an LLC or a corporation to do that.
The second one he mentions is an accountable reimbursement plan. And he lists a bunch of things you can run through an accountable reimbursement plan, cell phone, internet, home office, travel, meals, mileage, continuing education, licensing fees, medical equipment, software. All this stuff is deductible to any business. It's deductible to sole proprietorship. You're, again, only supposed to deduct the amount you're using for business use, not for personal use.
Maybe that's a little harder to defend the line between personal and business use. I don't think so. You either used it for business or you didn't. Lots of people cheat on this stuff of course. They deduct their entire cell phone costs rather than deciding how much of his personal use and how much of his business use and so on and so forth. But it's really not that complicated.
Now, there are some educational reimbursement plans you could do under a 127 plan. I don't know a lot of people doing that, but you can look into that if you're interested in that. You got your kids in a private school or something, you can look into that. But most of those deductions are available no matter what your structure is, whether you're a sole proprietorship, partnership, corporation, LLC, filing is one of those things, whatever.
But you're not going to have the accountable reimbursement plan. In fact, there's a little bit of a pain sometimes that you have to do an accountable reimbursement plan for some of this stuff once you have a corporation in place. Like when I have some of the stuff paid for by that I pay for personally, accidentally, it's a business thing. I have to have the business reimburse me. It's a little bit of pain to do that stuff. It's not that big a deal, but I don't know if that's a dramatically huge benefit.
We're going to talk for a minute about retirement plan stuff. He also talks about the ability to run premiums for your health insurance through payroll rather than just deducting them on 1040. Maybe that can save you a little bit of payroll tax there. So that might be a little bit of savings. Again, this is the same question of why you'd form an S Corp. It's all about saving Medicare taxes.
Family payroll strategies or income shifting. You can hire your spouse or children for your S Corp and then their wages are deductible and then they're eligible for a Roth IRA. Okay. That's true. But you can do that as a sole proprietor. He says, “Oh, dramatically more scrutiny.” Well, I did it for years. There wasn't any scrutiny. I can assure you. There's not all that much scrutiny going on. Although I think it is true that small businesses returns are some of the least audited returns out there. These little S Corp returns and those sorts of things don't get audited very often.
Cannot integrate your family into corporate HR benefits. Well, you probably can because whatever benefit you're buying as sole proprietorship is going to be available to your family as well. If you hire them by your sole proprietorship, they are eligible for retirement plans in the corporation or in the business, even if it isn't a corporation.
Fringe benefits expand dramatically inside corporations. FSAs, dependent care accounts, commuter benefits, certain insurance plans, education assistance, adoption assistance. If you want to run that stuff through, here's the deal. This stuff kind of makes sense when you're really truly self-employed. If you got your $20,000 of 1099 income in addition to your W-2 job, you're not going to be putting together commuter benefits and educational assistance plans and that sort of stuff.
But if you want to go after some of this stuff, there are a few small deductions that you can do with corporations that are a little bit easier than if you were just a sole proprietorship. So maybe it's worth looking into and spend a little bit of money forming.
Now let's talk about the big thing, which is the retirement accounts. He was convinced you could contribute dramatically more to retirement accounts if you form a corporation. And I'm not convinced even with this additional stuff that he sent over about it.
Here's the basic argument. The basic argument is that a sole proprietor must use earned income after deductions and self-employment tax adjustments. This reduces eligible compensation by 10 to 15%. No, it doesn't. It doesn't reduce it at all because that's all not profit anyway. It's not money you can be using to pay yourself a salary if you were an S Corp anyway. It's business expenses. So yes, it reduces eligible compensation, but it does it for both entities equally.
And says that a corporate owner can set their W-2 compensation. That's true, which becomes a clean input for plan formulas. I agree. It's a very clean input. It also happens to be less than the business is making because it doesn't incorporate in the profit. So, most of the time, if you're in this intermediate range where you would be able to contribute more via a sole proprietorship than you would with an S Corporation paying you only half of what you earn as income, it could actually be less.
He says there's more usable compensation space for employer 401(k) and contributions and gives actuaries predictable compensation needed to maximize cash balance plan funding.
Well, if you're making enough money and saving enough money that you're interested in a personal cash balance plan, we're talking people that are saving well over six figures a year for retirement, which is not most docs, even self-employed docs, then it does become a little bit easier. You got a stable W-2 compensation stream that they can base those contributions off of that could be worth it.
But if you're making that much money anyway, you ought to be an S Corp anyway, just for the Medicare tax savings. This again is not somebody making $20,000 or $30,000 or $50,000 or even $75,000 a year. There's just not the savings there to do that. You're not going to start a cash balance plan for your 1099 gig that makes $100,000 a year. It's just way too much hassle for the tiny amount you're going to be able to contribute to it.
He claims this result is simply that S Corp physician owners routinely achieve two to three times the combined contributions compared to sole proprietors with identical revenue. I don't think that's true at all. I'd be embarrassed to have written that.
The only way you're going to be able to do that is by opening up a cash balance plan you couldn't otherwise open. You can open one, but if you're making enough money, you're opening a cash balance plan, you ought to be opening up filing as an S Corp anyway for the Medicare tax savings and doing that. This is not something that's going to dramatically allow you to contribute more for your $50,000 side gig. I hope that's helpful in a discussion of what we discussed during the podcast.
I wanted to share another email that I got recently from someone who had been working with our partners. She writes in and says, “I'm an ER doc, recently graduated from residency, currently working multiple jobs that are all 1099. I work anywhere from 12 to 15 shifts a month and I'm making decent money. My goal is to pay off my student loans as quickly as possible within two to three years.
I got some quotes for refinancing rates and the best rate was with Earnest. I applied for refinancing, but was denied. I reached out to them and they told me I was denied because my income is 1099 and they want two years of tax returns proving my self-employed income is consistent. Do you know any way around this? Are there any refinancing companies that will work with physicians with 1099 income? The majority of ER jobs in my area are 1099. I'm wondering how other ER docs tackle their loans if we're unable to refinance for two years.”
Well, here's a downside of being self-employed. It can also give you a little more hassle getting a doctor mortgage too. Although usually there's ways around both of these. I asked Cindy who manages these relationships with our partners to reach out to all of them and figure out what's the deal with refinancing your student loans if you're on a 1099.
And here's what she got back. She checked with Splash and they require two years of tax returns. She checked with Laurel Road. If they've got their student loans in healthcare, they don't need a two-year history with Laurel Road. So, that's a good option.
Credible only requires them to submit one 1099 to verify their income or with pay stubs. So that is going to require you to wait until the end of the year. If you came out of residency in July and you don't get your 1099 until whatever, January or something, you're going to have to wait six or seven months to refinance with Credible. Juno is a marketplace and some of their lenders require some of them don't.
Ernest may not be the best choice. Splash may not be the best choice. Laurel Road seems like a good option. Credible is a pretty good option. And maybe you can find somebody with Juno through whom you can refinance your loans. It sounds like she didn't get an answer back from SoFi. They may be able to do it as well.
But hopefully that's helpful for those of you out there who are 1099s looking to refinance your student loans. Go to our recommended pages and you can find all those links to get there. Remember, you get a better deal going through the links on the White Coat Investor website than you do going directly to the company.
I hope you enjoyed that podcast. I hope that wasn't too much disagreement and yelling at each other for anybody. That's actually probably better podcast content where there's at least some disagreement with the guest.
QUOTE OF THE DAY
Dr. Jim Dahle:
A couple of things. First of all, I forgot to do the quote of the day. I usually do at the beginning of the podcast. Today's comes from Dave Ramsey. A little bit controversial in his own way, but he said, “You must gain control over your money or the lack of it will forever control you.” I love that quote. In fact, I love a lot of stuff that Dave does. Obviously, I've got a few disagreements with him, like most of you probably do as well. But I think in general, he's doing far more good than bad in this world.
I mentioned at the beginning about our Financial Bootcamp podcast. If you go to whitecoatinvestor.com/bootcamppodcast, you can listen to those. Most of them are new for this year. And if you're trying to get up to speed on the basics of personal finance and investing and business for physicians and other high-income professionals, you'll definitely want to catch those. They'll also be incorporated into the Milestones podcast that drops each Monday.
Thanks for those of you who leave us five-star reviews and tell your friends about the podcast. A recent one came in and said, “I wish I knew about you years ago. Saddened about the time and money I wasted, optimistic about the knowledge I'm getting from the White Coat Investor.” Five Stars.
We appreciate those reviews. They help us to spread the word about the importance of financial literacy and financial discipline among doctors and other high-income professionals.
SPONSOR
Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani of Protuity. One listener sent us this review. “Bob has always been absolutely terrific to work with. Bob has quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications underwriting process in a clear and professional manner.”
Contact Bob at www.whitecoatinvestor.com/protuity or by email at [email protected] or by phone at (973) 771-9100 to get disability insurance in place today.
All right, that's it for this podcast. Keep your head up, your shoulders back. You've got this. We're here to help. The whole White Coat Investor community is going to be behind you this entire year. Stick with us. We'll help you get to where you want to go. See you next time on the 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.
Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 255 – PA becomes a millionaire.
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I feel like I got to decipher that ad for a few of you out there. Let's spend just a second talking about that. Goodman does debt investing. So you're not owning the property, you're lending money to the people that own the property, but it's senior secure.
What does that mean? That means you're in first lean position. Meaning if something goes bad, you have the right to foreclose on the property. You're at the head of the line. You're at the top of the capital stack. And then it's a low loan to value. Meaning they don't lend 90% of the value of the property. They lend dramatically less than that. And then of course, class A properties are the nice ones. The ones that just got built in the last five or 10 years.
So, that's the type of investing they do at Goodman. If you're interested in that sort of an investment, it's not going to give you 18, 25% returns, like maybe some of the people doing value add equity real estate strategies are trying to aim for. It's debt investing. 7, 8, 9, 10, 11%. That's what you're going to earn on these things.
But to be fair, that's what you get out of the stock market. A little bit different way to invest, get stock market-like returns in some ways with less risk than the stock market has. There's something to be said for that. So, check that out if you want, whitecoatinvestor.com/goodman.
If you like learning about these sorts of private real estate opportunities, you should be signed up for our newsletter. It's whitecoatinvestor.com/reopportunities. And some of the emails you get if you sign up for that are basically these people telling you about their opportunities, like there'll be an email every month written by the Goodman folks, as well as our other sponsors.
But we also put some purely educational ones in there that we write and give you a chance to learn more about investing in real estate, not only private passive opportunities, but also direct real estate investing, as well as occasionally public opportunities, like investing in the Vanguard REIT index fund.
Okay, we got a great interview today. We hope you enjoy it. A lot of times people ask, “Well, you're always getting these people to make $800,000 a year. Of course, they're rich.” Well, we got a PA we're interviewing that has also become a millionaire, despite living in high cost of living areas.
So hopefully many of you will find that inspiring. If you don't, or even if you do, stick around afterward, we're going to talk for a few minutes, because this thing drops on December 29th. And it's that time of year again, where we got to talk a little bit about the backdoor Roth IRA process.
And I know Megan can't believe we're talking about this again on the podcast, but we got to, because maybe I'll head off some of the hundreds of questions will be sent about the backdoor Roth IRA over the course of the next four to six weeks. So stick around afterward, and we'll make sure you understand exactly how the backdoor Roth IRA works.
INTERVIEW
Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is David. David, welcome to the podcast.
David:
Hi, Dr. Dahle. Good morning. Thank you.
Dr. Jim Dahle:
Introduce yourself to the podcast here. Tell people what you do, how far you are out of school, what part of the country you're in, et cetera.
David:
Yeah, I graduated from the Wake Forest Physician Assistant Program in 2020. I did a few years in family medicine and the last two years in outpatient adult GI. And I'm on a Little Rock in the middle of the Pacific.
Dr. Jim Dahle:
Little Rock in the middle of the Pacific. Awesome. Okay, let's talk about your milestone. What'd you accomplish? What should we celebrate with you today?
David:
Okay, well, I am officially a millionaire.
Dr. Jim Dahle:
A millionaire, a million dollars. That's pretty cool. As a kid, what did the word millionaire mean to you?
David:
It brought visions of the character from Monopoly.
Dr. Jim Dahle:
With the black top hat?
David:
With the top hat, yeah. The cane and the mustache.
Dr. Jim Dahle:
I got bad news for you. When Monopoly came out like 100 years ago, a million dollars then was worth like $10 million now. So I don't want to burst your bubble. You can probably afford the top hat though, if you want it.
David:
All right.
Dr. Jim Dahle:
Pretty cool though, still. A million dollars, it's always going to mean something in our culture. Even 20 years from now, when a million is the equivalent of $200,000 or whatever, due to inflation, it's still going to mean something. And so, it's pretty cool to be a millionaire and exciting.
All right. Well, tell us the story. Tell us the story of your financial journey from the time you started school until now.
David:
I started school late. I didn't take my first college class until I was 31. So, it's my second career. I did an undergrad at UNC Pembroke in biology and then worked as a paramedic also. Then went to PA school at Wake Forest and just powered through that. I was fortunate enough, my zoology professor got me hooked up with a national scholarship for undergrad. They paid for everything there, including a modest stipend. And then with the National Health Service Corps, when I went to Wake Forest again, they paid for everything, thankfully, including a living stipend too.
Dr. Jim Dahle:
Okay. You had an NHSC commitment though, I assume.
David:
Yes. And going into COVID, that was quite the situation.
Dr. Jim Dahle:
So where'd you go? Where'd you go to work?
David:
Yeah, I planned to stay in North Carolina to continue taking care of my mom, but I ended up months down the road when they raised the bar from whatever the score was, 15 to 19, and that really limited the options. So it was going to be a federal prison.
Dr. Jim Dahle:
You almost had to go to prison to pay for school. That's less than ideal, I suppose. Although I've met a few docs that love their prison practice. They just think it's the cat's meow. They think it's awesome.
David:
Okay. Yeah. As a medic, I didn't particularly enjoy going to the prison to pick up patients, going to the jail. I said maybe that's not for me. So thankfully, I was able to find a job in Tampa, an underserved area there.
Dr. Jim Dahle:
How many years did you owe for paying for your PAs?
David:
Only two.
Dr. Jim Dahle:
Two years. Okay. So two years for two years seems like a fair deal. I got four years for four years out of the military. So it's about the same deal. Very cool. So you didn't have a financial debt. You had a time debt. And so tell us about how you've managed your finances over the last so many years until you became a millionaire.
David:
I've always been pretty conservative financially. I owe a lot to my mom. She immigrated from Thailand in 1969. She was always a saver and making sure she had money to send back home to the family. I just adopted that and I've just lived that way. I still have the same Toyota truck that I bought brand new in 2005. Yeah, I don't know. I get more joy out of experiences and giving things to other people than to buy stuff for myself.
Dr. Jim Dahle:
Well, when you decide to get rid of that Toyota, you might want to bring it to Utah because I swear every other car on the road is a 2005 Toyota. They're incredibly in demand here. People want four runners and that sort of thing. The older the style, the better. So think about that when you get ready to sell that thing. Anyway, give us a sense of what your net worth looks like. How much of it's home equity? How much of it's retirement accounts, investments? How much debt do you have? Tell us about all that.
David:
I'm renting right now. The real estate in Hawaii is pretty insane when I moved back about 18 months ago. I'm renting right now. I've got about $500,000 in a traditional IRA that I started when I was 18 years old. I've got $50,000 in my retirement Roth IRA here at work and another $50,000 in my prior job from Tampa and $170,000 in my high yield savings account.
Dr. Jim Dahle:
You add it all up and it adds up a pretty good chunk of change.
David:
Yeah. And then $350,000-ish, whatever the market's doing. And I have a brokerage account that's got about $350,000 in it.
Dr. Jim Dahle:
I was going to say, I'm not sure that all added up to a million until you added on the brokerage account.
David:
I was trying to pull it from memory. I can't get my spreadsheet to come up here.
Dr. Jim Dahle:
It's all investments. So what about debt? You got any debt in your life?
David:
Zero.
Dr. Jim Dahle:
You didn't have any school debt. You don't have a mortgage because you don't have a place. Very cool. So it's basically all assets.
David:
Yeah. I've been debt free since I sold my house in Hawaii, 2012.
Dr. Jim Dahle:
All right. Well, clearly your upbringing had an influence on this. Your mother had an influence. But why has this been important to you? Why is building wealth important to you? Why has this been a focus in your life? Give us a sense of what your motivation was.
David:
Because growing up, my mom had five kids and she was working at the hospital. But in environmental services, not making much in the way of wages, especially as a single mom. I remember as a kid being in the grocery store and we went to check out and my mom didn't have enough money. And we had to give the food back to the cashier. And as a kid, I didn't really understand that. But it didn't feel good. And I could see my mom, the look on her face was not good either. And so I said, I never want to be in that position.
Dr. Jim Dahle:
Yeah. Yeah, that can be a sobering experience. I have not only had to count up what we had when buying groceries before, but I've stood behind someone in line. I had to put two or three things back because they didn't quite have enough to cover it. And sometimes that's an opportunity to buy something for somebody that could really use it.
But it is something that can be very motivating. I understand. I donated plasma as a college student and bought groceries with the money. That's what I bought with the money was groceries. I'd always run out of money about March or April in the school year before I went back and worked all summer to save up money for the next school year. So I get it. I get it for sure how motivating that is to have financial security for the rest of our lives.
Okay, give us a sense. What have you earned as a PA throughout your career?
David:
The first job I really got taken advantage of, I think, because they knew that I was under the gun for the National Health Service Corps commitment. It was COVID, so jobs were limited. The first job, I'm kind of embarrassed to say, was $83,000 starting out. But I just had to reflect back on my $150,000 of forgiveness plus interest. And I said, “You know what? Okay, that's a pretty good deal all in all.”
Dr. Jim Dahle:
When you add it all together, it makes sense. It's kind of like how the military paid me less, too. It's a contract. It's not like a scholarship. It's not free money for sure. It's a contract. And they get their money out of you eventually.
David:
Oh yeah, 26 patients a day. They got every penny back out of me.
Dr. Jim Dahle:
Yeah, sounds about right. Okay, after you got done with that commitment.
David:
Yeah, after I got done with that. More recently, I'm around $150,000 to $180,000 depending on salary and bonus. And I get per diem to go to the neighbor islands to see patients over there.
Dr. Jim Dahle:
But even living in a very expensive place to live and making less than lots of physicians make, you've still been able to become a millionaire in really not that many years. Pretty awesome.
This is unique. We have somebody that's in Hawaii. What tips do you have for people who want to live in a high cost of living area despite maybe not earning a gazillion dollars a year?
David:
I'm staying at a family's property. That's helpful when you get the brother-in-law discount. And just to do your homework, do your recon, get out and see the area. You don't want to live in the slums, obviously. But there are some other ways that you can do what you like to call geographic arbitrage. Even within a small state, you can find different pockets where they're a little less popular and a little more affordable.
Dr. Jim Dahle:
All right, somewhere out there, there's a PA or there's an NP or there's a pharmacist or a veterinarian or whatever, and they want to be as successful as you've been. What advice do you have for them?
David:
Start early and be consistent. A lot of the money that I saved up was when I was waiting tables and selling cars before I got into medicine. And being able to buy Amazon at $8 a share in my retirement account and Netflix at $10 a share 20 years ago, that's really what got me here consistently.
Dr. Jim Dahle:
It's amazing. You put a little bit of money away, invest it in some reasonable way for a few years, what it turns into over decades. And the first stuff you save has the longest time to compound for sure.
Okay, very cool. What's next for you? What's your next financial goal that you're going to work on?
David:
I just celebrated the one-year anniversary of my first book that I published.
Dr. Jim Dahle:
Pretty awesome. Should we give it a plug? What's it called?
David:
It's a children's book. It's called Goodnight, Alex.
Dr. Jim Dahle:
Goodnight, Alex. All right, everybody run out to Amazon or wherever. Pick up Goodnight, Alex. And now you're going to be a multimillionaire just from the sales from this podcast. Everyone will buy the children's book, I'm sure.
David:
Yes, please do. Check it out. It's really great and I'm proud of it. Rick and I are working on the second one. We're about 50% through the second book now getting ready to launch it.
Dr. Jim Dahle:
Very cool. Is this a passion project mostly or is this a serious side gig?
David:
Probably 80-20. 80% passion, I don't know. The return on investment is going to take a long time. I sold 200 copies, so I made about $200 in the last 12 months.
Dr. Jim Dahle:
Okay, all right.
David:
And it's cost me 10 times that.
Dr. Jim Dahle:
Well, hopefully we make a little difference as White Coat Investors and it gets better.
David:
Yeah, yeah.
Dr. Jim Dahle:
Very cool. Well, congratulations on your success. Thank you for being willing to come on the show and inspire others to do the same.
David:
Yeah, thanks for your time, Dr. Dahle.
Dr. Jim Dahle:
I hope you enjoyed that podcast. Like I said at the beginning, you don't have to be a super high earner in order to do well financially. There's a huge spectrum of incomes among White Coat Investors, some of which have a five-figure income. You might be a resident physician. You might be a PA working off an NHSC commitment. You might be a part-time pediatrician. I don't know. You might have a seven-figure income. Maybe you're crushing it as a back surgeon or something.
We've got people through a huge range of incomes, but you can all be financially successful by following the same principles. Make a lot of money, carve a big chunk of it out to invest. Make sure your investments are working as hard as you are. Make sure you're covered for bad things happening to you. Things like death and disability. And give it a little bit of time. And it's amazing what will happen, especially those first few investments you made back in the day.
FINANCE 101: BACKDOOR ROTH IRA PROCESS
Dr. Jim Dahle:
Okay, I promised we're going to talk just for a minute about the backdoor Roth IRA process. I know lots of you out there do your backdoor Roth IRA every year, no problem. You don't need to be told how to do it. Humor me for a second. We're going to talk about it.
The backdoor Roth IRA is just a method of contributing to a Roth IRA. Back before 2010, the year before I started this blog, basically the rules were high earners weren't allowed to contribute directly to a Roth IRA. High earners with a plan at work were not allowed to deduct a contribution to a traditional IRA. And high earners were not allowed to do Roth conversions.
But in 2010, all those rules changed. Not all those rules, actually only one of those rules changed. The ability to do a Roth conversion. You still can't contribute directly to a Roth IRA. You still can't deduct your traditional IRA contribution. But what you can do is a Roth conversion. And that change in rules made the backdoor Roth IRA process possible.
So, what is that process? That process is taking a contribution and putting it into a traditional IRA. Whatever the annual limit is that year, $7,000, $8,000, whatever it is. You put it in a traditional IRA. You're allowed to do that no matter what your income is, as long as you have at least that much money in earned income or your spouse does.
Then you move the money from the traditional IRA to a Roth IRA. That's a Roth conversion. That's what became allowed for high earners in 2010. Because you never got a deduction for the contribution to the traditional IRA. There's no tax cost to doing the conversion.
The end result is exactly the same as just contributing directly to a Roth IRA. But there is a catch. That catch is when you report that conversion step on your taxes, you do that on tax form 8606 for your federal return. And on that form, it asks you, “What was your balance in traditional SEP and simple IRAs at the end of last year?” The year you did the conversion in. And if that balance is not zero, the conversion step gets prorated.
And you don't want your conversion step to be prorated. So you do what you can to avoid that. You take that money you have in a simple or a SEP and you do a Roth conversion on that money too. Or maybe you roll it into a 401(k). There's 401(k)s and 403(b)s and 457(b)s. Those don't go into that calculation. It's just traditional IRAs, including rollover IRAs, but not inherited IRAs or Roth IRAs. SEP IRAs and simple IRAs. They're the only ones that count. That you got to do something about to not get prorated on your backdoor Roth IRA process. And that's it. That's the whole thing.
On January 2nd, every year, we put money into traditional IRAs. On January 3rd, or sometimes they make us wait a few more days. We put more money. We'd move that money into the Roth IRA. And then you check back a couple of weeks later. Sometimes it earned $5 or something. And you can do a second Roth conversion of that $5. So you don't leave that behind in the traditional IRA.
Of course, you owe taxes on that $5 that are earned in the two days that sat in the traditional IRA. But that's not a big deal whether you convert that or not. Yeah, you get prorated, but it's like a $5 worth of proration. So it's not a big deal. You'll clean it up next year anyway.
Okay, that's the backdoor Roth IRA process. You can do it for the prior year up until tax day. You can make a 2024 contribution in 2025. It makes your paperwork a little more complicated. I recommend you do it during the calendar year, but you can do it. You just report the 2024 contribution on your 2024, 8606. And then you'll report the conversion step on your 2025, 8606.
It's not that hard to figure out. If you just go down the lines on the form, they're pretty easy and straightforward to work through. If it's tricky for you, go to our backdoor Roth IRA tutorial page. If you search Backdoor Roth IRA at the whitecoatinvestor.com, you'll find this tutorial page. It'll walk you through the process. We even put screenshots on it as often as we can and walk you through the process of how to do this.
It's not complicated. You're way better off investing in a Roth IRA than you are in a taxable account. And you can't invest in a traditional IRA with tax deferred dollars because you make too much money. So, this is a no brainer. Most White Coat Investors eventually figure out how to do this.
And that's what they do with some of their retirement money every year. They're maxing out their 401(k) at work. They're doing a backdoor Roth IRA for themselves and a spouse and everything else they save for retirement goes into a taxable account.
I hope that's helpful. If you got questions, first thing you ought to do is go to that tutorial page. Your question's probably been answered there. I promise. We've gotten every possible backdoor Roth IRA question that can possibly be asked at some point over the years.
But if you still have a question, you can shoot us an email. I'll try to answer your question. Maybe better yet, post it on one of our forums, the White Coat Investor Forum or the subreddit or the Facebook group. Somebody else will give you the answer. And then next year, you can give somebody else that answer. It's not that hard to do, but it's slightly more complicated than just contributing directly to a Roth IRA.
SPONSOR
Dr. Jim Dahle:
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Thanks for being a White Coat Investor. Thanks for being here. Keep your head up and your shoulders back. We'll see you next time and all next year on the Milestones to Millionaire podcast. I'm sure there's at least 52 of you out there that have accomplished something awesome in the prior year. We're going to highlight it. We're going to use it to inspire others to do the same this year. Thanks for being with us.
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.