Locum tenens taxes: Preparation is key to taking the leap

Locum tenens taxes

As the old adage says: In this world, nothing is certain except for death and taxes. And since nine out of 10 workers in the U.S. are W-2 employees, not independent contractors, we don’t give too much thought to how the automatic deductions for Social Security, federal and state income taxes, FICA, and Medicare taken from each paycheck happen. But for those working locum tenens — who work as 1099 independent contractors — there are many more considerations beyond the number of deductions and 401(k) contributions. That being said, the logistics of locum tenens taxes can seem daunting for physicians wanting to take the leap to working locums, whether it be full-time, as a supplement to your current position, or as a bridge to retirement.

To help us make this topic digestible, we spoke with Alexis Gallati, of Gallati Professional Services, who specializes in taxes for independent physician contractors. Her company assists high-net-worth individuals and businesses and helps them drastically reduce their taxes and tax liability and help them grow wealth.

“We also offer retirement planning, tax maintenance packages, and basically make sure you’re in good standing with the IRS — and pay the least tax possible,” she says.

First and foremost, she stresses the need for physicians to go into the process with open eyes, and to realize that there are steep penalties for lack of preparation when beginning work as a locum tenens:

“In a nutshell,” Alexis says, “the IRS says you have to pay tax on income as you earn. When you’re a W-2 employee that’s automatically done for you. When you’re a 1099 contractor you need to do it yourself.”

The value of professional help

Alexis stresses that it’s important to find an accountant who’s familiar with locum tenens work, and who’s available to work with you year-round.

“Make sure you find a tax preparer who is experienced in your particular situation,” Alexis recommends. “You have to make sure you use someone who has experience with multi-state taxation if you’re working in different states. It’s really important they know all of the states’ tax codes.”

Of key importance, she says, your accountant must be credentialed. “You want to make sure they have a PTIN, or preparer tax identification number,” she says. “You also shouldn’t limit yourself by only working with someone who’s local.” There are many tax experts who serve clients nationwide.

Employee vs. independent contractor

Locum tenens physicians, by definition, are independent contractors. They do not receive benefits or get automatic deductions from the facility in which they work or from the locums agency they’re working for. Instead of receiving a W-2 with the automatic deductions at the end of the year, they will receive a 1099-MISC from each business client, which simply reports income earned. There are no automatic deductions on a 1099-MISC. This is where a tax professional can help.

How to choose a business entity

There are many options for setting up a business entity when beginning work as an independent contractor. And depending on your situation, it may make more sense just to file as self-employed without creating a formal business entity.

If your situation merits the creation of a business or tax entity, two of the most popular for locums physicians are LLCs and S corporations. There are two crucial differences between an LLC and an S corp: an LLC is a business structure legally separating the business and the individual, and an S corp is an election that indicates how the business (physician) is taxed. The benefit of both is you can protect your personal assets from creditors of your business. However, this does not include protection from a malpractice lawsuit. If you’re working with an accredited locum tenens agency, though, they’ll typically offer comprehensive malpractice coverage.

Emergency medicine physician Dr. Jim Mock chose to go the S corp route. He’s found for him, there are tax advantages. He pays himself a monthly base salary, and if he exceeds his base salary he does a shareholder distribution that’s taxed a little differently than his base salary.

“Of course, I coordinate all of that with my accountant to be within federal regulations and tax laws,” he says.

Have a locum tenens tax plan before you start working locums

After 25 years in private practice, family medicine physician Dr. Marye McCroskey was ready to try something different. She decided to try her hand at locum tenens, but she and her husband didn’t jump into it without some pre-planning.

“I’d highly recommend getting an experienced accountant,” she says. “It’s important to be aware that each state has its own tax code. At the moment, I’ve got income from several different contracts, and it’s easier to have someone who specializes in physician taxes.”

The top 5 locum tenens tax considerations

Although the taxes are the least fun part of working locum tenens, don’t let this be a deterrent. Once you have a good system in place, it’s not any harder taking care of your locum tenens taxes than it would be for any small business owner. Finding a reputable tax professional with experience in locum tenens physicians’ finances is worth every penny, because they will help you develop a good system.

According to our tax professional, Alexis Gallati, here are the top 5 things to remember:

  1. You must give your agency your Form W-9 prior to beginning your first assignment.
  2. You have to pay income tax on income you earn as you earn it. For W-2 employees, this is done on their behalf each paycheck. As a 1099 employee, you must make quarterly estimated tax payments.
  3. Quarterly estimated tax payments must be made on time to avoid penalty. They are generally due on the 15th of April, June, September, and January.
  4. These payments must be 100 percent or 110 percent of your prior-year tax, or 90 percent of your current-year estimated tax.
  5. Failure to do the above will result in an estimated tax penalty, which is roughly 3 percent.

Tracking and reporting expenses

Alexis says the most common mistake independent contractors make is not keeping track of their expenses or their income. That’s why it’s important to keep receipts for everything from the time you leave your home for an assignment to the time you come back — and possibly in between.

Another must? Keep the actual receipts, or a copy; the IRS won’t accept bank or credit card statements. “It can be as easy as setting up a Google drive or a Cloud-based system; you don’t have to have the physical receipts, just a picture or digital image will work,” Alexis says.

“Additionally, be aware of those things your agency is covering, like travel, meals and incidentals, and make sure you’re not writing off expenses which are being reimbursed by the agency.”

Whether you have a per diem expense allowance is dependent primarily upon:

  1. The length of assignment. If your assignment is longer than one year, this allowance doesn’t apply. But if your assignment lasts one year or less, your employment is treated as temporary. “The term of assignment should be for a definite period of time and documented,” Alexis says. “If the assignment is reasonably expected to last for one year or less, but it’s later discovered that employment is expected to exceed one year, the employment will be treated as temporary until the date the expectation changes.”
  2. The distance from your permanent residence. Must be 50 miles or greater, generally with overnight stays.

Be sure to discuss with your tax professional whether actual expenses or a per diem applies. You’ll want to be sure to get credit for all of the work related expenses you are eligible for.

Pensions, SEPs, and savings

As an independent contractor, you will be responsible for creating your own nest egg for retirement. Dr. Mock — with the help of his accountant — has a solid plan in place to prepare for his future retirement.

“I have a two-part pension plan: a Money Purchase Pension Plan and a Simplified Employee Pension Plan (SEP),” he says. “The SEP allows me to be able to fund maximally every year, to be prepared. On top of that I have a college savings plan where I can save a certain amount but it’s tax-free and then some. Beyond that I’m taxed at a lower rate.”

Alexis recommends the Solo 401(k) over the SEP IRA, because with a Solo 401(k) you can put the maximum employee amount ($19,000) and put the employer amount ($37,000), whereas with an SEP IRA you’re limited to 20 percent of your profit into a retirement account. Both have maximum contributions of $56,000 (as of 2019).

And when it comes to looking at retirement accounts that you want to set up, Alexis says you may want to consider setting up an S corp or PLLC that will allow you to maximize your ability to make retirement contributions.

“There’s a new 199A or QBI deduction (one in the same), and most independent contractors are making over that $315,000 max income to take advantage of that deduction. A retirement deduction can help lower your income,” she says.

The benefits outweigh the burden

At its essence, locum tenens work brings many physicians the work/life balance they’re craving. Although this lifestyle can mean a little more administrative work, it’s worth the increased freedom, schedule flexibility, and opportunity for career growth. With a little help from a qualified tax professional, locum tenens taxes can be an easily managed part of a fulfilling career as a locums.