Earned is a wealth management firm built exclusively for doctors. They work with physicians to make a 360-degree view of their finances, including everything from investing, taxes, and career advisory to insurance, cash management, and estate planning. Here are their tax tips for 1099 locum tenens physicians.
Many physicians choose to work as independent contractors, either full time or in conjunction with their permanent work. As independent contractors they are paid as contractors rather than employees, meaning they receive their income reports through a Form 1099 (i.e. 1099 or 1099 contractor work). Some examples include locum tenens, expert witness, telemedicine, medical review, pharmaceutical research, consulting, and coaching.
When you receive 1099 income, you can deduct any ordinary and necessary business expenses you paid related to generating that income. This article will cover some of these deductions and how they reduce your tax bill.
Tax formula for business deductions as a 1099 locum physician
To understand what a deduction is, you first need to understand the tax formula as shown below:
Taxable income is used to calculate your tax liability. A higher taxable income means more income tax and a lower taxable income means less income tax.
How does a business deduction reduce my tax bill?
A business deduction in the above formula reduces your taxable income and tax liability. The question is, by how much?
The tax savings from a deduction is calculated by multiplying the deduction by your marginal tax rate. The below graphic shows an example deduction:
Note that a deduction only reduces your tax liability by a portion of the deduction. For this reason, you should never pay for something to generate a tax deduction because you’d be worse off financially.
Delve deeper: A physician’s guide to working as an independent contractor (CompHealth)
Examples of deductions for a 1099 locum tenens physician
Section 162 of the tax code allows you to deduct business expenses related to your 1099 work. In short, all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business shall be allowed as a deduction.
Here’s an example of some everyday expenses 1099 physicians deduct:
Your marginal tax rate is the tax rate on the next dollar of income. It would be best if you used your marginal rate when quantifying the benefit of a deduction because that’s the amount by which your tax will change.
This differs from your effective tax rate, which is your total tax divided by your total income. If we used your effective tax rate to measure the benefit of a deduction, we would understate the tax savings.
Home office
Suppose you use part of your home exclusively and regularly for your work. In that case, you can deduct a portion of your rent, mortgage, utilities, insurance, and other expenses related to your home office.
You can also count more of your driving as a business deduction if you have a home office.
Vehicle
Suppose you use your car for work-related purposes, such as traveling to different locations, visiting patients, or attending conferences. In that case, you can deduct the standard mileage rate or the actual expenses of your car, such as gas, maintenance, and depreciation.
CME
If you attend continuing medical education courses or seminars to maintain or improve your skills, you can deduct the cost of tuition, fees, books, materials, travel, and lodging.
If you have a W-2 job, it’s best to have your employer cover as much as they allow and then deduct whatever CME they won’t cover against your 1099 income.
Licensing
If you pay fees to renew your medical license, board certification, or professional membership, you can deduct those fees as business expenses.
Cell phone
Are you using your cell phone for work-related calls, texts, or emails? You can deduct a percentage of your cell phone bill corresponding to your word usage.
Meals for out-of-town travel
If you are out of town on a temporary assignment (lasting less than one year and expected to last less than one year), you can deduct a per diem rate for every day you’re there rather than tracking your meal spending. The daily rate varies by location but ranges from $50-$75 per day. This can add up for longer assignments.
Deductions by type of 1099 work:
1099 locum physician tax considerations
While tax deductions can help you save money on your taxes, you should also be aware of potential pitfalls. Here are some tips to avoid common mistakes when claiming tax deductions.
Questions about taxes as a 1099 locum physician?
Do not spend money just to get a tax deduction
Remember that a tax deduction only reduces your taxes by a fraction of your spending. You should only spend money on things that are necessary and beneficial for your work, not just for the sake of getting a tax deduction. After-tax income is what matters.
It is better to have someone else pay an expense than to have a deduction
Many locums agencies cover travel, mileage, and housing costs for their assignments. If you have a W-2 job, they may cover most, if not all, of your licensing and CME.
Don’t forego a deduction for fear of an audit
There are many misconceptions about certain deductions and their likelihood to trigger an audit. The home office is the most commonly cited. If you’re doing things correctly, you don’t need to fear an audit.
Use a dedicated checking account for your 1099 work
Depositing your 1099 income and paying for your 1099 expenses from a single account makes tracking and deducting your expenses more manageable.
Earned Wealth’s Chief Wealth Officer Bill Martin expertly reviewed this article. He specializes in tax-smart investing, private investments, and tax planning for doctors. Bill is also the author of The Smart Financial Advisor.
