We recently held another ask me anything webinar with Dr. Rip Patel. The topic of this webinar focused on maximizing your tax benefits when working as a locum tenens physician. Joining Dr. Patel were tax experts Alexis Gallati and Skylar Campbell. You can view the full webinar below.
So many questions came in we didn’t have time to answer all of them. Our tax experts were kind enough to answer the remaining questions.
Alexis Gallati with Cerebral Tax Advisors shared these responses:
- I withdrew 50k from my 401k because I had to pay bills because my moonlighting gig dried up with COVID. Are there any tax savings because of COVID hardships? The 401k distributions will be taxed over a 3 year period (2020-2022) unless you treat it like a loan and pay it back. Good news is that there is no 10% penalty. This article explains further.
- Sometimes my income is in 1099MISC box 6 “Medical and Healthcare payments” and sometimes they put it in box 7 “non-employee compensation.” What is the difference between these two boxes and why would one be used over the other? Sometimes it just depends on the person creating the 1099-Misc! In my opinion, all medical and healthcare services should be under box 6. However, some departments won’t prepare it properly. It is not a big deal for you as the receipient. Just make sure you report all of your income and your 1099-Misc or 1099-NEC forms equal or are less than your total income reported on your return.
- How much should we be putting aside to cover local, state, and federal taxes (I live in Reading, PA) and for health insurance. I’m 65 so I have Medicare. This is difficult to answer because there are so many variables involved. I would need to know how much you are making along with all your other deductions and tax strategies. In general, figure out your effective tax rate and try to withold based on that percentage.
- I live in Arizona and will be starting a locums job in California in a few weeks; will I have to pay taxes on that money in both Arizona and California? My husband is wondering if it is “worth it” so to speak. You have to pay tax in both AZ and CA. However, as a resident of AZ, you are able to take a credit for taxes paid to CA so you are not double taxed on the income earned in CA. You will want to make sure you keep clear records of income and expenses in CA. CA is notoriously ruthless when it comes to trying to tax income earned in other states.
- Last year I got my license in Alaska, California and Hawaii. Is that tax deductible? Yes! You need your licenses to perform your work, so it is a deductible expense.
- I was told LLC is not needed, nor the others? Is there a risk in not having one? Please see video below
- Alexis: in TN is it better to establish as a PLLC/LLC or S-Corp? In general, S-corps aren’t the best in TN because of the 6.5% franchise and excise tax. Once your salary gets above the social security limit ($142,800 in 2021), the 6.5% TN tax will wipe out any tax savings from Medicare.
- What are the best ways to save on taxes as a locum? That’s a bit of a loaded question and I think would be a great topic for another webinar! In general, identifying the proper entity, setting up retirement contribution, being eligible for an HSA, hiring family, etc. – there is a plethora of strategies that can help you save on tax. I recommend checking out my book “Advanced Tax Planning for Medical Professionals” that will provide you with the strategies mentioned and more.
- Is there an income threshold for 1099 that would make an LLC/S Corp worth setting up? I’m going to be doing 1099 work in addition to my base W2 private practice. Please see video below.
Alexis also recommends these resources for more information on tax homes and per diem rules:
- How Locum Tenens can register a tax ‘home’ while working in different states
- How Locum Tenens can use Per Diem rules and rates to stop tracking receipts
Skylar Campbell with Frost Dana Newman CPAs replied to these questions.
- If you live and set up an entity in one state, but work out of state, what steps do you need to follow to be sure that out-of-state location recognizes your entity? Any other special steps to register your business for the work you do out of state? Generally, you are supposed to have your entity registered in each state that you work. However, in practicality, you are not required to do so in most states. A tax return should be filed for each state with sufficient income to generate a tax liability. However, most states don’t require that you are registered with their state in order to file an income tax return and pay tax returns with that state. In some cases, registering your entity in that state can cause a lot of unneccesary headaches and work later on should you discontinue working in that state.
- How do you know when you have enough to retire? That’s a great and very complicated question. One rule of thumb that I generally follow and advise is you need 10x your current income when living comfortably. So if you are making $200,000 right now and live comfortably, you will need $2 million in retirement. However, every situation is different. One benefit of being a professional is that it is very easy to supplement retirement income by working very little. Perhaps you can work a one week 40 hour shift per month and make $60,000 per year. It may provide you something to do to fill your time, and between that and social security you may be at half of the amount you need in annual income in order to retire. Then you would need less in retirement and can retire earlier. I like to call this “semi-retirement” because you are still working a little bit, but can still enjoy a lot more time of not working. I would recommend finding a good financial planner to develop a plan to figure out how much you need to retire. But more importantly, how much you should be putting away each month now in order to retire.
- I set up my LLC in New York but have since moved to Maryland. I currently do locums in both locations. Do I need to file my LLC in my new state? If so, how do I do that? You aren’t required to move the LLC to the state you moved to. You can leave the entity set up in the state in which you reside and, if required, register as a foreign entity in the state in which you live. If you want to move the LLC to the new state, each state operates a little differently. Some states you can dissolve the old entity and re-establish the new entity in the new state. Some states require that you file articles of domestication or something similar to move into their state. This requires you to get a certificate of good standing from the old state and presenting it to the new state to have the articles transferred to the new state. You can keep your EIN with the IRS but move the entity from your old state to a new state.
- Over 65. no need for retirement income. currently working in multiple states and am sole proprietor. any advantages to LLC vs continuing as currently other than liability. Other than liability, the main advantage to having an LLC is that it provides more options for tax savings. If it makes sense, you can be taxed as an S-corp rather than as a disregarded entity. This requires some additional administrative work to be in compliance with the IRS, but could potentially save you some money on your self-employment taxes. However, creating that extra layer of liability protection is an important aspect, in my opinion.
- How do physicians with high income qualify for Roth IRA? What non-medical business gives to the most amount of deductions against the self-employed income? An easy way to get Roth contributions for a high income individual is to create a Solo 401k. You can make all of the employee contributions as Roth contributions ($19,500 per year). The employer contributions are tax deferred contributions, so you are taxed on those when you withdraw them later on in life. Or if there is a year when income drops significantly, it may make sense to roll those tax deferred contributions to a Roth account. You are taxed on the amount then, but potentially in a much lower tax bracket. You can also make a backdoor Roth contribution. This is when you make a contribution to a non-deductible Traditional IRA, and then roll that amount over to a Roth IRA. Because you didn’t take tax deduction, you are able to roll it over tax free. There are certain limitations to this however.
- As a resident just about to finish residency and considering locums work post-residency, any advice about resources that can help guide us on where/how/who can help with setting up 401k/retirement plans, tax advice (how much to withhold so we aren’t surprised on tax day and also how to keep track of our expenses that aren’t covered by locums company but that could be tax deductible), where to go to find insurances-disability, health insurance, etc. that aren’t covered by locums company. Also, does making payments to our medical student loans factor into our taxes? Make sure to find a tax preparer that can handle the work and complexities of a locum is the first step. Your tax preparer should be able to help you with the tax planning throughout the year by providing bookkeeping services and handling all aspects of your taxes, from business to personal. This will provide the tax preparer the whole picture to be able to help with everything going on. As income grows and situations change, you can constantly change the tax planning approaches to best serve your point in life. Many accountants work with financial planners to set up 401k plans, other tax advantaged retirement strategies, life insurance policies, disability insurance and other services you may need. In my opinion, the tax preparer is the quarterback of your financial strategy and should be able to help direct you where you need to go to get the services you need. The only portion of student loans that is deductible is the interest portion of the loan. Currently, you can only deduct student loan interest if your income is less than $85,000 for single filers. You also can only deduct $2,500 per year of student loan interest, it is not a great deduction.
- Can you talk about quarterly taxes? Quarterly taxes are requirements by the IRS to not only pay the required amount of taxes, but pay them throughout the year rather than in one lump sum. If not enough estimated taxes are paid, the IRS will charge underpayment penalties on your tax return. The quarterly taxes can be as simple as a calculation on a tax return that generates estimated payments for the following year based on prior year income. Or a more complex, but more accurate, procedure is to pay estimated taxes based on current year income. This is done by preparing financial statements based on bookkeeping work and running a tax estimate each quarter. This will help to mitigate any surprises at the end of the year when the tax bill comes due.
- Don’t you have to have a specific HSA insurance PLAN? In order to have a HSA plan, you are required to have a qualified high deductible health insurance plan. The deductible must be higher than $1,350 for an individual or $2,700 for a family. Make sure you work with your insurance agent to get a qualifying plan if an HSA plan is your goal.
Do you still have more questions?
Reach out to our tax advisors directly and they can get you the information you need.
Alexis Gallati | Cerebral Tax Advisors | [email protected] | Advanced Tax Planning for Medical Professionals (Alexis’ book)
Skylar Campbell | Frost Dana Newman CPAs | 702-878-4809 | [email protected]