Doctors: Is Your Physician Group Causing You to Pay Higher Taxes?

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Classifying doctors as employees can significantly increase their tax burden

An increasing number of doctors are banding together to form medical “super groups” and the benefits can be significant: economies of scale, greater leverage in negotiations with insurance companies and large hospitals, administrative support that leaves doctors free to focus on patient care, and a competitive advantage in the market.

Since 2016, less than half of practicing physicians in the U.S. still own their medical practice, according to a Modern Healthcare report.

But there’s also a major downside to this trend: Many physician groups are unwittingly causing their doctors to pay higher taxes than they should. Here’s a look at the reasons why, and what doctors can do to minimize their tax burden while reaping the rewards of regional physician groups.

The pass-through deduction: a significant tax break for independent contractors

Many large physician groups favor an employment model, where the group is structured as a corporation that employs individual doctors. Previously, few physicians paused to consider the difference between becoming a 1099/independent contractor or a W2/employee of their physician group.

Independent contractors are people or entities contracted to perform work or provide services to another entity as a non-employee. A growing trend in today’s gig economy, independent contractors generally exchange the perks of being an employee like benefits, 401(k) match, and greater job security for a significant tax advantage, potentially higher income, and the freedom to pick and choose their own hours and projects.

The Tax Cuts and Jobs Act (TCJA) of 2017 enacted sweeping changes to the tax code, including the addition of a completely new concept: a 20 percent “pass-through” deduction for individual taxpayers on qualified business income earned in a qualified trade or business.

This Qualified Business Income (QBI) deduction stands as a significant tax break for small business owners – including independent contractors – who operate as pass-through entities such as sole proprietorships or single-member limited liability corporations (LLCs). In these businesses, profits or losses “pass through” to the business owner, who pays personal income tax on the earnings at his or her individual tax rate.

In the past, employees paid slightly lower taxes on equivalent pay than 1099 contractors. But this new deduction changes the game – significantly tipping the tax scale in favor of contractors as long as they qualify and stay under certain high-income levels.

There is, of course, a caveat: the deduction is limited for skilled service providers like doctors, who can only qualify for the pass-through break if they earn no more than $415,000 a year for a married couple filing jointly or $207,500 for a single filer. But a skilled tax advisor may be able to find legal ways to help high-income doctors qualify for the pass-through tax rate as well, such as reducing their income by converting their office building into a real estate investment trust and charging themselves rent.

More tax deductions await

Even doctors whose incomes are too high to qualify for the pass-through deduction threshold can reap many tax rewards from changing their employment status from employee to independent contractor. Independent contractors can claim significantly more business-related deductions than employees. In fact, almost anything contractors spend on their business can be deducted from business income before any taxes – including FICA (Federal Insurance Contributions Act) payroll taxes – are paid, from scrubs to mileage to continuing medical education. In contrast, employees pay for these types of expenses with after-tax dollars.

Independent contractors can also claim business deductions for many of the benefits they pay out of pocket that would normally be provided by employers, such as health care coverage. Even so, doctors should attempt to negotiate a higher rate before changing their employment status, since their employer will no longer have to pay toward their benefits.

Independent contractors also have the freedom to choose their own retirement accounts, customizing a plan that leads to the most significant tax savings down the road for their personal situation. While that means they will miss out on an employer match, costs can be low for single-person plans such as individual 401(k)s, SEP-IRAs, and personal defined benefit/cash balance plans.

Inefficient corporate structure increases the tax burden

Many physician groups were inefficiently structured as corporations when they were formed, and now bounce out 100 percent of their taxable income to their doctors to avoid paying corporate tax. That leaves high-income doctors classified as employees facing a hefty tax bill – at the highest individual rate of 37 percent – with no or at least very few write-offs to offset their income. It also forces them to pay 100 percent of their FICA payroll tax, which eats up 7.65 percent of an employee’s salary up to a certain income level.

The income ceiling only applies to the 6.2 percent Social Security portion of the FICA tax, however. Not only is there no wage limit for the 1.45 percent Medicare portion of the tax, but there’s an Additional Medicare Tax that high-income individuals must pay that adds another 0.9 percent tax to any income that exceeds a certain threshold. This limit is currently $250,000 for married couples filing joint tax returns and $200,000 for single filers.

In contrast, these same doctors allowed to contract with the physician group through their own company could reduce their tax burden by a whopping $150,000 on between $500,000 and $600,000 of income by taking advantage of the many deductions now available to them.

Other factors to consider before making a change

Of course, tax deductions aren’t the only factor to consider before changing your employment status. When you are an employee, your employer withholds taxes on your behalf and remits them back to the IRS. If you become an independent contractor, you must have the diligence to ensure that your estimated taxes are paid throughout the year.

Independent contractors are also hit with a Self-Employment Tax of 15.3 percent that covers the 7.65 percent Social Security and Medicare payroll tax you would have paid as an employee, as well as its 7.65 percent counterpart your employer would have paid on your behalf. Since independent contractors are technically the employer and employee, they cover the full amount. While you can claim a tax deduction for half of it, the Self-Employment Tax can be a sizable expense that should be taken into account.

A skilled certified public accountant can help you weigh the financial benefits of both types of employment options. By adding a monetary value to all the benefits included in the W2 status – from paid time off to health insurance to Self-Employment Tax savings – you can make sure the tax break you realize from becoming an independent contractor outweighs the perks of remaining an employee.

Overcoming administrative concerns

Some physician group administrators hesitate to allow doctors to transition from employees to independent contractors out of fear that restructuring will harm the group. But contracting with doctors won’t affect the group’s negotiating power or control over its people; it only impacts how they are paid and enables them to do better tax planning.

A more valid concern is ensuring that doctors in the group fit the IRS framework for independent contractors. The employee vs. independent contractor designation is an area the IRS highly scrutinizes and penalties for getting it wrong are severe. While the circumstances surrounding many doctor-physician group relationships fit the bill, a qualified tax advisor can help everyone move forward with a structure that minimizes doctors’ tax burdens without imposing undue risk on either party.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.

Tips for Maintaining Medical Practice Profitability

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Expand with novel services. Connect with new patients. How to build revenue when burdened with rising operating costs and changes in the healthcare system

As deductibles rise, medical practices can see big losses. Some patients can no longer afford medical bills, leading them to avoid seeking treatment when they should. Or, many will simply seek out physicians who cost less.

In fact, high-deductible health plans (HDHPs) have been causing practices to lose money since at least 2016 when Market Watch reported that patients with these plans are unlikely to actually pay bills of more than 5 percent of their income. Some patients will avoid paying altogether, whereas others have spurred medical providers to offer to finance to those who can’t afford to cover their bill.

Another big change has been the repeal of the insurance mandate previously required under the Affordable Care Act, which has caused many patients to seek care without insurance. This puts physicians in a tough spot—should they treat these individuals and assume the financial risk?

Here are some tips for medical practices looking to maintain profitability and find new patients in this current healthcare climate.

After hours

One way medical practices can continue to grow revenue as well as stand out from competitors is to offer late office hours. These expanded services could be every day or just a few days a week to give working people more options. Extending hours only two days a week, for instance, can still allow physicians to attract a new set of patients while maintaining work/life balance.

Virtual visits

Offering virtual appointment options has several benefits for medical practices. One is of course that doctors can take appointments outside of regular working hours and at home, driving incremental revenue. Another is that it can cut down on missed or canceled appointments, which can cost an average of $200 per missed appointment. Overall, these no-shows cost the U.S. about $150 billion each year.

When online tools and reminders just aren’t working, practices can integrate a virtual visit option. If someone can’t find a babysitter or they are too unwell to come into the office, they can still “see” a doctor and the physician can visually examine and interact with the patient.

Build an online presence to find new patients

While word-of-mouth recommendations still have a significant impact, more and more patients now find a doctor online. This could be via a search engine, an insurance provider’s directory, or through online review sites. One study showed that as early as 2013, most patients started their search for a new provider by reading online reviews of practice or doctor.

This means that providers benefit from creating a solid online presence that includes a website, active social media platforms, and valid, accessible information on third-party review sites. If negative reviews are left, it’s a best practice to reply to these unsatisfied customers to show potential patients that negative experiences matter to the provider – and that they are willing to address problems.

Provide medical information online

Research from Pew shows that 77 percent of Americans say they first turn to a search engine to find health information. Thus, medical providers should consider adding information pages to their website. These resources outline the basics about the type of conditions the physicians treat and any technologies used, building trust with prospective patients while helping them find useful information about their ailments. It’s also a good idea to optimize this content for search engines using SEO best practices (e.g., keywords, internal links, title tags, and anchor text).

Meet with a business strategy and tax professional

A powerful way for medical practices to boost ROI is to partner with a business strategy professional and tax advisor. Provident CPA & Business Advisors helps doctors review their business plan, evaluating factors like cash flow, budgeting, critical drivers, KPIs, and more, as well offers access to the Value Builder System™. This evaluation uses an algorithm to review eight core value drivers used by buyers when they assess the health of a company prior to purchase. The VBS can help practices increase the value of the business by up to 71 percent.

Finally, a strategic tax advisor will evaluate your current practice’s business structure, potentially outlining a new organization that leverages significant tax savings – such as the new 20% pass-through income deduction available to qualifying businesses.

Contact our team today to learn more.

What’s the Magic Number a Doctor Needs to Retire?

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Doctors can get burned out fast, and early retirement grows more and more appealing. How do you know when you have enough saved to maintain your lifestyle?

The thought of early retirement is appealing to most doctors, who are often overworked and exhausted. But how do you know how much money you’ll need when the time comes?

The bad news is, there’s not one magic number to have saved for retirement. The amount a given person will need depends on a variety of factors, such as:

  • Where you live geographically
  • The kind of lifestyle you want to lead (i.e., alone in a cabin growing your own food vs. in a Manhattan penthouse)
  • The family members who depend on you
  • The traveling you want to do
  • If you have passive income, such as from a rental property

The good news is that it’s not impossible to figure out your own, personal magic number. Here are important factors to consider when you’re creating your retirement plan, regardless of your stage in your career path.

Figure out how much you need to live comfortably

Start by simply tracking your spending, if you don’t do this already. Aside from big monthly expenses like a mortgage or car payments, where is your money going?

While your priorities may change in retirement, chances are you won’t want to give up certain luxuries that you’ve gotten used to, like shopping at certain stores, having every cable channel imaginable, or booking travel without a second thought. The first step is knowing what you spend and what’s important to you.

Factor costs that may go up into retirement planning

It’s crucial to realize that in retirement, you may spend even more on certain things since you’ll have more free time. You’ll likely want to travel quite a bit more or spend more money on eating out at restaurants.

And another big expense that is likely to change significantly in retirement is healthcare, which remains one of the biggest costs for retirees. Fidelity estimates that the average couple will need $280,000 to cover healthcare costs throughout retirement. This, of course, will depend on your health, age, location, and other factors.

Don’t forget the costs that may go down

Remember that you’ll no longer be contributing to your retirement accounts, so you can eliminate that expense from your projected budget. And things like commuting costs will be less expensive.

When you retire, you’ll most likely save on taxes as well. You’ll no longer have to pay Social Security or Medicare taxes since you’ll be receiving income from your retirement accounts. If you have a Roth IRA, that income has already been taxed so you won’t have to pay taxes on the distributions.

Many people have their mortgages paid off by the time they retire, or they decide to sell their home and downsize – other ways to pay significantly less each month.

Inflation changes the retirement planning numbers

When figuring out your priorities and your ideal number with family, don’t forget about inflation. Remember that you’re estimating the annual income you’ll need in today’s economy. Depending on how close you are to retirement age, things could change drastically by the time you get there. A rule of thumb is to tack on 3 to 4 percent annually to account for inflation.

It’s often estimated that the average person will need 70 percent of his or her salary in retirement. For high-paying doctors, that’s probably a lot less, depending on your chosen lifestyle.

The Financial Residency laid out a helpful estimate that assumed a doctor who made $200,000 per year could reduce their income by 52 percent in retirement, eliminating taxes, saving for retirement, mortgage and home expenses, job-related expenses, and the cost of children.

Assess your risk tolerance

Once you figure out how much you’ll need in retirement, create a plan that will get you there. One important part of doing so is assessing your tolerance for risk. Young investors will often take more risks in where they’re putting their money than those nearing retirement. And it makes sense—the farther you are from retirement, the more time you’ll have to correct a big loss.

But it’s also important to assess your risk tolerance during retirement. How much risk are you willing to take to lose a safe, steady income stream, in exchange for the potential to see bigger returns?

Some retirees prefer to have that safe stream of income and they don’t mind giving up the potential for big returns. This means the withdrawal rate of your retirement funds should be around 3 percent, and you’ll need about 30 times your annual spending amount.

If, however, you have a higher risk tolerance, your withdrawal rate may be 4 or 5 percent, requiring 40 to 50 times your annual income amount saved up.

There are plenty of online retirement calculators you can use to play around with these numbers, like this one from Physician on Fire.

Create a retirement plan that’s realistic

It may be tempting to predict that you need much less per year in retirement than is practical. Working as a physician is extremely taxing and the retirement lifestyle starts to look better and better as you continue to put in long hours.

But don’t jump the gun. You don’t want to be in a position where you regret retiring. You don’t want to think, “If only I’d hung on a couple more years, I’d be able to do XYZ.”

Reviewing your plan each year will help you stay on track and adjust investments as needed. And of course, whenever possible, try to save even more than you had accounted for. Your retired self will thank you later.

To set up a tax strategy that saves the most money possible while you’re working – and sets you up to more quickly hit your retirement goals – meet with a professional tax advisor from Provident CPA & Business Advisors.

Financial Strategies Every Mid-Career Doctor Should Consider

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As your career hits its stride, taking these 8 steps is key to keeping your financial goals on track

If you’re a doctor who’s starting your career or approaching retirement, the amount of financial advice that’s aimed at you is overwhelming. But the mid-career physician – mainly in their 40s to early 50s – is largely ignored by the reams of financial articles on the Internet.

The average mid-career medical professional has been an attending for about a decade and plans to work for at least a decade more. But despite their high income, their delayed entry into the workforce probably gave them a late start at saving and investing. They are also likely paying down enormous student loan debt while covering typical mid-life household expenses and trying to save enough for retirement.

Mid-career is the perfect time for doctors to organize their finances, prioritize their goals, and solidify the financial strategies they want to follow. Here are eight tips for creating a financial roadmap that keeps these physicians on the path toward a comfortable retirement:

  1. Fix your financial mistakes. Let’s face it: it’s pretty certain that you’ve made at least one major financial mistake by the middle of your career. Maybe you took bad advice from a shady financial advisor more interested in their commissions than what’s best for you. Maybe you underestimated your need for disability or life insurance, or you’re choosing to invest in taxable accounts before maximizing tax-advantaged retirement accounts.

    Whatever you did wrong, now’s the time to make it right. If financial planning isn’t your strength, that may mean finding an advisor you can trust to sniff out and correct the mistakes in your portfolio.

  2. Make a push to pay off your mortgage. It’s wise to head into retirement with your mortgage paid off – and the sooner you can achieve that, the better. When you look at it on paper, who wouldn’t choose squirreling cash into investment accounts with high returns instead of paying interest on what you borrowed from a bank?

    But even those with incomes high enough to pay off their mortgages long before they retire have a hard time resisting spending their extra cash instead of investing it in their future. By mid-career, you’ve probably been in your house a few years and can anticipate your future earnings, so it’s easy to set a goal for paying off your house. Once your mortgage is gone, you can boost your retirement savings, allocate cash toward college, and even have more to spend on luxury items like vacations.

  3. Keep your expenses in check. If you’re not putting at least 20 percent of your gross income toward retirement by mid-career, it’s wise to make some changes. A detailed budget brings clarity to where your money is being spent so you can make progress toward your financial goals.

    Take a hard look at where you’re spending money and make sure it aligns with your priorities. For instance, if seeing the world matters most to you, splurge on amazing vacations, not all the latest gadgets.

    It always stings a little to reign in your lifestyle. But many doctors are surprised to realize how easily careful budgeting can reduce or eliminate personal expenses they don’t really care about, freeing up significant chunks of cash to pay down medical school debt, purchase a building for their practice, buy into a practice, or save for college and retirement.

    And here’s one more word to the wise: pay off your credit card debt every month to avoid high-interest charges. If you’re finding that you can’t, stop charging.

  4. Squirrel away cash for college. While you’ve hopefully been putting some money toward this goal since your kids were born, now’s the time to step up your game. The College Board’s 2018 Trends in Higher Education reports that the all-in cost of a single year at an in-state four-year public college average $20,770 – and private schools average a whopping $46,950. Doctors planning to send two kids to a private college will need $750,000 pre-tax to foot that bill – and that’s not including graduate school.

    Most practicing doctors boast earned income and assets that prevent their children from qualifying for need-based financial aid. The best vehicle for saving for college is generally a 529 Plan, which offers tax and financial benefits. But you’ll need to do some financial planning to determine how you will split the cost between 529 savings and cash flow from your current earnings.

    Keep this in mind as well: saving for college is a sort of like a test run of your ability to save for retirement. If you find yourself woefully unprepared when your children graduate high school, it’s a major wake-up call that drastic changes are needed before you retire.

  5. Evaluate where you are. If you’ve done a great job with your finances by mid-career, the world is your oyster: you can consider early retirement, working less, taking a job you’ll enjoy that pays less or eliminating exhausting on-call shifts. But if you haven’t, it’s important to find ways to get your savings on track: perhaps moving to an area with a lower cost of living and income tax burden, asking a stay-at-home spouse to work, or exploring passive income sources such as real estate investments.

    By mid-career, many doctors are starting to feel burned out. Try to make changes that can help you enjoy your practice. After all, working longer is the best way to rectify poor financial decisions in the past – giving you many more years to save, more time for your investments to compound, and fewer years to save for.

  6. Solidify your retirement plan. It may be hard to believe that retirement planning can be tough for doctors – after all, the medical profession is one of the most lucrative careers you can choose. But despite their high income, many doctors fail to max out their retirement plans and save enough for the future.

    Mid-career is the point where you should have a realistic retirement goal and solidify your plan for making it happen. That includes understanding the pros and cons of your retirement savings choices, having a clear picture of how much you need to sock away each month, and putting a solid strategy in place for building the funds you need to enjoy your golden years.

  7. Update your estate plan. The Tax Cuts & Jobs Act of 2017 brought some good news to high-income doctors, increasing the federal estate tax exemption to $11.2 million per person and $22.4 million for married couples. That makes federal estate tax planning a breeze for all but the richest doctors, although those who live in states that impose their own estate tax, death tax, or inheritance taxes still need to take extra care as they put together their wills and trusts.

    A well-crafted estate plan saves time, avoids probate, reduces or eliminates estate taxes, and eases any financial burdens for surviving family members. But the 2018 Report on U.S. Physicians’ Financial Preparedness found that nearly 40 percent of doctors are very or somewhat concerned that they don’t have the right estate plan in place.

    By this point, you should at least create the minimum pieces – a will and end-of-life and medical directives – and make sure they stay up-to-date with changes in your life. If you have minor children, you should also name a guardian to care for them and a custodian to look after their money and property. That way, events unfold exactly as you want them and the assets you worked so hard to accumulate remain with your family instead of Uncle Sam.

  8. Make sure you’re with the right advisors. There are many reasons doctors may find themselves in a tough financial situation, but getting bad financial advice or paying too much for good advice is an easy problem to fix. If you’re happy with your current situation, there may be no reason to make a change. But as your portfolio grows and the accompanying fees grow with it, it’s important to make sure you’re getting the right help at a fair price.

    Only 12 percent of doctors planning to retire consider themselves “ahead of schedule” in their retirement financial plans, according to the Physicians’ Financial Preparedness report. Working with an exceptional certified public accountant/advisor will develop a tax plan that lets you enjoy the lifestyle you’ve earned while helping put you in the best position for retirement.

Mid-career is the perfect time for doctors to check in to ensure that they’re making steady progress toward their financial goals. Fix mistakes, create a plan to pay off your mortgage, save for college, and make sure your expenses, retirement plan, and estate plans are in order. By re-evaluating your financial picture while you’re still enjoying a high income, you can make any adjustments you need to ensure financial success now and throughout your golden years.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.