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Tax Planning for Locum Tenens Physicians
New to a locum tenens assignment? To optimize tax planning and maximize savings, here are important factors to consider.
Being a locum tenens physician gives you a great deal of flexibility, providing new opportunities during a career and a chance to gain further professional experiences and perspectives. You can potentially work in locations you wouldn’t otherwise, including different states and perhaps even countries.
There’s plenty to consider when you’re taking on these roles, including moving costs, where you’ll live, your new employer, and plans for the future. And there are also unique tax implications from being a locum tenens physician since you will be most likely be working as an independent contractor during your assignment.
Here’s what you need to know about tax planning for locum tenens positions:
1099s and paying estimated taxes
Up until now, you may have always been a W-2 employee, meaning taxes are taken out of your paycheck each month by your employer, and you simply have to file an annual return. When you start as a locum tenens doctor, you become an independent contractor—meaning you’ll receive a 1099 form from your employer instead of the W-2. This income is still reported to the IRS by a locum tenens employer.
As an independent contractor receiving one or more 1099s, you’ll probably have to pay estimated quarterly taxes. You’ll only receive the 1099 annually, so you have to keep track of your income and calculate how much you owe to the IRS each quarter. When it’s time to file the annual tax return, you’ll report your 1099 income on Schedule C (Form 1040 or 1040-SR).
Depending on the type of business structure, the rules on when and how much you pay will vary. But be prepared to set aside more for taxes, since you’ll be covering your employer’s share of FICA taxes as well as your own, unlike W-2 employees.
Writing off expenses
A benefit of being an independent contractor is that you can write off work-related expenses. If you have to move for your locum tenens assignment, for example, you can usually write off the costs of moving and travel. Other deductions apply to a home office (if applicable), retirement savings, and sometimes your car. Make sure you save all receipts and records and document your business expenses when they occur.
You may qualify for many other deductions, so walk through your expenses with a tax professional. It’s crucial to take advantage of all available tax credits since you’ll be covering more in taxes as an independent contractor.
Creating a tax entity
Some locum tenens physicians decide to create an LLC, PLLC, or corporation to gain more control over their taxes. Sometimes, it might make more sense for you to create one of these business structures if you are earning a lot in your temporary position or paying a significant amount in self-employment tax. However, don’t make the call without first talking through your situation with a CPA.
Filing in the right locations
Just because you’re temporarily working in another state doesn’t necessarily mean you don’t have to file taxes in your home state. You will likely have to file in both locations. And if you’re working in multiple states, you will have to pay taxes to all of them, though you won’t have to pay taxes on the same income more than once.
If you’re taking on an international locum tenens position, you’ll still be taxed by the IRS on income earned outside the country, in most cases.
Finding the right tax help
It’s incredibly beneficial to find a qualified tax professional to assist you if you are a locum tenens physician. The aforementioned tax considerations will vary based on your specific situation—where you’re practicing, for how long, the type of business entity you’ve created, and more. A tax professional will help you understand when to pay taxes, what you can deduct, and how much to pay quarterly, if applicable.
Provident CPA & Business Advisors can provide the peace of mind that you’re filing correctly and taking advantage of each and every deduction available to you. Changing locations or job duties for a locum tenens assignment can already be chaotic, so allow us to help manage your tax burden.
4 Questions to Ask Yourself When Planning an Exit Strategy
Sooner or later, you’ll leave your business. Asking yourself the hard questions now can save you time and stress as you exit your company later
Have the customers received their orders? Have my employees been paid? Am I getting paid this month?
These are probably just a few questions you’ve asked yourself as a business owner. As the head of your company, it’s safe to say you have many responsibilities. Too often, however, business owners get caught up in the hustle and bustle of running a company forget to plan for their future, including their exit strategy.
While you might not leave your company in the near future, you will at some point. How you choose to exit will ultimately be up to you, but in the meantime, it’s important to consider your options and proactively plan for your future. As you plan your strategy, ask yourself these questions:
1. Who will take over my business?
While you can choose to sell or liquidate your business, you can also hand over the reins to qualified successors who can run the business in your stead. In order to ensure the smoothest transition possible, you should start the succession planning process. Here are some things to keep in mind:
- Critical positions must be filled. As you prepare to leave, you must identify who will take on your role and the roles that are fundamental to your business’s success. If these positions go unfilled, it could negatively impact the company and its growth, as well as making it much harder to sell profitably.
- The successor and key team members must be trained. It’s not enough to just fill critical positions. Your successor and key team members must be given ample time to learn new skills and transition into new roles. Whether you choose to pass your business on to a family member or someone outside your organization, train the new leader accordingly.
- Have a continuity plan in place. At some point in time, your business will face disruption, whether it’s a natural disaster, cyber-attack, or simply your exit from the company. Create a continuity plan to ensure your business continuously runs and is able to serve clients with the same level of quality—whether you’re present or not, and whether you still own it or not.
2. What are my financial goals for my business?
You want to see your business succeed but gauging success can be difficult if you can’t estimate its current value. Not knowing how much your business is worth can lead to problems later on when it’s time to sell, extract value through a loan or buy/sell agreement, or transfer the business to someone else.
Enter the Value Builder System, or VBS. Created by entrepreneur and author John Warrillow, the VBS offers a straightforward approach to increasing the value of your business. Your company’s value is determined—and driven—by eight multiples. Consider these “drivers” as you plan your business exit and ask yourself these questions:
- Financial Performance. Do I have records proving my business is creating revenue and/or is profitable?
- Growth Potential. How likely is my business to grow when I’m not here?
- Switzerland Structure. Is my business dependent on a particular client, supplier, or employee? Is it dependent on me as the owner?
- Valuation Teeter Totter. How much cash does my business need to operate?
- Recurring Revenue. How much of my revenue is expected to continue in the future?
- Monopoly Control. Is my business different from others in my industry?
- Customer Satisfaction. Do my customers return again and again?
- Hub & Spoke. When I leave, will my business still run like a well-oiled machine?
Whether you plan to pass your business on to someone else (like a family member or employee) or sell it to an outside party, the VBS can increase its value and smooth the transition. Start reaching your financial goals by learning your business’s Value Builder Score.
3. Will I be ready to retire?
You might have financial goals for your business, but that doesn’t mean you’ve considered how and when you’ll retire. According to a recent survey, nearly two in five small business owners don’t think they will be able to retire before 65.
Even if you don’t plan on retiring in the near future, the sooner you start preparing, the better. There are a variety of traditional retirement plans both you and your employees can contribute to, including a SIMPLE IRA or a SEP IRA, but perhaps your most obvious retirement asset is your business itself.
Selling a business successfully is not easy, however. Market conditions will play a big role in your ability to sell it, so be sure to build flexibility into your retirement plan. That way, you can sell your stake at the most opportune time. Other factors—your location, your lifestyle, the number of family members who depend on your support, and any passive income—will also affect your retirement plan as well.
Another important part of a successful exit strategy is estate planning. Unfortunately, unexpected events do occur. An estate plan can ensure your assets and money go to your desired family members, minimize the amount of time your assets have to go through probate, and also decrease the amount of taxes paid out at the time of your death.
4. Who will help me along the way?
Exiting your business is a big decision, and as such, you need the right professionals to guide you through the process. From developing a succession plan to retirement planning, a skilled business advisor can walk you through the process of designing a smart exit strategy—ideally, far ahead of when you plan to walk away.
Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. 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 as well as our business advisory services, and discover how we help businesses exceed expectations.