Filing taxes in multiple states and figuring out deductions and tax benefits for your locum tenens assignments can be time-consuming and confusing. As a locum tenens physician, you are classified as an independent contractor, not an employee. Because of this, you are responsible for making estimated tax payments. That means you won’t see state, federal, Medicare or Social Security taxes taken out of each paycheck during a locum tenens assignment. And instead of the IRS W2 form, you’ll receive the IRS 1099-MISC form for annual income reporting.
Taxes and forms needed
Locums specific rules
Locums work can be very profitable but keeping track of taxes and allowed deductions can be tough. Use this guide to keep up on everything you need to know.
What You Need to Know About 1099 Tax Forms and Filing Taxes as an Independent Contractor
For those not familiar with the 1099-MISC form, here are answers to some frequently asked questions independent contractors have about these forms.
1. What’s the difference between a 1099 and W2?
Companies provide W2 forms to their employees. These forms show the employee’s taxable income along with how much has been withheld for taxes. On the other hand, companies that pay more than $600 in a 12-month period to a non-employee for services provided must supply that person and the IRS a 1099-MISC form listing the total gross compensation.
2. When are 1099s distributed?
January 31 is the deadline for companies to deliver 1099 forms declaring the previous year’s compensation to independent contractors.
3. What if I don’t receive a 1099 from a company I worked with?
Credible staffing companies will send out the required tax forms to their locum tenens providers, but oversights can happen or delivery can be delayed. However, it’s still your fiscal responsibility to pay the appropriate taxes, including Federal, State and self-employment (Social Security and Medicare). So, it’s extremely important to keep your own records of your locum tenens earnings. You can use those figures to calculate your taxes.
4. What if there is an error on the 1099 form?
This is another reason why it’s important to be diligent about keeping your own records of your locum tenens earnings. You’ll want to use your earning records and compare them against any tax forms to make sure the numbers match up.
Don’t panic if you notice a discrepancy. Contact the company to request a correction and ask for an updated form.
5. Do I have to pay estimated taxes?
If you expect to owe more than $1,000 in taxes for the year, you should pay federal estimated taxes on a quarterly basis. This has no effect on what appears on your 1099 form, but it will save you the stress of having to write one big check each April. You may also be required to pay estimated taxes to the state(s) where you live and where you work.
Working as an Independent Contractor
Locum tenens providers work as independent contractors, not employees, which means you can deduct costs associated with your temporary assignment, including food, housing, travel and continuing education. Independent contractors also can take advantage of a self-employed retirement plan and contribute up to 25 percent of their income.
There are many distinct differences between an independent contractor and an employment relationship. Many of these differences are summarized below for your general understanding, but we strongly encourage you to consult with a financial, tax, and/or insurance professional(s) regarding these matters.
Insurance and Benefits
Certain insurance and retirement benefits are commonly provided an employee in an employment relationship that, by law, may not be provided an independent contractor.
1. In general, an individual cannot establish a valid unemployment claim based on earnings as an independent contractor. Unemployment compensation is a potential benefit that exists for individuals who have worked as an employee and have lost their job through no fault of their own and who are able and available for work as an employee. A physician may file an unemployment claim if previously employed as an employee. However, CompHealth (or any staffing agency) should not be listed as a previous employer on the claim, nor should any staffing agency compensation be reported as wages on that claim.
2. Workers’ compensation insurance is government-mandated employee insurance. It is provided to cover health costs incurred by employees as a result of accidents while working on the job. Independent physicians must secure this insurance coverage on their own if it is desired; however, it may duplicate typical health insurance coverage.
3. CompHealth cannot provide health, dental, disability, and life insurance benefits to nonemployees (physicians). This insurance coverage can be obtained directly by the physician or might be available through the physician’s spouse’s employment.
4. Independent physicians are not eligible to participate in CompHealth’s 401(k) Plan. However, as described below, more lucrative retirement plans are available to independent contractors.
There are many income tax advantages and disadvantages in being an independent contractor as compared to an employee.
1. As an individual independent contractor, a locum tenens physician has more opportunity to claim work-related expenses than the typical employee. All independent contractor-related income and expenses must be reported on IRS Form 1040 Schedule C. Unlike employees, these expenses are not subject to the limitations of Schedule-A, itemized deductions.
2. Expenses (to the extent not paid by the staffing agency or client) are claimed on Schedule C and include all costs associated with the temporary work assignment such as travel, meals, housing, work tools and supplies, and continuing education. However, no deductions may be claimed for expenses attributable to personal, living, or family expenses.
3. On assignments requiring overnight lodging (away from home), meal deductions claimed may be reasonable actual out-of-pocket meal costs, the IRS standard daily meal and incidental per diem of $51 for 2016, or the CONUS meal and incidental rates that vary from $51 to $74 per day depending on the assignment location.
4. On an “away-from-home” assignment, all transportation costs (home to the assignment area and daily trips from temporary housing to the work site) should be deductible to the extent not paid or reimbursed by the client or staffing agency. If the physician drives their own vehicle, 54 cents per mile for 2016 plus tolls and parking may be claimed; or one may claim actual expenses including a pro-rata portion of depreciation, gas, maintenance, and insurance.
5. As an independent contractor, the physician may have a more lucrative retirement plan(s) than the typical employee 401(k) Plan. Creating an SEP, Keogh Plan, or other self-employed retirement plan before December 31 will allow the physician to contribute to the plan(s) before April 15 of the following year up to the lesser of $53,000 or 25 percent (100 percent for some plans) of net self-employed income for the 2016 tax year. The physician might also qualify for a traditional or Roth IRA.
6. As an independent contractor, the physician may claim a deduction from adjusted gross income (without regard to itemized deductions) for 100 percent of health insurance premiums paid.
7. To the extent the physician sets aside a separate room or area in their permanent residence to conduct administrative functions of the locum tenens business, deductions (e.g., depreciation, utilities, insurance, etc.) associated with this home office may be claimed.
8. Some business liability and tax advantages may be available in forming a professional corporation for the locum tenens business including setting up a defined benefit retirement plan with even more lucrative contribution deductions.
1. A locum tenens physician (not incorporated) will be subject to federal self-employment tax reported on IRS Form 1040 Schedule SE (both the employee and employer portion of Social Security and Medicare tax). An income tax deduction may be claimed for half of this tax.
2. Federal tax law limits the deduction for actual meal costs or the meal per diem amounts to 50 percent of that claimed.
3. A locum tenens physician will generally be subject to state income taxes in the state of each work assignment to the extent the state has a personal income tax. However, a state tax credit for the nonresident state tax liability is generally available to reduce the home state tax (state of residence generally taxes all income). This credit should fully or partially eliminate any double state taxation. The states of AK, FL, NV, SD, TN, TX, WA, and WY have no tax on this type of personal service income.
4. California requires all staffing agencies to withhold 7 percent of gross compensation paid to nonresident physicians working assignments in California. This withholding should substantially or fully offset the tax liability on the physician’s nonresident California income tax return.
5. In limited cases, a locum tenens physician may have a city or county income tax reporting obligation for the tax home and/or the assignment jurisdiction, a state and/or local sales/gross tax on the gross income earned in the assignment jurisdiction, such as Hawaii and New Mexico, or a business or other license (beyond the medical license) requirement.
6. Filing Schedule C, quarterly estimated tax payments on Form 1040-ES, and potentially one or more state income tax returns with quarterly estimated payments increases the tax compliance burden.
IRS Publications to Consider
(Available on the Internet at www.irs.ustreas.gov)
Publication 334–Tax Guide for Small Businesses (For individuals who use Schedule C)
Publication 463– Travel, Entertainment, Gift, and Car Expenses
Publication 505–Tax Withholding and Estimated Tax
Publication 560–Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 583–Starting a Business and Keeping Records
Publication 587– Business Use of Your Home
Publication 1542– Per Diem Rates (for travel within the Continental United States)
Qualifications for Travel Deductions
CompHealth does not monitor the tax requirements relating to the taxation of your travel-related benefits such as airfare, car rental, mileage reimbursement, and lodging reimbursed to you or paid on your behalf. As an independent contractor you are entitled to deduct unreimbursed travel expenses incurred while on away-from-home assignments; however, to do so, you must monitor the tax rules and should consider the following more pertinent requirements:
To be considered qualified travel expenses, you must be considered a “qualified traveler” who meets the following three requirements:
1. You must maintain a permanent tax home where you generally return after each assignment and where you incur duplicate housing costs
2. The temporary assignment must require overnight sleep and lodging away from your tax home. That is, the assignment must not be within commuting distance of your tax home
3. Your temporary assignment(s), including extensions, must not be expected to last longer than one year within the same geographical area without a substantial break in service. This includes all assignments within the same geographical area, whether with CompHealth, another agency, or work you find for yourself. The IRS has ruled that a three-week absence is not long enough, but a consecutive seven-month absence is long enough to restart the one-year counting. There is no clear guidance for absences between three weeks and seven months.
If you meet these requirements, then you can deduct certain unreimbursed travel-related expenses against your income. These deductions are generally claimed on IRS Form 1040 Schedule C (not subject to the limitation of itemized deductions) or on your professional corporation income tax return.
If you are not a “qualified traveler,” you should notify CompHealth immediately and we will report all travel expenses as taxable compensation along with your cash compensation on year-end Form 1099-MISC.
To the extent CompHealth reimburses you or pays travel expenses on your behalf, you may not deduct these costs on your personal income tax return. However, if your actual expenses are greater than the amount funded by CompHealth, you may be able to claim a tax deduction for the additional cost you incur.
Typical Travel Expenses
• Temporary Lodging: If temporary lodging is not provided by CompHealth, you may deduct your actual housing costs. As a self-employed traveler, you may not deduct the housing portion of the IRS per diem amount; IRS rules preclude the housing per diem. Only actual costs maybe claimed.
• Meals & Incidentals: You may deduct one-half of your meal costs. You may deduct either one-half the actual cost of the meals or one-half of the Meals and Incidental (M&I) portion of the IRS per diem amount allowed for the area of travel by the U.S. General Services Administration (GSA). The standard M&I per diem amount for 2016 is $51 per day. Higher amounts are allowed for designated high-cost locations.
• Mileage: If you are using your personal vehicle, you may deduct a cents-per-mile amount for your travel to the assignment, your business mileage while on assignment, and your trip home. This cents-per-mile rate is not available for rental cars. The standard rate for 2016 is 54 cents per mile.
You must keep adequate documentation for all deductions you claim. You may find the following IRS publications helpful:
• Publication 463–Travel, Entertainment, Gift, and Car Expenses
• Publication 535–Business Expenses
• Publication 334–Tax Guide for Small Businesses
• Publication 1542–Per Diem Rates (for travel within the Continental United States)
One-Year Assignment Limit Rule
The IRS has long held that for an employee traveling away from home on business to receive tax-free travel benefits (meal, lodging, and transportation) the travel assignment must be temporary. Tax legislation and a clarifying IRS ruling in the early 1990s provides that for an assignment to be temporary it must be expected to last less than one year and cannot be indefinite in length. Otherwise the lodging at or near the work site is considered the employee’s tax home and all travel benefits paid would be considered taxable compensation. The rationale for the rule is that for an assignment lasting more than one year, the employee would be reasonably expected to move their residence to minimize travel expenses.
More precisely, the rules provide that an away-from-home assignment will meet this temporary requirement (travel expenses not subject to income tax) if the assignment is expected to last less than one year, and does in fact last less than one year. If an assignment is extended for which it will then last more than one year, all transportation, meal and incidental per diem, housing allowances, and corporate-paid housing costs must be treated as taxable compensation beginning with expenses incurred when it first becomes known that the one-year limit is anticipated to be exceeded, not just when the 366th day is reached. Expenses incurred and paid prior to when it is first anticipated the one-year limit will be exceeded do not need to be reclassified as compensation, but all future expenses must be treated as taxable compensation.
The one-year limitation applies to the general work location — not just the same assignment — and would apply even if the traveler were employed by a different agency and continued to work in the same general area (within commuting distance of the current work site or temporary lodging) without a significant break in service.
Since all traveler assignments should have definite lengths and be less than one year, the uncertainty for indefinite assignments should not be applicable. A taxation concern arises when the assignment, including extensions and other assignments in the same area, begins to approach the one-year limit. The traveler and recruiter must jointly monitor such situations.
Assignments with extensions failing the one-year limitation will create taxable compensation subject to applicable payroll taxes on all the travel benefits once it is anticipated the one-year limit will be exceeded. Assignment extensions must be evaluated in light of this limitation. Note the additional income tax burden (could approach or exceed a 40 percent tax rate) on the increased taxable income may be deemed unacceptable and outweigh the intrinsic benefits of the current assignment or location. The recruiter will work with the traveler to find a temporary assignment in another location with the understanding that returning to the current assignment (or location) after being away for at least 13 weeks (see Break in Assignment discussion) will be uncertain. During this break period there can be no definitive plans of the traveler returning to the general assignment area and any returning assignment will depend on the client’s staffing needs after the break period.
An obvious and permitted strategy is to limit the final extension so that the traveler is not expected to be in the same area for more than a full year. Note this counting is 365 continuous calendar days from the first day of the initial assignment in the area. Only counting days worked or any sort of subtraction of days for short assignment breaks will not solve the issue.
Because you work as an independent contractor when you take locum tenens assignments, you generally should not file an unemployment claim when your assignment ends. CompHealth should not be listed as a previous employer because you were an independent contractor, not an employee.
California-specific Income Taxes
Independent contractors who work in California and are not residents of the state are required to have 7 percent withheld on all compensation, unless the compensation does not exceed $1,500 annually. More information on this law and forms needed can be found at https://www.ftb.ca.gov/.
Disclaimer: The above information has been condensed from various sources generally available to the public that is subject to change, and is general in nature for which the propriety may depend on personal facts and circumstances.
Tax information contained in this document is not intended to be used, and cannot be used, by any person as a basis for avoiding tax penalties that may be imposed by the IRS or any state. We recommend each taxpayer seek advice based on their circumstances from an independent tax advisor.