Filing taxes as an independent contractor can be extremely complex, especially since tax laws change from year to year, and physicians are often in a special category. Here are four tax tips for locum tenens physicians that can lower your tax burden. In addition, seeking out expert tax advice for your personal situation can help you identify and organize your eligible deductions, making this time of year a lot less stressful.
1. Apply the Qualified Business Income tax provision to eligible income
The new Qualified Business Income tax provision (QBI), which passed in 2018, allows select professionals to deduct up to 20% of their income from their return. However, not all locum tenens physicians will qualify for this deduction, depending on your income level.
Jerry Callahan, a director with Pearce, Bevill, Leesburg, Moore, P.C. and a CPA of 30 years who works exclusively with physicians, explains that physicians fall under the category of Specified Service Trade or Business, whose income is not typically eligible for the QBI.
“The new tax provision — 199A — allows non-professional businesses to exclude up to 20% of their income from that activity from their tax return. Since locum tenens physicians are providing professional services, they are not typically eligible for that benefit. Still, if you’ve got a dermatologist — for example — that’s in the practice of medicine who also has a spa, and the spa is a separate company, then the 20% deduction may apply based on their specific circumstances, but anything that’s inside of that physician’s practice that relates to healthcare services, which is the majority of what they do, would not be eligible for the QBI tax provision.”
That said, there are exceptions based on income level that can result in considerable tax savings. Discuss the QBI provision with your tax professional to see if you qualify. Ancillary business ventures may qualify, even if your practice income does not.
2. Capture all your “gray” deductions
“I put expenses into three categories,” Callahan explains. “One, which is expenses that are completely personal, such as your personal clothing, personal care, or your home repairs. Personal expenses like that are not deductible. Two, you’ve got things that are 100% deductible, things like professional liability coverage, as an example, or supplies that clearly have a business use and are easy to support. Three, there’s a bunch in the middle that I call the gray deduction. If you take a referring doc out to dinner or if you take a colleague or someone from the hospital, whoever it may be that you have a connection or a business-related discussion. That’s something that ordinarily would be a personal expense. However, if you take the time to document who you went with, why you did it, and create just a brief one- or two-line description of what you talked about, that would take something not ordinarily deductible and make it deductible.”
It is always best to consult with a CPA to ensure you are getting all eligible tax deductions. CPA and CFP Marc Lion, a practice leader with Mazars USA, highlights, “When a locums incurs expenses that are applicable, related to their business — legitimate business expenses — they should be sure to write them off, take them as an expense against the income that they’re earning and they would get a dollar-for-dollar tax write-off.”
When you identify and properly document your gray expenses, you may be able to significantly reduce your taxable income.
3. Document eligible deductions at the time of the expense
Any business expense that you want to write off on your taxes needs to be documented at the time the expense occurs.
“The IRS requires ‘contemporaneous records.’ That basically means it’s got to be documented at the time the expense was incurred,” explains Callahan. “In other words, you can’t recreate past expenses. Let’s say two years from now you get audited and you try to go back and recreate receipts, the IRS would disallow that deduction at that point because you didn’t document it at the time you incurred the expense.”
Keeping track of your business expenses can be tricky. Lion recommends this strategy: “I recommend having a separate business credit card — a corporate card if you’re incorporated or a business card for solo entrepreneurs. Use this card to capture all your business-related expenses. It makes record-keeping easier and more streamlined for looking things over at the end of the year when you’re ready to file. Capture all your business expenses in one place.”
4. Utilize your locum tenens tax advantages
As an independent contractor, you’re able to reduce your taxable income by deducting business and home office expenses, as well as health insurance premiums and HSA contributions. These legitimate deductions add up quickly, but they’re not the only deductions allowed.
Callahan describes another benefit of being an independent contractor, “They’re able to put money into a Simplified Employee Pension (SEP) plan, which in effect allows them to deduct about 20% of their income. I’ve worked with physicians now for 30 years, and more and more as they get ready to retire, the primary assets they typically have at their disposal are their retirement plan, their primary residence, and perhaps a vacation home. As a result, a SEP serves as a really good tax deduction. It’s a dollar-for-dollar offset of income in addition to growing tax-deferred. In effect, you are paying yourself first instead before paying the government.”
Being a locum tenens physician offers several benefits at tax season. Implement these outlined strategies for starters. And be sure to consult a CPA for more strategies on how to structure your salary, payments, and retirement savings to keep as much of your own money as possible.
Do you have tax tips that have helped you in your locums practice? Share in the comments below.