As a locum tenens physician
engaged by CompHealth to work an agreed-upon assignment, you are working as an independent contractor, not as an employee.
There are many distinct differences between an independent contractor and an employment relationship. We have summarized many of these differences for your general understanding, but 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
IRS Publications to Consider
- 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.
- Federal tax law limits the deduction for actual meal costs or the meal per diem amounts to 50 percent of that claimed.
- 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.
- 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.
- 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.
- 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.
(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)
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.