The demanding work environment of modern healthcare professionals can leave little time to manage the often complex tax arenas that accompany it. Independent medical professionals face a varied range of tax challenges, whether they’re locum tenens handling multi-state tax returns or anesthesiologists deciding whether to file as an S corporation.
In this article, we’ll shed some light on the subject and offer insights into tax deductions, strategies, and legal structures that can help independent medical professionals minimize their tax liability.
Table of Contents
- Locum tenens tax advice
- Nurse tax deductions
- Travel nursing and taxes
- Tax deductions for veterinarians
- Tax deductions for doctors
- Tax deductions for physiotherapists and chiropractors
- Tax deductions for dentists
- Tax advice for anesthesiologists and other specialists
- A tax advisor’s perspective
- Tax planning for physicians – how Harness can help
- FAQs
locum tenens tax advice
As 1099 independent contractors, locum tenens need to adopt a thorough approach to tax management built on comprehensive record-keeping. To minimize your tax liability, it’s important to document every business expense, such as:
- Travel: airfare, lodging, rental cars
- Professional fees: licensing, malpractice insurance
- Education: continuing medical education or certifications
Note: Record all expenses associated with your work as an independent contractor. Carefully classify your logs so your CPA can make sure you receive every deduction you are entitled to. If you have a dedicated home office to help keep you organized, this allows for further deductions, provided the office is used exclusively for business.
The multi-state nature of a locum tenens’ work requires an understanding of residency rules and filing obligations in each relevant jurisdiction. International assignments further require familiarity with the Foreign Earned Income Exclusion and applicable tax treaties to avoid double taxation. Within this, you should pay particular attention to “permanent establishment” rules when working abroad, as this can trigger foreign tax liabilities.
Independent contractors are generally ineligible for unemployment benefits, underpinning the importance of careful financial planning and emergency fund creation. In order to effectively manage your tax obligations, consider setting aside 25-30% of each payment into a dedicated tax savings account. This ensures you have sufficient funds for your quarterly estimated tax payments.
Additionally, you can bolster your long-term financial security by maximizing contributions to retirement accounts like SEP IRAs or Solo 401(k)s, capitalizing on their tax-deferred growth potential. You should also take advantage of deductions for self-purchased health insurance premiums and explore the benefits of a Health Savings Account (HSA) to further optimize your savings. Finally, 529 savings plans, if applicable, are a tax-efficient way to make payments toward your education and loans, or those of your dependents.
Nurse tax deductions
Self-employed nurse practitioners (NPs) and physician associates (PAs), or those with control over their practice, can claim a wider range of deductions than their employed counterparts. For example, self-employed NPs and PAs can deduct the same home office savings, health insurance options, and use SEP IRAs or Solo 401(k)s for higher tax-deferred savings, similar to locum tenens.
Deductible expenses for NPs and PAs also include credential fees, renewals of state licenses, and national certifications. They can also deduct associated continuing education costs and malpractice insurance premiums.
Beyond this, a broad selection of job-related items such as scrubs, stethoscopes, mileage, and travel expenses (excluding commutes) can also be claimed. With that said, detailed records, including receipts and mileage logs, are essential for substantiating all deductions and ensuring IRS compliance.
Travel nursing and taxes
Travel nurses face a specific tax challenge, primarily due to their pay structure and the concept of a “tax home.” A travel nurse’s income typically comprises a lower taxable base hourly rate and non-taxed stipends for expenses like housing and meals.
To qualify for these tax-free stipends, however, establishing and maintaining a “tax home” is vital. The IRS defines a tax home as a primary residence to which the nurse returns regularly—ideally every 12 months—where ongoing expenses like mortgage payments or rent are paid.
Without a valid tax home, stipends become taxable income. As a result, maintaining proof, such as mortgage payments, utility bills, and a home state driver’s license, is essential.
While federal-level job expense deductions are largely non-existent, some states still allow deductions for travel nurses. Potential deductions include mileage, rental car expenses, uniforms, education, licensing fees, and certain travel and meal costs.
Once again, accurate record-keeping is vital. Maintain a receipt book for all expenses and be aware that the travel nursing profession is subject to scrutiny, increasing audit risks. In addition, the lower taxable income resulting from non-taxed stipends can impact loan approvals and future benefits. It’s advisable that travel nurses consult with a tax professional experienced in their field to optimize their financial circumstances.
Tax deductions for veterinarians
Veterinarians looking to optimize their tax strategy must first determine their optimal business structure. While sole proprietorships offer simplicity, Limited Liability Companies (LLCs) provide crucial liability protection, and partnerships offer shared responsibilities.
Notably, S corporations offer a major advantage through pass-through taxation (a mechanism also used by partnerships). This means business profits “pass-through” directly to the owners’ personal tax returns, effectively avoiding double taxation.
Regardless of the chosen structure, veterinarians will still need to manage income tax, self-employment tax, potential sales tax, and carefully account for deductions and business asset depreciation.
When it comes to deductions, the following all count as legitimate expenses:
- Medical supplies and equipment
- Office space
- Employee salaries and benefits
- Professional fees
- Marketing expenses
- Office supplies
- Insurance
- Vehicle expenses, including mileage
Depreciation on capital assets and charitable contributions to animal-related organizations can further reduce taxable income.
To effectively manage their tax liability, veterinarians should adopt a comprehensive strategic approach. For example, using the Qualified Business Income (QBI) deduction can be a powerful tool for reducing taxable income.
Simultaneously, maximizing retirement contributions ensures long-term financial security while providing immediate tax benefits. Veterinarians can also consider employing family members for legitimate business tasks, which offers both income-shifting potential and deductible expenses.
To fine-tune their financial management, veterinarians can explore the benefits of deferring revenue and accelerating expenses. There are also options such as state-level flow-through entity tax payment options, which can offer additional tax advantages.
Tax deductions for doctors
The tax arena in which primary care physicians (PCPs) find themselves is often defined by multiple income streams, including private practice earnings and investment income.
LLCs and PLLCs offer both liability protection and flexible taxation, making them attractive options. However, for significant self-employment tax savings, professionals can elect S corporation tax status, which allows income to be split between a reasonable salary and distributions.
It’s important to note that while S corporation status offers tax advantages, some states mandate the formation of Professional Corporations (PCs) for specific professional practices, regardless of the desired tax structure.
The tax deductions that PCPs can claim are similar to most other self-employed medical professionals. They include things like the costs of dedicated home offices, medical equipment, diagnostic tools, and medications, as well as continuing education expenses, such as conference fees and travel. That said, it’s wise to record and classify every one of your expenses, irrespective of what they may be, and allow your CPA to provide clarity on exactly which expenses you can claim for.
Strategic tax planning for PCPs involves the optimal use of tax-advantaged accounts. Health Savings Accounts (HSAs) offer tax-deductible contributions, tax-free growth, and withdrawals for medical expenses. While Flexible Spending Accounts (FSAs) allow pre-tax contributions for medical costs, they typically operate under a “use-it-or-lose-it” rule.
Tax deductions for physiotherapists and chiropractors
For physiotherapists and chiropractors, strategic tax planning centers on maximizing deductions and reinvesting profits. A key strategy is to invest in activities that are 100% tax deductible and generate future revenue, with marketing being a prime example. Expenses for newsletters, website subscriptions, and brochures are fully deductible and drive patient acquisition, reducing year-end tax liability while building future income.
Beyond marketing investments, physiotherapists and chiropractors can capitalize on the core deductions, including office rent, utilities, professional licenses, membership fees, continuing education, along with equipment and supplies.
Physiotherapists and chiropractors structured as pass-through entities can also use the Qualified Business Income (QBI) deduction, offering up to a 20% reduction in qualified income. While this deduction applies to all pass-throughs, it’s worth noting that this provision is scheduled to expire in 2025.
As with other medical professionals, physiotherapists and chiropractors should make use of Solo 401(k)s and SEP IRAs for tax-deferred savings or explore defined contribution and benefit plans for highly profitable practices.
Tax deductions for dentists
Dentists are often burdened with higher tax rates, but can strategically minimize their liabilities through proactive planning. A key aspect of this approach is establishing a SEP IRA, allowing major tax-deductible contributions that directly reduce taxable income.
Further tax advantages can be found in the 14-day rental rule (or Augusta Rule), which allows tax-free rental income from your home for up to 14 days annually when used for business meetings. The Qualified Business Income (QBI) deduction, designed for pass-through entities, presents another opportunity to decrease taxable income—though it is worth noting again its expiration in 2025.
While QBI deductions may soon be unavailable, other deduction options remain. For example, it is possible to transform family vacations into tax-deductible business expenses by ensuring the trip’s primary purpose is business-related, such as attending dental conferences or vendor meetings.
In addition to this, hiring your children to work within the practice offers income-shifting opportunities, with wages becoming deductible business expenses. In certain business structures, children under 18 may be exempt from Social Security and Medicare taxes, provided that reasonable wages are paid for legitimate tasks, and thorough documentation is maintained.
Tax advice for anesthesiologists and other specialists
For those in specialized medical fields, such as anesthesiology, forming an S corporation is generally a wise move. The pass-through taxation structure avoids corporate-level taxes, with profits and losses flowing directly to individual tax returns, which can potentially lowering overall tax liability.
The S corporation structure eliminates double taxation, which is a key benefit over C corporations. It can also prove advantageous for high-earning professionals like Certified Registered Nurse Anesthetists (CRNAs) and anesthesiologists.
An S corporation offers a number of other key financial advantages. Firstly, it allows the deduction of legitimate business expenses, which directly reduces the company’s taxable income. Secondly, it provides significant self-employment tax savings.
Owners pay FICA taxes only on a “reasonable salary,” while distributions of profits are exempt from these taxes. Thirdly, S corporations provide the opportunity to pursue tax-efficient retirement planning by allowing for the establishment of tax-deferred plans like SEP IRAs or 401(k)s.
A tax advisor’s perspective
We spoke to Vlad Chery, an experienced tax advisor who specializes in tax strategies for medical professionals, who shared some practical insights with us on a number of topics.
Common tax mistakes
“The most common mistakes that healthcare professionals make,” said Vlad, “stem from a lack of understanding about quarterly tax obligations, self-employment tax, and the absolute necessity for accurate income and expense tracking.”
“Independent medical professionals often miss deductions like mileage, home office, insurance, and education. To capture them, they should use a separate business bank account to avoid mixing personal funds. It’s important to remember that deductions vary by specialty… travel nurses, for instance, tend to have higher travel costs, while anesthesiologists have higher supply costs. You need to tailor your expense tracking.”
Optimal business structures
“The decision to switch from a sole proprietorship to an S-Corp hinges on a simple cost-benefit analysis… transition when the tax savings surpass the compliance costs. For new independent medical professionals, a single-member LLC is often an easy way to set yourself up, but it tends to be tax inefficiency due to steep self-employment tax.”
“An S-Corp is the preferred long-term structure. An S-Corp’s flexibility in managing salary and distributions provides major payroll tax savings, and its pass-through taxation avoids the double taxation of a C-Corp.”
“Regarding tax-saving strategies, hiring family members can be beneficial, but there are a lot of misconceptions about that. Home office deductions, on the other hand, are more straightforward. If you qualify for them, you should absolutely take advantage of them. Single-Member LLCs can deduct allocated home office expenses on their personal return. S Corp owners should adopt an Accountable Reimbursement Plan and submit their home office expenses to the business for nontaxable reimbursements.”
Retirement planning and long-term tax reduction
“For retirement planning, self-employed medical professionals should consider a SEP IRA for its simplicity and no-fee structure, allowing contributions up to 25% of compensation. While a Solo 401(k) offers higher contribution potential due to both employer and employee contributions, it does come with fees.”
“The key to reducing taxable income is maximizing contributions to these retirement accounts, lowering both your business and individual taxable income. Long-term tax strategies like consistent Roth IRA contributions and Roth IRA conversions from previous 401(k)s or traditional IRAs are effective ways to reduce future tax bills.”
Advanced tax strategies
“Medical professionals should prioritize proactive accounting, as it allows the strategic timing of income and expenses. While there are no specific industry tax credits, professionals working across multiple states, such as travel nurses or locum tenens, need to be aware of the potential need to file non-resident tax returns in each state where they earned income. You need to be careful when planning for state tax obligations.”
Closing thoughts
“My top advice for newly independent medical professionals is to consult with a CPA early on to understand the tax implications of their transition. For streamlined tax filing, use QuickBooks Online, particularly the affordable ‘Ledger’ version, to track income and expenses. Most importantly, set up a dedicated business bank account to maintain clear separation between personal and business finances. I know I mentioned it before, but it bears repeating. It’s vital to tax efficiency.”
Tax planning for physicians – how Harness can help
When it comes to tax efficiency for independent medical professionals, there’s a lot to think about and even more that needs to be carefully understood. As Harness, we simplify the tax arena for medical professionals by connecting them with qualified tax advisors who have the specific expertise needed.
From efficiently managing multi-state filings and maximizing your available deductions to helping you choose the most tax-efficient business structure, a tax advisor from Harness can help keep your finances in good health.
FAQs
Here are the answers to the most frequently asked questions about taxes for medical professionals
Why is tax planning for doctors so crucial, especially for those in private practice?
Doctors often face complex income streams and varying tax obligations. Proactive tax planning for doctors ensures you maximize deductions, minimize taxable income, and stay compliant, ultimately securing your financial future.
How can I stay updated on changes to the tax code that may affect my medical practice?
Staying informed about the tax code requires continuous updates. Subscribe to reputable tax publications, attend professional seminars, and consult regularly with a qualified tax advisor.
I have investment income. Can tax loss harvesting benefit me?
Tax loss harvesting can be a valuable strategy for managing investment gains and losses. By strategically selling investments that have lost value, you can offset capital gains and reduce your overall tax burden.
How can I grow tax-free for retirement as a physician?
Using Health Savings Accounts (HSAs) and Roth IRAs allows you to grow tax-free for qualified medical and retirement expenses. These accounts offer tax-deductible contributions and tax-free withdrawals when used correctly.
What are the most common physician tax deductions I should be aware of?
Common physician tax deductions include home office expenses, medical equipment, continuing education, professional fees, and malpractice insurance. Careful record-keeping is crucial to substantiating these deductions.
How can I minimize my overall tax burden as a self-employed physician?
Minimizing your tax burden involves strategic business structure selection (e.g., S corporation), maximizing deductions, utilizing tax-advantaged accounts, and consistent financial planning.
Are there any tax credits available specifically for medical professionals?
While specific tax credits vary, explore credits for energy-efficient upgrades, educational expenses, and those related to hiring eligible individuals. A tax advisor can help identify applicable credits.
How do charitable donations impact my tax liability?
Charitable donations to qualified organizations can be tax-deductible, reducing your taxable income. Keep detailed records of your contributions to ensure proper documentation.
When should I seek professional tax advice as a medical professional?
It’s advisable to seek professional tax advice when starting a practice, experiencing significant income changes, dealing with complex investments, or facing any uncertainty regarding tax laws and regulations.
About the expert:
Vlad Chery, CPA, is a tax advisor on the Harness platform and the founder of CheryCPA. He is an expert in guiding medical professionals through entity structuring, estimate planning, and accounting strategy for the optimization of bookkeeping expenses. He is based in Houston, Texas.
Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.
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