2023 Financial Guide for 1099 Physicians
Thinking about becoming a 1099 physician? Before we dive into it too far, what exactly does that mean? As a 1099 physician, 1099 physician assistant, or another type of contractor, you’re not an employee — you’re an independent contractor, which means you sell your services or fulfill a work performance agreement with another entity, such as a practice or hospital. You don’t have legal connections to the practice other than providing services as a contract physician.
The IRS 1099 Form is a collection of tax forms that document different types of payments made by an individual or a business (usually not your employer). That individual or business sends copies to you and the IRS in order to report any money they paid you during that particular tax year.
Let’s take a quick look at financial terminology, business structure, quarterly taxes, health insurance, disability and life insurance, retirement accounts for the self-employed, 1099 deductions, and more. By the time you’re done reading, you’ll have a better idea of how to handle taxes as a 1099 physician.
Learn the tax terminology
We’ll take a look at some tax terminology regarding various types of tax treatment. There are four types of corporations: a sole proprietorship, a Limited Liability Company (LLC), an S-Corporation (S-Corp), and a C-Corporation (C-Corp):
- Employee/employers: An employee employed by an employer (such as a doctor employed at a hospital) will fill out a W-4 for their employer when they first begin their job. Employees receive a copy of a W-2 tax form from their employers, which is filed with the IRS at the end of each year. That information flows directly onto the 1040 tax form.
- Independent contractors: Independent contractors, who are self-employed, fill out W-9s for their clients and receive 1099 forms from clients they do work for throughout the year. You pay taxes through the 1040 tax form, not a 1099.
- Sole proprietors: A sole proprietorship means you own an unincorporated business by yourself. For sole proprietors, 1099 forms and other business expenses flow onto Schedule C and then onto the 1040.
- Partnerships: Partnerships file a return to report income, gains, losses, deductions, and credits. A partnership does not pay tax on income. Instead, it passes profits or losses on to partners, who must include partnership items on their tax or information returns. 1099 forms flow onto Schedule K of a partnership return (1065). The partnership issues the partner a Schedule K-1, which then flows onto the 1040.
- Corporations: LLCs are taxed either as a sole proprietor, as a partnership, or as a corporation (C or S). Income paid to a corporation goes on to the corporate return (1120 for a C Corp or a 1120S), which issues W-2s to its employees and K-1s (for an S Corp) or 1099-Divs (for a C Corp) to its owners.
Decide on a business structure
What business structure makes the most sense for you — a sole proprietorship, LLC, S-Corp, or C-Corp?
- LLC: An LLC is a business structure that offers limited liability protection and pass-through taxation. You cannot be held personally responsible for any business debts and liabilities with an LLC.
- S-Corp: S-Corps are corporations that pass corporate income, losses, and credits through to shareholders for federal tax purposes. An S-Corp is the only type that will decrease your taxes. Partnerships limit your liability but don’t lower your taxes.
- C-Corp: C-Corps are subject to both corporate taxes and then owners are again taxed on dividends they receive. C-Corps benefit from fewer restrictions than an S-Corp, including more flexibility with ownership regulations and stock options.
It’s important to talk to an accountant to find out which business structure works best for you.
Estimated quarterly taxes
Quarterly taxes are estimated quarterly taxes you must pay to the IRS four times per year as an independent contractor physician. You can send a check or pay online four times per year:
- The first business day after April 15
- June 15
- September 15
- January 14
Send in IRS Form 1040ES along with your estimated amount, but here’s the tricky part: making sure that you don’t send in too much or end up with a huge bill on April 15. You can quickly figure out estimated quarterly taxes by multiplying what you owed last year on your taxes by 27.5% and paying that amount each quarter.
For more accuracy, you can estimate your tax burden, divide it by four, and pay the amount you calculate on those four dates.
1099 health insurance
As an independent contractor doctor, you’ll likely want health insurance, which you may need to purchase independently. Health insurance can be expensive, ranging from a few hundred dollars per month for a basic plan for a single healthy person to $3,000 per month for a family plan. You may qualify for a group plan through a professional association or your spouse’s plan if your spouse is an employee. You may also need to purchase it on the open market through a government exchange or marketplace through private insurers. Remember that you may have to purchase at a certain time of the year. Most of the time, you can purchase health coverage at any time.
The Affordable Care Act has made it possible to purchase a few individual health insurance options: Bronze, Silver, Gold, and Platinum plans.
Thinking of buying a high-deductible health plan, a plan with a high minimum deductible for medical expenses that you must pay before insurance coverage kicks in? Consider investing in a health savings account (HSA), which allows you to set aside money on a pre-tax basis to pay for qualified medical expenses.
Disability and life insurance
Employers may also provide other benefits beyond health insurance, but as a contractor doctor, you may have to pay for disability insurance and life insurance. Disability insurance protects you if you cannot work due to an injury or illness and life insurance protects your loved ones if you were to die unexpectedly. It might replace your income, pay for daycare or college expenses for kids, day-to-day living expenses, debts such as a mortgage or auto loans, and more.
Retirement accounts for self-employed
1099 physicians must also save for their retirement on their own. Freelancers and independent contractors can take advantage of a few retirement plan options, including an IRA, SEP IRA, SIMPLE IRA, or a self-employed 401(k).
It’s a good idea to talk to a financial advisor about the best option for you (or do a lot of research on your own) in order to choose the right retirement plan for you.
1099 deductions for physicians
A physician independent contractor can take business-related deductions such as the following, including anything you spend on your business, such as:
- White coats
- Licensing fees
- Car mileage
- Real estate depreciation
- Food expenses
- HSA and IRA contributions
- Student loan payment deduction
On a personal note, also consider the child tax credit, losses in the stock market, education savings deductions, home office deductions, and more. Check with your accountant for other deduction possibilities.
EIN and a business bank account
Keeping business and personal spending separate can help you organize your business and personal life. After you register your business to give your business a separate legal identity, get an employee ID number (EIN), which is a way to identify your business. (It’s kind of like a Social Security number.)
A bank business account can keep your personal and business money separate and requires you to conduct all business transactions through business accounts. You can also add a business credit card. Putting business expenses on a personal credit card can be risky and max out your personal credit limit. Finally, integrate your payment and accounting software to complete your business.
Corporations don’t need W-9s and 1099s
If you do decide to go the S Corp route, your tax life can become more complicated. However, the perk here is that your clients do not need to give you 1099s for any payments that equal $600 or more. That means you shouldn’t have to provide them with a W-9 either.
PSLF implications of being a self-employed physician
It’s important to note that a self-employed doctor independent contractor cannot take advantage of a Public Service Loan Forgiveness (PSLF), even if you contract with a 501(c)(3) hospital. As an independent contractor, you will have to consolidate or refinance student loans
Consolidating means putting federal loans together with one payment under one interest rate. Refinancing means that you put your loans together (or just a couple of loans together) and end up with one payment with a new interest rate.
You may also consider other forgiveness options, such as President Biden’s one-time student loan forgiveness plan which provides eligible borrowers with full or partial discharge of loans of up to $20,000 for Federal Pell Grant recipients and up to $10,000 for non-Pell Grant recipients.
Individuals who made an adjusted gross income (AGI) of less than $125,000 in 2021 or 2020 or families that made less than $250,000 in 2021 or 2020 can qualify. You can apply for relief as a self-employed physician through December 31, 2023.
The pass-through business (199A) deduction
Some self-employed doctors can also get a large deduction from federal income tax through the pass-through business deduction, up to 20%.
Doctor income is only eligible for this deduction if your total taxable income as long as your income is less than $164,900 ($329,800 if married).