Physician side-hustlers! Don't give all your money to Uncle Sam

While many of us enjoy being physicians, practicing medicine may not be our only job. Whether it’s the desire to make more money or pursue another passion, having a side gig has become increasingly common. If you’re a doctor with a side job, consider these seven strategies to help lower your tax burden.

1. Optimize your income 

I occasionally run into doctors who tell me, “I don’t want to make more money because I don’t want it to all go to taxes.” If you’re a physician who has had the same thought, let me give you some reassurance: this isn’t true. If you make more money, all of it will NOT go to taxes. You will pay some in taxes, but not all of it. Even if that extra income pushes you into a higher tax bracket, you will still only pay tax at that rate on the amount of income in that new bracket, all other income will continue to be taxed at the other rate.

2. Increase the tax withholding at your job 

The IRS is a pay-as-you-go system. This means they want citizens to pay taxes throughout the year, not just once a year. If you’re employed then your employer withholds a percentage of the tax you owe before you get paid. If you are self-employed, you have to send in quarterly estimated tax payments four times a year.

If you don’t own a larger corporation but you still make extra money on the side, you have to pay taxes periodically on that income as well. Each person has to pay federal taxes, state taxes (unless you live in a no-income tax state), and the full cost of FICA taxes (for Social Security and Medicare).

Having your employer withhold more money in taxes to account for that extra revenue can prevent you from paying a large tax bill and also prevent you from having to make quarterly estimated tax payments on your side income. 

3. Reserve money for taxes in a HYSA 

When you make money from a side gig and get paid as a 1099 contractor, no taxes are being withheld before you get the money. That means you are responsible for paying taxes on your own, which can be around 30% of your income, or more. Instead of being hit with a large tax bill in April, prepare for this cost in advance.

4. Open a solo 401K  

One way to lower the amount of taxes you owe on money from your side gig is to invest that money instead. If you make extra side income, you can open up your own retirement account (like a solo 401K) and contribute money into that account to invest. Any [pretax] money you put  into the account is deducted from your taxable income which lowers your tax rate.

Per the IRS rules, you only get one employEE contribution per year (which is the contribution you make via your job’s 403b or 401K plan) but you can have multiple employER contributions (and this is the type of contribution you can make when you open your own solo 401K).

When you make side income as an independent contractor you are both the employer and the employee. You can make your employee contribution into your main job’s 403b or 401K to get the “match” (extra money) from your job. Then you can make an employER contribution into your own solo 401K of around 20% of revenue. 

5. Hire a good accountant 

Once you start establishing multiple revenue streams with income from your job (as a W2 employee) and income from other sources (as a 1099 contractor) your tax situation may get complicated. While you are smart enough to figure some things out on your own, you may want to elicit the help of an expert by hiring a tax professional.

Hiring a good accountant can help you keep things straight and ensure that you are paying the right amount in taxes. They can also advise you on the most optimal business structure and help you strategize ways to lower your taxes in the future.

They may also be able to work with you or your financial advisor regarding tax efficient investments and other accounts that can help you build your net worth while minimizing your tax burden. 

6. Track all of your business expenses 

As a business owner (or person who makes side income) you have the ability to deduct expenses on your taxes that other people cannot. For example, if you are a physician who does contract work at another hospital or at a clinic on the side, you can deduct expenses like the cost of certain insurances, medical licensing and renewal fees, annual membership dues for certain speciality-specific organizations, and payment for uniforms/scrubs, etc.

Be sure to keep track of all these expenses (and their receipts) so that you can tally up the total at the end of the year. The more expenses you have, the more you can deduct, and the lower your taxes will be. 

7. Be savvy at the end of the calendar year 

One way to minimize the taxes you owe each spring is to optimize the timing on revenue and expenses. The amount of taxes you owe is based on the income you received throughout the calendar year. So find ways to optimize this. Toward the end of the year, see if you can delay income until the next month (January) and front-load expenses before the end of the year (in the current month of December).

Doing so will decrease your revenue and increase your expenses during the calendar year, both of which help to lower your taxes. It’s not that you want to make less money and have extra costs, it's that you want to be strategic about when you get the money and when you pay for the costs.

So if you already know you will get additional money, delaying it until the start of the next year can save you money on your taxes in the current year. If you already know you have an expense coming up, choosing to pay it before the end of the year can also save you money on taxes.