7 money-saving tax hacks for locum tenens docs

If you’re a doctor who does locums or works as an independent contractor, there are some strategies you should consider that may make your life a little easier—and reduce your tax burden. 

Negotiate well 

As an independent contractor or locums doc, you are not employed by the organization or hospital where you work—thus, you will have to pay the full amount of FICA taxes (for Medicare and Social Security) and won’t be eligible for certain benefits like health insurance. 

Because your employer isn’t automatically deducting taxes in your paycheck or subsidizing healthcare costs—among other benefits enjoyed by company employees—you 'll see higher costs, and should therefore be compensated more. 

In addition to negotiating higher pay, try to pass off some of your added costs onto the organization that hired you. Many locums docs are able to get their travel, lodging, transportation, and food fully covered.

Choose the most optimal business structure 

As a locums doc, there are a few different business structures you can consider. Most physicians choose to make their business a single-member LLC, but doing so still gives them the option of two different tax structures: Being taxed as a sole proprietor or as an S corp. 

Being taxed as a sole proprietor is the default option, which means your 1099 business income passes through to your personal income and is taxed together. Being taxed as an S corp is a little different. As an S corp, you can pay yourself a salary (which is taxed normally) and any additional income above your salary can be taken as “profit.”

Remember, FICA taxes are around 15% of your income per year. Usually the employee and the employer pay approximately 7.5% each. However, as a locums doc (and single-business owner) you are both the employee and the employer, which means you have to pay both halves of the tax (the full 15%). Although you only pay social security tax up to a certain amount of income, you have to pay the Medicare portion of this tax on all income. Any money you classify as “profit” reduces the Medicare portion, which can result in tax savings of thousands of dollars per year. 

Be strategic about the salary you pay yourself 

Let me first say this: You always want to make as much money as you can. Although you will pay more in taxes the higher your income, you only pay that higher rate of taxes on the amount of money above the previous tax bracket. So don’t be hesitant to make more money or be tempted to “stay within a tax bracket.”

As mentioned in the above section, the amount you classify as “salary” will be fully taxed. The amount you classify as profits will save you money in FICA taxes.

Per IRS rules, your salary must be commensurate with what other people in your profession make (so you can’t give yourself a salary of $50,000 when most other people in your profession make $200,000). Doing so will drastically increase your chance of being audited which could get you in trouble with the IRS. Besides, you also want to make sure you give yourself a high enough salary to be able to contribute as much money to retirement accounts. 

Reserve money for taxes and stay in the safe harbor 

When you earn 1099 income, you do not have an employer automatically withholding money for taxes out of your paycheck. This means you have to reserve money for taxes on your own and file quarterly estimated tax payments 4 times a year.

A tip to avoid that is to save money in taxes with each paycheck (usually around 30%) in a high-yield savings account or money market fund.

Another tactic is to pay enough in taxes throughout the year to avoid any tax penalties in April. One way to do that as a physician, especially when your income may fluctuate from year-to-year, is to stay in what the IRS calls the “safe harbor.” The safe harbor means that you either pay 90% of what you owe in taxes this year or 110% of what you paid the previous year in taxes. Look at your tax bill from last year, add 10% to it, and pay that amount in quarterly tax payments throughout the year by saving money from each paycheck. 

Hire an accountant and do year-around tax planning

Many physicians could benefit from a good accountant, especially those who do locums and/or make enough side income that requires them to make quarterly estimated tax payments each year. But be sure to vet the accountant thoroughly and meet with them throughout the year for tax planning. Waiting a month before taxes are due is not the best time to ask your accountant about deductions and ways to lower your taxes. Your accountant is likely swamped with many other clients and working on a strict deadline.

The ideal time to do tax planning is periodically throughout the year. Be transparent about your income and job situation and ask your accountant about ways to lower your taxes. That may mean maxing out pre-tax retirement accounts, changing your business structure, restructuring the way you give, and maximizing certain deductions. 

Invest in pre-tax retirement accounts like a solo 401K 

Most employees have access to retirement accounts through their job like a 401K or a 403b. As a person who is self-employed and does locums work, you have access to retirement accounts like a solo 401K that you can open on your own. As a self-employed person you can make both employee and employer contributions. As of 2024, the maximum employee contribution is $23,000 for those under 50 and $30,500 for those over 50. You can also make employer contributions of up to 25% of your compensation. The total amount contributed each year to the account (including employee and employer contributions) must be less than $69,000 if you are under age 50 or under $76,500 if you are over age 50.

Maximize, track, and deduct your business expenses 

As a self-employed person, you may have a lot more business expenses that you realize. Many of these expenses are deductible and can be used to lower your tax bill. For example, things like transportation to and from work, equipment like stethoscopes, uniforms like scrubs, along with the cost of certain insurances like health insurance and malpractice insurance are deductible. You can also deduct “normal” expenses that you may not typically think of like a portion of your home mortgage or rent if you have a home office, a percentage of your internet/phone/electricity bill, business meals, along with the cost of bookkeeping and accounting. Be sure to track these expenses and keep copies of receipts so you can deduct the cost of these expenses from your revenue each year. The more things you can turn into business expenses, the lower your taxable income and the less taxes you pay.