Locum Tenens Physician Tax Planning Essentials: Navigating Inconsistent Income

If you are a physician working in a managed care health system, chances are you’ve asked yourself at least one of these questions about work-life balance:

• How do I stop taking so many calls?
• What if I didn’t have to work holidays?
• What am I missing out on by working every other weekend?
• When will I find more time to travel? And who will take care of my patients?
• When will my hospital fix the staffing shortage?
• How do I get out of this committee assignment?
• Will CMS cut the reimbursement for my procedure?
• How long and how expansive is my non-compete clause?

If this sounds like you, transitioning into locum tenens work might be appealing. It lets you choose your own assignments, decide when and how long to take time off, all while earning more than you would as a W-2 employee.

So why don’t more physicians take the leap into being their own boss? The reasons are abundant: unpredictable income, the hassles of navigating multi-state credentialing and licensing, and the impact on student loan repayment strategy. 

Transitioning to self-employment also introduces significantly greater complexity to your tax situation, and not planning for this can result in large tax liabilities and penalties.  

If you feel stuck in a job you’re unhappy with, the tax-related challenges for physicians making this transition can seem overwhelming. Keep reading to learn about the financial implications of moving to locum tenens, and which tax deductions can help lower your tax payments — a common question among physicians making this shift.

NOTE: This is for educational purposes only and isn’t personalized tax advice. For locum tenens tax advice, reach out to a CPA or professional tax advisor for help with your specific situation.

Minimize expenses, but know what you can write off

One of the reasons that locum tenens assignments typically pay more than the same type of employment work is that you get fewer benefits and reimbursements. 

• You’re responsible for the cost of healthcare, dental, disability and life insurance.
• You won’t have a flush CME fund for a five-day conference in Honolulu. 
• You may need to purchase your own malpractice policy. 
• Your costs for state licenses, obtaining a duplicate DEA license (in every state you practice) and credentialing services (such as FCVS) can add up quickly.

Generally, it’s wise to take advantage of expense reimbursements or have the hospital or agency pay for your expenses, as long as it doesn’t compromise the ability to negotiate your rate. This scenario can vary significantly if you’re working with an agency versus contracting directly with a facility. 

If you’re with a locum tenens agency, housing and travel expenses are generally covered, and in most cases, you’re included in a group malpractice policy at no extra cost. It’s also customary for agencies to pay for licensing fees.

If you’re contracting directly, the person across the table is more likely to consider these expenses part of the total cost of hiring you rather than as line items coming from separate “buckets.”

Maximizing business deductions as a locum physician

When the expense comes out of your pocket, your goal is maximizing available business deductions. Here are some of the most common (and valuable) deductions for a physician sole proprietor or independent contractor:

Deductions on Schedule 1 (adjustments):

• Health insurance premiums.
• Pre-tax retirement plan contributions (i.e. Solo 401(k) contributions).
• HSA contributions.

Business deductions (Schedule C for a sole proprietor):

• Malpractice insurance.
• State licenses.
• DEA license.
• Conferences and CME.
• Travel to short-term (not long-term) assignments.
• Credentialing.
• Meals and incidental expenses (generally only 50% deductible).
• Medical supplies and equipment.
• Professional fees (for contract review, business advice, tax services).
• Home office deduction.
• Utilities, such as cell phones.
• Office supplies.
• Bookkeeping software.
• Equipment (may need to be depreciated over several years).
• Uniform (e.g. scrubs, white coat, etc.).

Unfortunately, you can’t deduct premiums for other kinds of insurance, like disability insurance, dental insurance and life insurance. You also won’t get a deduction for your student loan payments unless you’re under the income threshold for the student loan interest deduction.

It’s worth noting that all of these business expense deductions lower your adjusted gross income (AGI) and potentially your student loan payments as a locum tenens provider. This can be especially valuable if you’re pursuing a federal loan forgiveness strategy.

Related: Locum Doctor Mortgage: 0% to 10% Down for 1099 Physicians

Deducting expenses makes them cheaper, but that doesn’t mean they’re free

While business deductions are exceptionally valuable, it’s crucial to understand that they only cover a portion of the expense. You must decide whether the overall cost is worth it. To calculate the true cost, you’ll need to consider self-employment taxes and know your marginal income tax rate. Here’s an example:

Jessica is considering attending a medical conference in Hawaii. The total cost, including air travel, lodging and conference registration, is about $5,000. Her marginal tax rate is 43.8%, which consists of a 35% federal marginal tax, 5% state marginal tax, 2.9% Medicare tax and a 0.9% additional Medicare tax. 

If she attends the conference, she can deduct $5,000 on Schedule C, yielding a tax benefit of $2,190 ($5,000 x 0.438). The remainder ($2,810) is her true out-of-pocket cost. 

Prior to doing this calculation, she decided that the most she was willing to pay was around $3,000. Since the expense is less than $3,000, she submits the conference registration and books her flights and hotel.

Managing your finances as a locum tenens physician

Moving into locum tenens work is a viable option for physicians looking for more control over their schedules and potentially higher earnings. However, the transition also comes with its own set of challenges, particularly with physician financial planning when tax time rolls around. 

While understanding tax deductions can help you lower your tax liabilities, it doesn’t eliminate them completely. If you’re considering switching to locum tenens, professional advice from a tax advisor is recommended. Fortunately, SLP Wealth can help you with that. Our team of tax professionals offers physician-specific advice to help you examine the benefits and drawbacks and choose the best path forward.