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A Physician With One Job Is Increasingly Uncommon
As reviewed in my last post, side jobs for doctors are typical and are likely to grow exponentially in the coming years due to the advent of virtual or telehealth. Your professional services will be in demand for this growing market space and side work will be plentiful.
Although many doctors may take the traditional route of 1 job in 1 location for the long term, this will become less common over time. I can say this with confidence for two reasons.
One is that the telehealth side job market space is growing with no end in sight.
The second is because Gen Z and Millennial doctors prefer a mix of job structures that can be built around their desired lifestyle and quality of life. They have identities and a sense of balance in their professional life that is far greater than their Baby Boomer & Generation X (born 1965-1980) peers. Thus they are less likely to over-burden themselves with work in just one location.
So in the future, we’ll see doctors having multiple income sources from multiple professional jobs.
W-2 Is Easier But Taxes Are Higher
Knowing that most of you will end up with multiple sources of income brings up the question of what is the best way to receive that income so that you can pay the lowest amount of taxes and retain as much of your earnings as possible. This is a common and vexing question for the legion of high-income earners like yourself and this is especially noted each spring when you do your individual taxes.
I can tell you the easiest and most common approach is to receive it as an employed doctor via W-2 income. The end focus here is a simple bank deposit of your compensation after your employer has collected the taxes and baked in the benefits for you.
It’s pretty straightforward as an employed doctor. You go to work, and then you get paid while your benefits are covered. Your decisions about your earnings are distilled down to lifestyle choices in regard to what to do with your “take-home pay”.
Yes, this approach is easy, but it costs you a lot of money—both in how much you pay the government in taxes, but also in how much you pay for generic benefit packages created for the masses.
There Is A Better Option
The better option is to receive your earnings as a 1099 independent contractor, rather than a W-2 worker. This move opens the door for additional tax strategies for you which are then multiplied when you form a professional micro-corporation to receive those earnings. In case you didn’t know, the US tax code favors businesses, not individuals. So by placing your own professional micro-corporation in control of your earnings, you can come out ahead with taxes.
Doctors are among a group of service professionals with whom the tax code has empowered to be dually recognized as an individual and small business, called a professional corporation (PC). You are special and the tax code recognizes your uniqueness. I have written about this special power available to every doctor in the following blog posts:
When you create the optimal professional micro-business architecture around yourself, you place yourself in a position to retain 10-15% more of your earnings in comparison to the same income as a W-2 employee.
The dollars earned through your professional micro-corporation will be put to work to benefit your household through:
- A lower effective tax rate
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Larger retirement saving ceilings
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Individualize fringe benefit plans that actually benefit your household
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Greater professional autonomy through control of your own small business
Common Questions
As you consider the idea of starting a professional micro-corporation, the most common question that I hear is “how much will it cost me to start my own company?”, which is then followed by the question “won’t it be simpler and less costly to receive my earnings as a sole proprietor rather than as a corporation?”
Can I Save Money By Being a Sole Proprietor?
Let’s start with the 2nd question first. Choosing to designate yourself as an unincorporated sole proprietor certainly can save you some money because you won’t have any business costs or overhead. In addition to this, you can deduct certain business expenses that you can’t do as a W-2 employee. This is a great option for you due to its simplicity, and it’s the route that many medical independent contractors take.
However as the graphic below illustrates, due to your high income and large personal assets, you will be better off incorporating as a micro-business to receive your 1099 income. It is a far better asset protection option, and it also opens the door to some additional business strategies that can help you.
Independent Contractor & Taxes
In the eyes of the law, a worker is either an independent contractor or an employee. However, an independent contractor is not a type of business entity, it simply means you are a non-employee.
The income generated by non-employees is tracked by the IRS for tax purposes and tagged to an associated business entity or to you individually. Either way, you have to pay taxes on the earnings.
Business entity types associated with what the IRS describes as “self-employed trade or business” includes partnerships, sole proprietorships, corporations, and LLCs. If you’re working as an independent contractor and you do not file business formation paperwork with your state, you will automatically have a sole proprietorship. Alternatively, you can take steps to form a business, such as a professional corporation or an LLC.
Sole Proprietor vs Micro-Corporations For Doctors
I am a big fan of single-member micro-corporations for doctors such as Professional Corporations (PC) or Professional LLC (PLLC). This is wise because your liability risks are high, and you are a high net-worth individual with assets that need protection. If you start receiving 1099 income, you will be considered a sole proprietor by default by the IRS.
For a number of reasons, I believe every doctor should form their own micro-corporation right from the start of their career. Then you can determine how you want to use, or not use that business structure within ANY job & income situation.
How Much Will A Professional Micro-Corporation Cost Me?
Do It Yourself
Like many things in life, you can create your own micro-corporation on your own for around $1000 via companies like LegalZoom on the web. Going this route will save you several thousand dollars at the onset. But, very likely you will later find out that you didn’t that save much because you had to pay a real professional clean up your shoddy work.
Local Legal Help
Prices can vary to create a micro-corporation, but hiring someone to build a generic micro-corporation for you is much different from building a customized professional micro-corporation for your global life situation. Thus are many attorneys who are unfamiliar with doctors, but who can help create what amounts to a cookie-cutter LLC for you for a few thousand dollars. It will be functional, but it will lack the structure needed to help you truly maximize your retained income.
Specialized Legal Help
Your more expensive option is to work with an agency familiar with doctors and experienced at building professional micro-corporations. The costs are easily recouped by the robustness and efficiency of the work by a team of professionals who know how to support doctors.
At SimpliMD we can build an individualized professional micro-corporation for you for around $5000. This is a no-frills but robust corporation built for doctors that can have additional corporate features added later.
The next level is the professional micro-corporation that includes a dwelling unit program. This will cost you $11,000 but these dollars will easily be recouped in your first year.
The last level is $15,000 and is filled with a host of individualized fringe benefit programs including the dwelling unit program. These will be built to benefit your entire household and save you a lot of money over the years.
In the end, you don’t know it, but choosing to not start your own professional micro-corporation costs you more in taxes every year than all three of these prices add up!
Who would you rather pay, the government, or yourself?
Minimum Value Proposition For A Micro-Corporation For Your Side Jobs
It’s important to consider the question of starting a micro-corporation for your 1099 income from a Return On Investment (ROI) stand point given the significant start-up and its maintenance costs. In business terms, this is called the minimum value proposition.
MVP
The minimum value proposition is the lowest level of value that a product or service can be offered to you. It is the foundation of any successful business and should be considered carefully when deciding if you want to start a professional micro-corporation. A good minimum value proposition should provide enough benefits to make want to do it and should be easy to actually do.
So an MVP for starting a professional micro-corporation should pay for itself every year including the option to be outsourced in both creating and operating it. It should also place you in a position of control over its operation and business decisions, although you can outsource its management and bookkeeping as well.
Since it is an individual small business you only have to manage yourself and any business decisions associated with your corporation. It’s very lean, simple, and much different than operating a private practice with employees, practice management, medical office building management, and potentially partners.
I analyze this question of a minimum value proposition for starting your micro-corporation from a financial standpoint in my new book “Doctor Incorporated: Stop The Insanity of Traditional Employment and Preserve Your Professional Autonomy”.
Sign up to grab a copy and check out the financial breakdown.
$25,000 MVP
The short answer to the MVP question is if you take in $25,000 or more in side income, you would benefit financially to receive it through a micro-corporation rather than as a W-2 employee.
Side Job Comparison with $40,000 Income
Let’s look at a specific example of what this would look if you used your micro-corporation only for your side income in comparison to receiving it as a W-2 physician.
For our example, let’s suppose you are married, traditionally employed as a W-2 physician making $300,000 per year and you are adding $40,000 of side income to your household.
W-2
If you receive it as W-2 income, the $40k would be taxed at a higher rate because it’s simply added to your total wages; at a marginal tax rate of 24%, thus you would only take home $30,000.
1099
If you receive it in a 1099 micro-business you could end up with a solo 401(k) of nearly $25,000, a profit-sharing distribution of $5000, and potentially add in $8500 of untaxed income to your household via a dwelling unit program.
In other words, your household would hold onto $38,500 of this $40,000 side income, which is a whopping difference of $8500 more than if you added the same money to your W-2 salary.
21% Retained Income With Professional Micro-Corporation
This $8500 represents retaining 21% of your side job earnings by simply receiving it through your professional micro-corporation. I don’t know about you, but I would rather keep that money myself rather than pay it to the government in taxes. W-2 employees miss out on this opportunity.
It is noteworthy that the W-2 physician ends up with $30,000 of spendable income in their bank account, whereas the 1099 physician ends up with $13,500 of spendable dollars in their bank account because they are “forced” to save $25,000 of the dollars by placing it on their 401(k).
So the more taxes you are willing to pay on the money now, the more of that money you can actually access now.
Given your large primary job income, you should easily be able to get by spending less of this side income now and instead using it to grow your net worth faster through your 401(k). This forced savings plan also helps keep you from simply burning through the extra income that is dumped into your bank account. For many of you, once it lands in your bank account, it’s fair game to be consumed.
You can see how the comparison of W-2 to 1099 breaks down in this graphic.
The bottom line is by forming a micro-corporation and funneling this side income through your micro-corporation, you will save nearly $10,000 in taxes compared to receiving it as W-2 income.
These numbers demonstrate the impressive financial benefits of opening up a micro-corporation to receive your professional side income, even if you are traditionally employed.
Scalable
These financial benefits of owning a micro-corporation are scalable and especially shine with larger income sources such as streaming your primary job through it (employment lite).
I recommend you speak to your accountant or tax professional about this, but as you can see there are significant business and tax strategies that can be used to help you hold onto more of your income.
I would add that if you are at or over the $400,000 income threshold, the benefits of receiving your side job income through a micro-corporation will likely save you even more in taxes.
Using Your Micro-Corporation With Your Primary Job
Outside of side jobs, knowing about the $400,000 threshold should also lead you to take a closer look at your primary job.
This is the job that is the central income-generating work that you do. It is ideally predictable and long-term because it must support your chosen lifestyle. Corporations often share similar sentiments about the need for labor that is long-term and predictable and thus two ideas link up together in the form of an employee. Employees are framed as permanent labor.
For these reasons and others, both corporations and workers are often reluctant to describe their primary job as anything other than employment due to the perceived non-permanent nature of independent contractors. Traditionally permanent labor was automatically designated as an employee (W-2), and non-permanent was designated as a non-employee (1099).
So when you start working full-time as an attending physician for anyone, it is often done with the mindset that it is a permanent position—long-term and predictable. Thus it would traditionally seem to be a cut-and-dry decision tree in reference to designating you as an employee rather than an independent contractor.
But as I make the case for, given 90-day termination without causes clauses in each of your contracts, in reality, you are legally a long-term independent contractor rather than an employee.
If your primary job is to provide professional services to for a large corporate employer’s patients (if you are employed, they are not YOUR patients), then you would be wise to consider receiving those earnings as an independent contractor (1099) rather than as an employee (W-2). Before you launch into assuming this means you going into private practice, let me present you with the hidden, but best flavor of employment available to doctors. It’s called “employment lite” and it is a fusion of employment and independent contractor work through what is called a professional services agreement. Think of it like long-term independent contracting work.
This arrangement is far better for you for many reasons, but taxes are an especially compelling reason to consider it due to the way it can lower your effective tax rate.
“Employment lite” is a professional services contractual agreement by which the hospital-corporate employer contracts with your micro-corporation for your professional services. This is what it looks like.
You Pay The Taxes, So You Should Get To Decide Your Taxable Entity
From a tax perspective, you are responsible to pay for the taxes on your earnings regardless of who receives them.
However, the entity that receives it first makes a HUGE difference in reference to the tax options available to you.
If you choose to be traditionally employed as a W-2, your employer will pay for half of your payroll FICA taxes (not a bad deal), but ultimately they are paying those taxes on your behalf, upfront to the IRS. This means the taxes are removed from YOUR earnings and the end result is that those dollars come out of YOUR paycheck.
High-income earners like doctors are like sitting ducks for the IRS when they choose to receive their income as traditional W-2 employees. That is because there is a shrinking menu of tax deductions available to you annually. As I have written about on KevinMD, this is only going to worsen over the upcoming years as the growing ethos of the US government is that the rich must pay for more than their fair share of taxes.
According to the Tax Foundation, in 2021 the average annual tax bill for physicians was $89,000 placing you among the top 10% of all taxpayers in the US. You are known to be an overachiever as a doctor, but this is one area that you don’t want to be in the top 10% bracket! Sadly, with your high income, if you are a W-2 earner, your options to lower your tax bill are very limited. Many of you know about the pain that I talking about!
When you choose to receive the income for your professional services as a 1099-Independent Contractor, you will open the door for tax advantages that are not available to you as a W-2. This includes both your primary job and your side jobs. Anyone who is paid $600 or more in non-employment income will receive a 1099 slip for those earnings, and for most of you, this will include virtually all side jobs that don’t flow through your primary employer.
Your Decision To Be A Professional Micro-Corporation
I have written extensively on this blog about why I believe every physician should create their own micro-corporation. Whether you choose to activate that power, should be your own prerogative. That decision should not be made for you by some corporate gatekeeper.
You can choose to make your micro-corporation inactive as a matter of your own will, and in fact, this is your ultimate power move when it comes to your decision to join up as a traditional employee. It’s all baked into what I call the “the deal”.
The Deal For Your Business Power
Ultimately employers are after your business power to generate income for them, and they are willing to provide you with ample up-front financial incentives to make it hard to resist trading in your business powers to them. With loan paybacks, signing bonuses, and amped-up guaranteed salaries these truly are hard to resist coming out of residency. Honestly, it’s not until 3-5 years later that you begin to feel the pain of being controlled as a corporate employee and asset. This is what the deal looks like for traditional employees.
In contrast, this is what the deal looks like if you choose to be a long-term independent contractor through employment lite:
The Benefits of the Professional Micro-Corporation
In the end, when you have your own professional micro-corporation you will find that it provides benefits in the following ways:
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Greater professional autonomy
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Unique tax strategies
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Deductible business expenses
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Retained income
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Larger Retirement Funding
Take the Next Step
You should take the next step and form your own professional micro-corporation. Not doing it is costing you a lot of money, and a whole lot of professional autonomy.
I have found that the gap between knowing it will be helpful to have a professional micro-corporation and actually doing it is extremely wide.
Doctors tender to be business illiterate and thus are at risk of being too busy to act on their knowledge, or even worse yet, being taken advantage of by unscrupulous business and financial salesmen who promise to help you incorporate. To be honest many of them don’t understand the modern professional micro-corporation and instead will falsely assume you are creating a private practice. Although I am not against private practice, that is not what I am talking about here.
I Can Help You
I am not a salesman, I am one of you. I am simply one doctor altruistically trying to help other doctors arrive at their best life.
Some of you would prefer to DIY, thus I provide a roadmap for you in a previous blog post. Others of you have professionals in your life who can help you do this, and I say go work with them if you trust their work on your behalf.
Yet, I also recognize that many of you need a trusted physician-centric agency to depend on in order to do this right. Back when I did this, I had to figure it out for myself. It took a little time to assemble the right team who understood me and my doctor’s life. In fact, building the right team to support you is one of my take-home messages for busy doctors. You need a professional support team that is working with you to make your life better!
It’s why I want to share what I discovered works best for doctors and provide a simple access point for you to follow my lead. This is why I created SimpliMD as a unified team of business professionals who specialize in helping physicians hit the “easy” button to both set up and operation of their own professional micro-corporation.
FREE Business Coaching Session
In fact, I am so passionate about this, I’ll provide you with a free business coaching session worth $500 for FREE.
Take the next step by signing up for 45 minutes of free business coaching where I’ll listen to your situation and provide you with some coaching tips. You can set up this free meeting at the following link.https://calendly.com/drinc/45min.
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