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The Self-Employed Physician’s Guide To Determining Their Salary

The Self-Employed Physician’s Guide To Determining Their Salary

Jun 30, 2023

How Much Should You Pay Yourself?

What Is The Value Of Your Services?

In my last post, I discussed the importance of getting paid what you are worth. This is a critical concept to understand whether you are an employee, or whether you are self-employed as a small business owner/ independent contractor. Knowing the value of your professional services to others is an essential feature of negotiating a fair-market-value contract.

How Much To Pay Yourself?

In response to my post, a self-employed physician from California asked the question:

What if you own the business and pay yourself?

This is a fantastic question whether you are in traditional private practice, or a single-member professional corporation. Each of the small business owners has to decide how much to pay themself.

I am going to answer this self-employed doctor’s question from the perspective of the single-member professional corporation owner who is working as an independent contractor in a primary job via what is called an employment lite agreement. It’s what I do, so I can speak to it from a personal perspective.

Your Professional Micro-Corporation Will Be Paid

First, understand that your compensation for your professional services will be paid to your professional corporation in this contractual arrangement. The value of that compensation is essentially the same whether you are employed or a contractor. Also, understand that the total value is not just the salary/comp formula but also includes benefits and professional fees.

Put another way the labor expenses for employed doctors include their salary/compensation formula + benefits +retirement contributions +professional fees like malpractice insurance. This represents your total value and expense to your employer.

When you either start with a fresh employment lite agreement or convert from a traditional employee to an employment lite agreement it is important to know that your professional micro-corporation should be paid the equivalent total fair market total value labor expense as the employed doctor. This “grossed up” number is important because your micro-corporation will be responsible to pay for your retirement, benefits, and professional fees like malpractice insurance.

In the end, what an employer pays you for your professional services should be the same whether you have a traditional employment contract or an employment lite contract. Locums are a whole different thing and will cost employers more than both of these contractual arrangements.

Much like a traditional employee, you will want to maximize the Fair Market Value of your employment lite contract—which was the point of my last post. I encourage you to reach out to Contract Diagnostics to complete their Compensation Rx for only $297 to find out your true value.

As a professional micro-business owner, you may also have additional side job incomes that contribute to your primary job compensation. Just like any small business, generating revenue is a critical feature of a healthy business and therefore having diversified revenue sources/contracts is always helpful.

How Much Should You Pay Yourself?

For the single-member professional micro-corporation owner, once you have a relatively predictable value for your annual corporate revenue (based on FMV contracts), this is where the fun begins—especially if you are a high-income earner like a doctor.

This is one of the elements that sets you apart from the rest of the single-member small business owners in America—their income can be less predictable and they are always working towards stabilizing and growing their revenue. As a physician, your professional micro-corporation has a very predictable high revenue based on your FMV contract, but it also lacks scalability due to it being a single-member corporation that is completely dependent on you alone. In the end, you as an individual doctor can only do so much work. Therefore your professional corporation will usually have a ceiling on its potential revenue.

Savvy doctors who really begin to understand their business powers will use their high income, professional skills & earned assets to create an enterprise of active and passive income sources and businesses that eventually create additional income sources—that don’t require your time or presence—and thus brake the scalability barrier of your micro-corporation. In essence, they will master how to make their money work for them. This is why my enterprise is made up of 9 businesses and not just my PC.

The Fun

The “fun” for the self-employed physician in his/her single-member corporation is figuring out how to get as much of your earnings/corporate revenue into your household in the most tax-efficient manner. Unlike your traditionally employed peers whose earnings are filtered through the highly taxed W-2 channel—you have options.

As a micro-corporation owner, your household income will arrive to you via 4 basic channels as noted below.

You will note your salary is just one of those 4 channels. It is typically the largest of the 4 and thus it is the most important —and the good news is that you get to decide the amount!

I can’t over-emphasize this 4 channel concept enough to you:

small business owners understand all 4 of these cash flow channels and use each to wisely get dollars into their homes in the most tax-advantaged manner.

Your paycheck is just one of the sources of these dollars to your household.

This is in contrast to traditional employees, whose paycheck and ERISA-limited retirement contributions reflect the total household value of their work. Typically these doctors pay a much larger percentage of their earnings to taxes than self-employed doctors.

Reverse Engineering

Because the earnings for your PC are relatively predictable based on FMV, you have the power to determine your salary and the dollar value of the other sources of household money—through what I call a reverse engineering process.

The reverse engineering process requires you to know two important numbers:

  • Your annual household expenses/spending. Although I believe in budgets, at a minimum every doctor should know how much they are spending each year-including all loan and credit card payments. This number is the minimum value that you should set your salary at.

  • Your IRS-compliant lowest “reasonable salary”. This represents the range of income that the IRS expects a doctor in your specialty to make each year. If you pay yourself less than this amount, the IRS is more likely to audit you out of concern that you are trying to evade taxes. The “sweet spot” for lowering your taxes as a doctor is to keep your reasonable salary as low as possible.

    As a self-employed doctor, understanding the concept of a “reasonable salary” defined by the IRS can significantly impact your tax liabilities. By ensuring that you are paying yourself the lowest reasonable salary, you can effectively lower your payroll taxes and maximize your business’s financial potential.

    The IRS has specific guidelines in place to determine what constitutes a reasonable salary for self-employed individuals, including doctors. This determination takes into account factors such as the nature of your medical practice, your level of experience and expertise, industry standards, and the amount of time and effort you dedicate to your business.

    By adhering to these guidelines and paying yourself a reasonable salary, you can demonstrate to the IRS that you are not attempting to evade taxes or artificially reduce your income. This not only helps you stay compliant with tax regulations but also provides solid documentation in case of an audit.

The reverse engineering process also ideally should include an evaluation of which tax entity for your professional corporation will provide your household with the maximum tax-advantaged dollars in each of the 4 channels.

Let me emphasize this is highly individualized for every doctor—and includes multiple factors including specialty, income, fringe benefit needs, family structure, assets, and other passive/active income. The complexity of this is why I recommend an agency like SimpliMD help you with this process—they have a team of legal, accounting, and business professionals who can provide you with an objective analysis of this for a reasonable fee. This What-If Tax planning worksheet provides extremely valuable data in a side-by-side analysis like this example.

You can schedule a free business coaching meeting with them here to begin exploring this.

For the sake of simplicity, let me walk you through some of the general concepts within the framework of an S-Corp vs a C-Corp for your professional micro-corporation.

Most doctors as single-member professional corporations will choose S-Corp taxation, but again this is very individualized and worth of analysis with a reputable agency like SimpliMD.

Physician Self-Employed Salary in Their Micro-Corporation: S Corp vs. C Corp

When establishing a micro-corporation as a self-employed physician, choosing the right corporate structure is crucial. The decision between an S corporation (S corp) and a C corporation (C corp) can have significant implications for how you pay yourself a salary. I am going to explore the differences between these two structures and discuss how they affect the determination of your salary as a self-employed physician.

  1. Understanding the S Corporation (S Corp): An S corporation is a pass-through entity that allows profits and losses to flow directly to the shareholders’ personal tax returns. In an S corp, the owners, known as shareholders, can pay themselves a reasonable salary as employees and receive additional income through distributions. These distributions are generally not subject to self-employment taxes, providing potential tax advantages.

  2. The C Corporation (C Corp) Option: A C corporation is a separate legal entity responsible for its taxes and liabilities. As a self-employed physician operating as a C corp, you would become an employee of the corporation. This means you would receive a salary, subject to income tax and payroll taxes, including Social Security and Medicare taxes. Any profits retained within the corporation are taxed at the corporate level. When distributing profits to shareholders, they may be subject to additional taxes, such as qualified dividend rates.

  3. Salary Determination for S Corporations: In an S corp, the IRS requires that shareholders who provide services to the corporation receive “reasonable compensation” for their work. The salary should be commensurate with the services provided and comparable to what a non-owner employee in a similar role would earn. Setting an unreasonably low salary and distributing most of the profits as dividends may attract scrutiny from the IRS. A reasonable salary helps ensure compliance and reduces the risk of audits.

  4. Salary Determination for C Corporations: As an employee of a C corp, your salary would be determined based on industry standards, your qualifications, and the specific services you provide. Unlike an S corp, there is no requirement for the salary to be “reasonable” in relation to the work performed. However, it is essential to ensure that the salary is justifiable and aligned with market rates to avoid potential tax issues or challenges in the event of an IRS audit.

  5. Tax Considerations: Both S corporations and C corporations have distinct tax considerations. In an S corp, the portion of profits distributed as dividends to shareholders is generally not subject to self-employment taxes. This means potential savings on Social Security and Medicare taxes. However, the salary portion is subject to payroll taxes.

    In a C corp, both salary and dividends are subject to taxes. The salary portion is subject to income tax and payroll taxes, including Social Security and Medicare taxes. Dividends received by shareholders are subject to taxation at the individual level, potentially at qualified dividend rates.

It’s important to consult with a tax professional or accountant specializing in physician finances to ensure compliance with tax laws and make informed decisions about your salary and overall tax strategy.

The 60/40 Rule

An important concept that is used for a physician who owns a single-member professional corporation taxed as an S-Corp is the 60/40 rule. This rule, which refers to the allocation of income between salary and distributions, can significantly impact your tax obligations and overall profitability.

The 60/40 rule states that as a physician S-Corp owner, you should allocate at least 60% of your PC’s revenue as a reasonable salary and no more than 40% as distributions. This allocation is based on the IRS guidelines aimed at preventing excessive tax avoidance through misclassification of income.

By adhering to this rule, you can ensure that you are properly compensating yourself for the services you provide while minimizing your tax liability. Allocating a reasonable salary demonstrates that you are paying yourself in line with industry standards and avoids potential audits or penalties from the IRS.

Moreover, following the 60/40 rule allows you to take advantage of potential tax savings. By keeping a portion of your income as distributions, which are subject to lower self-employment taxes compared to salaries, you can optimize your overall tax burden.

It is important to note that every physician’s situation may differ based on factors such as specialty, location, practice size, and personal financial goals. Consulting with a qualified accountant or financial advisor who specializes in physician S-Corps can provide valuable guidance tailored to your specific circumstances.

Understanding and implementing the 60/40 rule is essential for physician S-Corp owners seeking financial success. By appropriately allocating income between salary and distributions, you can ensure compliance with IRS guidelines while maximizing tax savings. Seek professional advice to navigate this complex area effectively and make informed decisions regarding your finances.

Example

If you were a physician currently earning $500,000 as a traditional employee you would pay W-2 taxes on all of that $500,000 income minus any itemized deductions.

If your PC was paid that same $500,000 (assume for the sake of this example that the benefits, professional expenses, and retirement costs are the cost neutral for both doctors), this doctor’s household income would arrive via:

  • 60% Salary: $300,000 as W-2 income

  • 40% Business Channels

    • Tax Advantaged Household Income/Expenses: $80,000

    • Tax Deferred Retirement Plan: $70,000

    • Business Distributions: $50,000

The W-2 tax burden for the physician as a professional micro-corporation will be significantly less than if they chose to be a traditional employee with only $300,000 being subjected to payroll taxes versus $500,000.

And in the end, the 4 channels of cash flow into dollars for the doctor as a professional micro-corporation will result in a 10-15% retention of the earnings in comparison to the traditional employee.

Summary

Determining your salary as a self-employed physician involves a thoughtful analysis of your financial health, personal needs, market conditions, long-term goals, and tax entity options. By considering these factors, seeking professional guidance, and continuously evaluating your financial situation, you can establish a fair and sustainable salary structure that aligns with your expertise and aspirations.

Consulting with professionals who specialize in physician finances can provide valuable insights and help you make informed decisions based on your specific circumstances. Ultimately, the choice between an S corp and a C corp should consider both tax implications and the long-term goals of your personal and professional life.

 

Employment Lite Is Better for Employers & Doctors

Employment Lite Is Better for Employers & Doctors

Jun 24, 2023

Employers Like Control

Physician employers don’t love you, they love you for what you can do for them. The age-old expression“It’s not personal, it’s just business” pretty much sums up how they will view you.

Thus they are initially going to roll out employment contract options that favor them keeping maximum control over your revenue-generating powers. That is a good business move on their part.

In the end, their business model for your professional services will be based on:

  • The revenue you generate for them

  • Your alignment with their business system

  • Your costs to them as professional labor

The more control they have over you, the more they can maximize their return on investment in you as a business asset.

Remember it’s not personal, it’s business—and in the end, you are simply a business asset to them—like a piece of machinery that churns out money.

You Should Control Your Professional Life

However, if you can embrace your employer’s mindset of “it’s not personal, it’s just business”—you can empower yourself to define the relationship as business to business right from the beginning. This framework is powerful because it serves to preserve a measure of your control over your professional autonomy that will prove important in the long run.

It all begins with your understanding that you are a business.

You a living, walking professional micro-business—as an individual physician you have earned this super-power.

What this means is that you have the power to engage in business contracts as either an individual or as a business. It’s your choice and not your employer’s.

So as a business person, you don’t have to accept their initial traditional contract that is generically a business-to-individual contract.

Instead, you can politely acknowledge that although you could engage with them in a business-to-individual contract (traditional employment), you would prefer to engage with them in a business-to-business contract.

By defining the relationship from the beginning as business to business you signal to them that you want to be seen as a short-term or long-term independent contractor. If your plan is to settle down, buy a house, and create roots in one place, which is pretty typical for most doctors, then you should look at being a long-term independent contractor with them.

You need to think of yourself as a professional micro-business engaging in long-term independent contracting work.

This mindset for you is critical for you to embrace in order for you to thrive in the evolving macro-economic world of healthcare.

Long Term Independent Contracting Is the New Normal

As the gig economy continues to grow, more and more professionals are opting for long-term independent contractor positions. This arrangement offers a level of flexibility that traditional employment cannot match and offers a great deal of flexibility and autonomy.

Long-term independent contractors are typically highly skilled professionals who have chosen this path as a career choice. They are not just freelancers looking for short-term projects, but rather individuals who want to build a long-lasting relationship with their client-employers.

For businesses that employ doctors, hiring long-term independent contractors can be an excellent way to access specialized expertise without the overhead costs associated with full-time employees. You can bring a wealth of experience and knowledge to the table, often at a lower cost than hiring someone in-house.

Overall, the rise of long-term independent contractor positions is changing the way we think about employment and work relationships. As technology continues to advance and location indendent work becomes more common, we can expect this trend to continue growing in popularity.

Business-to-Business Contracts

Now that you signal to your employer that you view yourself as a professional micro-corporation and want to engage with them as a long-term independent contractor, they will typically reluctantly close their contract file marked ‘traditional employee”.

Please note, at this juncture, they are likely to push back and try to persuade you that they only offer traditional employee contracts if you want to work for them long-term. Although this may be their preference, practically speaking it is typically not true.

So, if you confidently hold your ground, and competently communicate that you prefer to engage with them as a professional micro-corporation—they will—In turn, open up their hidden contract file that is preserved for business-to-business contracts with individuals. Generically these are called professional service agreements (PSAs). and they are mostly used for locums but also apply to long-term independent contractors.

Much like a traditional employment contract, they will choose the one that offers them the most control over your revenue-generating powers—and this is the employment lite agreement.

Employment Lite

An employment lite agreement is strikingly similar to a traditional employment agreement—primarily because it helps maintain an employer’s control over your professional services. Both types of agreements used to include non-compete clauses but with the recent FTC changes, these are becoming a thing of the past.

So, I suggest right from the beginning you ask for a PSA, aka employment lite agreement. For your reference here is what it looks like:

The only thing that keeps you from asking for an employment lite agreement is YOU. And if you are unprepared for the moment—you will be escorted unknowingly through the traditional employee door. To understand how to not miss this moment read my blog “Empower Yourself To Choose Your Worker Classification”

After the initial recruitment is over and mutual interest is confirmed, their first move is to consider you an individual tax-payer, like most doctors, and therefore they will pull the traditional employment contract out of their files. It’s what they want you to see, and it’s what they prefer you sign with. That is because this contract provides them with the maximum control over you. Employment by IRS & Department of Labor standards may as well be translated as Control.

Employment Lite Keeps Employers in Control

However, employment lite maintains the integrity of an employer’s trifold business model for you-including their control over:

  • The revenue you generate for them

  • Your alignment with their business system

  • Your costs to them as professional labor

In the end, employers get to keep their control of your professional services, and the associated business that is generated by your work, but as I will explain later, they can do it for less costs in an employment lite agreement, than with traditional employees.

A PSA is a business-to-business contract that allows you to fully align with the employer (thus they retain the business purposes of employing you)—but provides you with the freedom to engage in work outside of your primary job (professional autonomy).

The extreme control that employers place on you in traditional employment ultimately creates a burden and sense of entrapment for us as doctors—and thus sets in motion the cascade that leads to burnout.

Employment lite allows them to still have control, but it is far better for your general well-being and financial health.

PSAs ultimately are a solution to the burnout crisis created by traditional employment.

The Three Revenue Channels You Provide to Employers

As a reminder, there are three primary channels that employers make money from you:

All three of the channels function the same whether you are traditionally employed, or whether you are in an employment lite contract. In essence, both types of contracts are revenue equivalent for them. So from a business standpoint, which contract you want to choose has no consequences on how much revenue they will make from you. This is a huge point for both parties to understand.

Knowing that the revenue generated for the employer is equal in both contracts, the next consideration for both parties is to compare are the costs of each labor model.

Do PSAs Cost Employers More?

Employers often worry that a professional services agreement will lead to more expensive physician labor expenses for them in comparison to employment. This is because PSAs are part of what is called “contracted labor”—and contracted labor is usually more expensive.

Thus if you approach them about the employment lite option, they will typically say “no” due to cost concerns, as well as other alignment and control concerns.

This is critical for you to understand because you may have to take a few minutes to explain to them that you are talking about long-term contracted labor (employment lite) which is substantially different than their most common professional service agreement which is short-term contracted labor (locums)

Locums represent temporary physician labor and are a much higher cost to any large corporation due to the added expenses associated with its temporary state, and the 3rd party locum’s agency fees. Most hospital-physician employers are always trying to reduce and minimize their physician labor expenses in this “contracted labor” category. In fact, this is one of the top methods they will use to cut their physician labor costs.

Thus, their first instinct is to say “no” to any version of contracted labor.

But as I will explain later, employment lite is a type of contracted labor that will actually cost them LESS. You will have to remind them of this point.

Long Term vs Short Term Physician Labor

Although locums and “employment lite” technically both use professional service agreements, and both represent “contracted labor”, their functional role in providing professional services to a health system’s patients, as well as their costs are much different.

Because of their difference, I believe they shouldn’t be placed in the same “bucket” or line item on the corporate spreadsheet.

Locums is a short-term, or interim physician labor category. Much like “travel nurses” are a short-term or interim category for nursing labor. Both cost the corporation more money than traditional employees, and both are temporary stop-gaps that keep revenue flowing.

“Employment lite” is long-term contracted labor that is highly aligned much more like their employed peers within a health system. They are both long-term physician labor that provides professional services to a health system and thus provide more secure, predictable, and reliable revenue streams for a health system.

Re-Thinking Labels and Terms

In reality, “employment lite” should be considered a type of long-term physician labor expense similar to employed doctors, rather than equated to short-term “contracted labor” like locums. The term “contracted” is antiquated and progressive terms like “short-term labor” and “long-term labor” are more appropriate in the evolving world of physician labor.

Thus the two main types of long-term professional services provided by doctors to a health system’s patients should then be either traditional labor (employment: W-2) or contracted labor(non-employment: 1099). Both are acceptable, and both benefit the employer equally in terms of reliable revenue generation.

Labor Expenses

The system expense for fair market compensation for long-term physician labor professional services should be exactly the same for employees (W-2) and non-employees (1099).

The earnings for your professional services regardless of whether it is a salary, salary +, or productivity compensation formula should be same fair market valuation whether you receive it as an individual or whether you receive it as a micro-corporation.

Employers typically provide a benefits package and malpractice insurance to the employee and this has a definable value. As in independent contractor, you will be expected to source your own benefits and malpractice insurance. Contractors can be compensated an equitably valued dollar value for these expenses within their contract, and this is pretty simple pass-through math.

This means both employed and independent contractor doctors providing long-term professional services to a healthcare employer will cost the employer exactly the same amount of money for their labor expenses. They are apples to apples when it comes to compensation and employment expenses for their labor.

But hold on, there is a catch, and it involves taxes.

Payroll Taxes & Savings For Employers

Employers financially will come out ahead by choosing to use Independent Contractor based employment lite for their long-term professional services for doctors. That is because corporations don’t have to pay their half of the payroll taxes for contractors like they do their traditional employees. For expensive labor like doctors, this can save employers $10,000 or more annually per doctor (employers pay half of an employee’s payroll taxes if you didn’t know this). We are talking about large savings for a health system when this is multiplied out by the hundreds of employed doctors they may have. I hope those in the C-suite who might be reading this, have had their ears perk up after hearing this.

Keeping it real, those payroll taxes don’t just disappear if you receive your earnings as a 1099 contractor. Because now you will be fully responsible to pay for both the employer and employee halves of the payroll taxes ( you are now self-employed technically). Before you worry that a micro-corporation and employment lite structure will cost you more in taxes, let me inform you that it won’t. This is because there are unique tax options available to small businesses that you now be able to access via your micro-business. These options are not available to individual taxpayers.

In fact, this structure, when constructed and managed properly by agencies like SimpliMD, will lower your effective tax rate in half compared to the >25% effective tax rate that traditionally employed doctors experience. That is a lot of tax savings!

Cost Savings

When viewed from the traditional viewpoint of contracted labor being associated with locums, contracted physician labor truly does cost employers more money. Corporations justify this extra cost because it is better than their lost revenue from a physician vacancy.

Short Term Independent Contractors (locums) Prevent Revenue Losses

Physicians are a primary revenue-generating source for employers, and if vacant positions remain open for prolonged periods, healthcare organizations can take a big hit on their bottom lines due to the loss in revenue. Revenue is king in big business. Bringing in short-term contracted labor helps reduce the revenue losses until longer-term solutions can be resourced.

“More and more healthcare organizations are weighing the cost of bringing in locum tenens providers versus the cost of not having coverage and finding that locums make a lot of financial sense,” says Michael DePaolis, senior vice president for Weatherby Healthcare.

Simply put, short-term contracted physician labor to provide professional services to a system’s patients will help retain service levels and a reliable revenue stream. And this is why short-term contracted labor will continue to play an important role in filling physician labor gaps.

Long Term Independent Contractors (employment lite) Save On Labor Expenses

When contracted labor is innovatively re-thunk and re-organized into short-term contracted labor and long-term contracted labor, now corporations get the best of both worlds via the use of the employment lite model.

  • They maintain robust physician-based revenue with reliable long-term labor

  • But they reduce their labor expenses compared to both traditional employees and locums.

As you can see, long-term contracted labor is actually less expensive to the employer than traditional employees. This is further broken down in the following graphic.

When comparing traditional employment with an Employment Lite structure, large corporations should be very interested in this progressive view of labor expenses and the cost savings associated with long-term independent contractors like employment lite.

Alignment Is Important Too

But what they fear within employment lite is the loss of system alignment and the loss of control over the physician due to their independent contractor designation and the introduction of a doctor’s micro-corporation that can contract with other healthcare entities for their professional services.

Let me reassure you and them-this that long-term contracted labor is still very aligned long term with the large corporation much like any employed doctor. In essence, employment lite is a functionally a type of long-term physician labor for corporations very similar to employment. This graphic from the January 2023 edition of the MGMA magazine nicely affirms this truth.

Win-Win

In the end employment lite provides doctors with a win by preserving their professional autonomy, preventing burnout, and improving their financial well-being.

Employment lite provides employers with a win by giving them long-term physician labor that generates the same amount of revenue as traditional employees but does it at a less expensive price point.

Employment Lite truly is a win-win for both parties.

Exploring an Exciting New Employment Option for Doctors

Exploring an Exciting New Employment Option for Doctors

Jun 21, 2023

Exploring an Exciting New Employment Option for Doctors

I want to share with you this week the recent book review on my new book from my friend and fellow physician blogger Dr Jordan Frey.

He has a lot of great content and I encourage to check out his site and sign up for his blog posts on personal finances for doctors.

Check out his review!

by The Prudent Plastic Surgeon, Dr Jordan Frey

It’s rare that we discover something that can truly change the landscape of medicine. The idea of financial well-being and freedom is one such example in my experience. However, I recently came upon another. And this one takes the form of a truly new and exciting employment option for doctors.

The way that I came across this idea is via my interactions with Dr. Tod Stillson. He is a family practice doctor in Indiana…or as I like to call is, “God’s country.”

Anyway, I met Tod awhile back and he explained to me his thoughts on the employment landscape for physicians. He even went into the interesting way he has structured his contract. These general thoughts can be found here in this guest post from Tod.

I understood some of the advantages of this approach then. But it wasn’t until this past week, when I finished reading his new book, “Doctor Incorporated: Stop The Insanity of Traditional Employment and Preserve Your Professional Autonomy”, that I really recognized it for the paradigm shift that it is and can be.

So, I am really excited to share my thoughts of the book and more importantly the new employment options for doctors shared within!

Doctor Incorporated: Stop The Insanity of Traditional Employment and Preserve Your Professional Autonomy

The basic tenet of this very easy-to-read book (it took me about a week of leisurely reading to finish the book) is that the current evolving employment landscape is not working. So doctors need to evaluate and search for a new employment option. And in Dr. Stilson’s mind, a PC-employment lite is just the employment arrangement to revolutionize the landscape and rejuvenate physicians!

employment option doctors

Let’s dig a little deeper…

What is the problem?

Without giving it all away, the problem is that doctors are losing their autonomy and in the process their well-being. This leads to burnout (more on that here) which leads to worse patient care and a crisis in the healthcare system.

I mean, tell us something that we don’t know…

And while many solutions center on doctors themselves – things like resiliency training and the like – what is really needed is a systemic change and solution.

FIRE is one such solution. But, if someone doesn’t like their job, that still requires putting our nose to the grindstone while we are getting there in some cases.

So, Tod proposes another solution: a PC-employment lite arrangement.

What is PC-employment lite?

In very simple terms, this employment options for doctors involves an individual doctor forming a PC (Professional Corporation). Their employer then hires this PC – rather than the individual doctor themselves – using a traditional employment contract.

In this arrangement, money now flows from the employer to the PC and then to the doctor’s household rather than from the employer to the doctor directly.

This may seem like a semantic distinction, but it is not.

Employment carries benefits for doctors

There is a reason that >50% of doctors now choose traditional employment. Major benefits include:

  • Quick-start without taking on any additional financial risk 

  • Predictable paycheck at fair market value rates

  • Robust benefit package that saves you the time & effort of sourcing them yourself

  • Term limits in your contract that make it easier to change jobs. This is important since 50% of doctors leave their first job

  • Time away from work rather than using your non-clinical time to operate-manage your practice and its employees.

  • Great remedy for your business illiteracy 

However, there are disadvantages, the biggest of which are:

  • Loss of professional and personal autonomy

  • Loss of our “small business superpowers”

  • Lack of financially beneficial options as W2 employees

  • Limitations in scope of practice outside of our employer

PC-employment lite provides the best of both worlds

PC-employment lite is one of the best ways for both employers and doctors to win in business relationship that supports a doctor’s well being.

In this book, Tod argues that the formation of his own PC-employment lite agreement restored a significant amount of both his personal and professional autonomy. And all while maintaining his employment relationship with his hospital.

Further, now that the hospital was contracting with a PC rather than an employed doctor, compensation ceilings were higher allowing him to earn more.

Freedom

Tod also now had more freedom to explore other clinical and non-clinical physician side gigs like these!

Add on top of this that he now had available to him a variety of tax beneficial options for his income. This meant that he could actually keep more of his income for himself as well! That’s because, while there are things W2 physicians can do to lower their tax burden, more options are available for 1099 and self-employed physicians…

On the flip side, the hospital actually saved costs associated with maintaining this working relationship. And they still got to keep a productive doctor within their network.

That’s a win-win.

But will your employer really go for it?

In my mind, one of the best parts about this book is that it goes in depth into the potential barriers to implementation of a PC-employment lite arrangement.

And while our employer is usually the first one we think won’t go for it, the truth is that we first must convince ourselves. We are human and humans generally don’t like change. Even when the status quo isn’t working, we tend to stick with it. As Tod points out, this is the definition of insanity according to Einstein. But it is in our nature and nature is hard to break.

So, the book dedicates chapters to help us work on our mindset. But it also spends a great deal of time laying out the benefits of a PC-employment lite arrangement for employers. This along with other negotiating advice will help us go into negotiations confident and with good data to help improve out position.

Tod also helps lay out options if your employer does not go for the arrangement initially so that you can continue progressing towards this structure in the future.

And how do we form a PC?

There are nuances to this.

However, the book does go into the actual process of forming a PC. While this is not a recommend DIY process, it helps to understand it fully so that you can find the right help.

And, on that topic, a lot of people including myself may be worried about the challenges and complexity of managing a PC. Again, this can be a DIY endeavor. But a better plan is to work with a team that helps run your PC legal entity and maximizes its advantages for you. Any cost is well worth it.

My takeaways from the book

As I write this now, I am actually in the process of negotiating my second contract with my employer. So reading the book was very timely.

As a result of reading the book, I really do believe that a PC-employment light option for doctors presents a lot of advantages. And the biggest of these may be more personal and professional autonomy.

I plan to discuss this option with my employer and build a memorandum of understanding (MOA) into the contract to revisit this arrangement at my next negotiation. I even discussed this with Tod who recommended this approach since I am already near a completed contract that I like.

You can read more details about my contract negotiations here!

Take home message for you

PC-employment lite does represent a new and very exciting employment option for doctors.

The current job landscape for doctors is quickly becoming more treacherous. And employment does provide many advantages. But this comes at a great cost.

“Doctor Incorporated: Stop The Insanity of Traditional Employment and Preserve Your Professional Autonomy” by Dr. Tod Stillson provides an amazing blueprint to help all doctors reclaim their autonomy and small business powers, accelerating their path to financial freedom and being the best doctors they can be.

Because I truly believe that a world of financially free doctors would change healthcare for the better in unimaginable ways. In fact, here are 9 Powerful Ways Financially Free Doctors Can Improve Healthcare!

In the end, I highly recommend this book for all physicians, and it’s why it makes my list of 10 books that you must read.

Understanding Household Cash Flow for PC owners

Understanding Household Cash Flow for PC owners

Nov 18, 2022

I get it, receiving a large paycheck on a regular basis feels great!

Predictable Pay

One of the most appealing features for a doctor becoming a traditional W-2 employee of a large corporation is receiving a predictable paycheck that is regularly deposited into their bank account. By the time it gets there, it has been filtered and washed from all local, state, and federal taxes. This includes accounting for all the benefits that are paid for you (in reality you and your employer share these costs), and if you are wise, you have your payment system set to max out your tax-advantaged retirement funding through your 401(k), 403(b) and the like. After all this process is completed, the dollars that land in your bank is yours to spend, save, or give as you want.

The autonomy and pleasure of having a job associated with a high income are fantastic on many levels, and the simplicity of receiving such a large sum of money regularly without the hassles of running a business is a pretty good deal. I did this same W-2 employee process for years, and blindly enjoyed the ease of placing things on auto-pilot while watching to make sure the money made it to my account. I always said to myself, “I can’t believe I make this much money doing something I love”. Through large corporate employment, I enjoyed simply practicing medicine, getting fair market value compensation, and eliminating the hassles of managing a small medical business. This is what my paycheck looked like in 2012,

Take Home Pay Focus

Like most of you, my singular focal point was the bottom-line take-home pay. The rest of my paycheck was a lot of blah-blah-blah worthy of being ignored or glossed over at a minimum. I mean who really wants to observe the pain of how much you are paying in taxes with each pay period?

The Invisible Opportunity


Fast forward to the present day and quite honestly most of you never even see your paycheck. The digital age has ushered in the direct deposit into your bank account that basically bypasses a paycheck, pays stub, or any physical evidence of what happens between the dollars you earn, and the dollars that you actually receive. Therefore, many of you may be unaware of what this looks like, and probably don’t care much about all the filters demonstrated in this paycheck example. The dollar amount that you are paid is so high, that rest just “is what it is.”

But, you should really pay attention, because the average high-income W-2 employee is losing about 10-15% of their earned dollars in this W-2 bath. As I will explain, by starting your own micro-PC and then converting your traditional employment to a PC-employment lite structure, you will regain control of your hard-earned dollars. Then as the money is directed through your PC first, rather than to you individually, you have the power to manage those dollars as they traverse through the various filters of a paycheck. Here are where the opportunities to retain income are found in the paycheck of every traditionally employed doctor:

Each of these retained income opportunities is opened up by starting your own micro-PC and then converting to a PC-employment lite structure with your employer. This is the first and most important mind shift decision that every employed doctor must make. This doesn’t mean you are “going into private practice”, but what does mean is that you are covering yourself individually in a micro-PC wrapping and then continuing to work for your large corporate employer with the exact same compensation structure as you did as a traditional employee. You still have no responsibilities to manage the clinic, your clinical operations, etc… Honestly, pretty much everything remains the same, except you now are responsible to source and managing your benefit plans (which is better because you can individualize them) and now you can fully control the flow of your dollars earned. This all happens by adding “PC” to the end of your name. This leads to your compensation flowing to your micro-small business first rather than to you individually. From a tax standpoint, this puts you back in control of your earnings and makes a huge difference as I will explain below.

The Small Business Cash Flow To your Home

As a small business person, your household dollars will now flow to you in a different way than you are used to as a traditional W-2 employed physician.

You will still be paid a W-2 salary, but this time your own business will be paying you a “reasonable salary”. But unlike the traditional employee, as a micro-PC owner, you will have multiple cash flow channels into your home. Thus your self-employed W-2 salary from your own company will not need to be the equivalent of your salary as a traditional W-2 employee of a large corporation. In fact, as I will explain, less W-2 compensation is better in regard to your taxes.

In fact, by lowering your self-employed W-2 salary and following the S-corp safe harbor ratio of 60-40 you will be able to reduce the tax burden associated with your high income. 60-40 reflects S-corp owners receiving 60% of their income via salary, and 40% of it via corporate distributions. Let me take you on a short primer on how a PC-employment lite arrangement will lead to tax savings for you compared to receiving all of this income in one lump sum as traditional W-2 employed doctors do.

Taxes You Pay on S Corporation Salary and Payroll Earnings

S Corporations must have payroll and salaried employees. Even if you’re running the business by yourself or with a spouse, you will still need to run payroll and deal with payroll taxes.

You will pay several types of tax on any payroll amounts that you pay to employees or business owners:

    • Employer payroll tax of 7.65 percent on payroll amounts earned

    • Employee payroll tax of 7.65 percent on payroll amounts earned

    • Federal income tax on payroll amounts earned after a standard deduction

    • State income tax on payroll amounts earned after a state deduction

    • Unemployment taxes payable to the IRS (FUTA) and your state (SUTA)

Taxes You Pay on S Corporation Distributions

Money that you don’t take out of your business as payroll can later be taken out for you as a distribution.

When you make a distribution from an S Corporation, anyone receiving a distribution will pay taxes as follows:

    • Federal income tax on money distributed

    • State income tax on money distributed

The biggest difference, and the advantage of being taxed as an S Corporation, is that you won’t pay self-employment or payroll tax on the distributions. This saves you a total of 15.3 percent of what you pay out as a distribution versus receiving it as W-2 income as an owner.

Multiple HOusehold Dollar Sources

So on top of your PC’s self-employment salary to yourself, along with any salaried income that is associated with employed family members (there are many tax benefits to employing family members), your PC will provide dollars into your household via 4 other general sources:

    1. PC Distributions ( profits)-for tax purposes distributions are usually better than bonus compensation because bonuses must be run through payroll (taxes) and distributions are not taxable.

    1. Tax-advantaged household income as a dwelling unit reimbursement program.

    1. Reimbursement for business expenses that are shared within your household.

    1. Tax-deferred retirement plans like a solo 401 (K) or cash balance plan. These can be as much as 3x larger than ERISA-capped plans from large employers as traditional W-2 employees.

In this small business model, the total cash flow into your household will be much less predictable compared to a traditional W-2 employee. For some that make this arrangement a bit more challenging as you attempt to mirror your household expenses. That is because as a small business owner, the dollars arrive in your bank account in a more asynchronous pattern., which takes a little getting used to.

I would also add that the most significant tax-advantaged financial benefits for high-earning small business owners occur within your retirement account, These are dollars you won’t be spending now, so although end up in your household as a large amount of retained income, those dollars will not be available to pay for your current spending. However, when the cash flow in your micro-PC is constructed properly you will have the same amount of dollars in your bank account to spend as the traditionally employed doctor’s take-home pay. But the key difference from traditional employment is that you will pay far fewer taxes and have a significantly larger retirement account as a micro-PC owner. Both of these elements of paying fewer taxes and growing your retirement account will allow your high income earnings to be translated into the more rapid growth of your net worth.

Your self-employment (along with any employed family members) will result in a consistent paycheck (weekly, biweekly, or monthly whichever you prefer). You can even automate this as a direct deposit and enjoy the pleasure of seeing the money land in your bank account after the earned dollars have been rinsed off all of their federal, state, and local tax obligations. Whatever payroll system you set up will do this for you.

But the rest of the money in your small business’s bank account will flow through a series of reimbursements, invoices, and distributions that will also land in your household, but in a more tax-advantaged manner. The net effect is that you be able to retain 10-15% more of your earned income over a calendar year. However, this asynchronous cash flow will require you to more actively manage your household expenditures to match the irregular flow of dollars into your home.

Lowering your Tax bill

In this micro-PC model, your predictable salaried paycheck will likely be less than you are used to receiving as a traditionally employed W-2 physician. This is good because it is an important strategy associated with lowering the effective tax rate on the dollars that you earn.

In order to know how much your self-employment payroll needs to be set at, it is helpful to know your household expenditures for each month and even more ideally organize and follow an annual household budget. All of this will allow for a reverse engineering calculation by your accounting service to help you determine your minimum salary after they take into account the 4 other sources of dollars that will flow into your home. The accounting service assisting you with payroll will need to know the following information to determine this self-employment salary:

    • Determine how you want to manage charitable giving:

        • Do you want it to come out of your PC as a business expense?

        • Do you want it to come out of your personal funds which are less tax-advantaged at your high Income due to Alternative Minimum Tax (AMT) rules

    • Determine your savings rate that includes your retirement funds and your automated(hopefully) personal investment plan. I suggest that 20-30% of your gross income should be saved if you can afford it.

    • Determine what is your needed monthly income to meet your budget (aka spending plan) that includes the above elements. If this is new to you, I recommend either Mint or Every Dollar for doing this.

All of this will add up to determine the monthly W-2 compensation that is needed to meet your minimum needed monthly expenditures.

Predictable Household Dollars for the PC owner

From a predictability standpoint, each month you will receive dollars in your bank account from your small business from two sources:

    1. You and any family members on the payroll

    1. Your tax-advantaged household income such as a dwelling unit rental

Corporate distributions to owners are typically made annually, based on the financial performance of the small business. This number can be relatively predictable each year, based on the professional arrangements and contracts that you engage in through your micro-PC. But as previously stated, and I will restate due to its importance, an S corp distribution is note is not subject to Social Security or Medicare taxes. This means distribution will provide significant tax savings in comparison to receiving it in your household via payroll only (like a traditionally employed physician).

This is one of the many ways that S Corporations can be great way to reduce the amount of tax that you pay as a business owner.

In summary as a high-income earning physician, your earned dollars are easy targets for the IRS through your W-2 earnings, as I have written about in KevinMD. So although the predictable direct deposit in your bank account is nice, you are losing 10-15% of your earnings in this process. If you form a micro-PC and then use that in a PC-employment lite arrangement you can continue to work for a large employer but now you gain control over your earnings as a micro-PC business owner. This will give you control over the flow of your earned dollars and thus you can retain a significant amount of those earnings. In addition to reimbursements, tax-advantaged household income, and retirement funding–the largest amount of your household dollars will arrive from your micro-PC via a two tax-advantaged channels(the 60:40 S Corp safe harbor previously mentioned):

    • By paying yourself a “reasonable” W-2 salary

    • By taking money out as a distribution, based on your own in the company

It’s the difference between your salary amount and your distribution amount, which reduces the amount of tax that you will owe. The net effect of all of this is a lower effective tax rate for your household, fewer total tax dollars paid annually, and more money that is retained in your home. All of this adds up faster-growing net worth, and ultimately an early arrival at financial independence much faster than your traditionally employed physician peers.

Thus choosing to start your own micro-PC and then using it within a PC-employment lite structure is the smart move for any physician! And that is exactly what I have done.

Employed Physicians Can Upgrade Their Benefits with their Own Professional Corporation

Employed Physicians Can Upgrade Their Benefits with their Own Professional Corporation

Jul 25, 2022

Dr. Incorporated brings you this week's theme about "How Employed Physicians Can Upgrade Their Benefits". Standard physician employment...

A traditional physician employment contract is part of your conditioning during training.

Through medical school and residency, you align yourself with healthcare corporations (yes medical schools are a BIG business) and sign up for the associated corporate benefits packages. You end up trusting in their collective wisdom and the beneficence of the packages given to you and your peers.

This all sets in motion a mindset that continues when you graduate from a residency:

1. Align your Professional Life with a trusted healthcare corporation, and sign up to work for them under a fair market value arrangement.

2. Let that same trusted corporation resource your benefit plan as part of your compensation package and trust that it is built to maximally benefit your personal life.

This is the pattern that you are conditioned to follow in your training and is reinforced by the same employed medical educators that influence you. You are trained to do what they do professionally, and this includes their job choices. What they do is sign employment contracts with big business healthcare and blindly accept their benefits package. In this context, the blind then lead the blind (you).

There was a day and time when big company retirement pension plans and healthcare plans were truly a benefit. They were robust and excellent. I can recall my first hospital employee contract that included free medical care at that facility including labs, x-rays, ER, outpatient visits, etc. This was included in my benefits package and I paid nothing for it out of my paycheck. It was truly a benefit.

Those days are gone. A relic of the past. Now a good portion of costs for many benefit programs are shared by you and your employer, and it seems more and more of it is paid by the individual.

This includes pensions that used to be a bedrock benefit for employees. Now only 4% of private sector employers offer any kind of defined benefit plan, which is down from 60% in the early 1980s. Pensions have now transitioned to newer tax-advantaged retirement funds like 401(k)’s are offered as replacements and are filled more and more by the employee rather than the employer. At this time, only 50% of employers offer any sort of matching program for employees with 401(k) funds. You are paying for more and more of this yourself.

Most of you don’t realize that your benefits package offered by your employer, lacks any ability to be individualized. By definition, as a large corporation, the benefits they offer can’t be individualized due to federal laws like ERISA that sets boundaries in place for all corporate employees regarding retirement and health plans. While ERISA is important for equality purposes, the downstream effects on you as a high-income earner are significant, especially concerning your retirement plan.

Before I started my PC, I was pleased as a punch that I had maxed out my retirement benefits with my employer. I had no idea what I was shooting for, or if it would be “enough”. I was ignorant about what I would need and didn’t know how to calculate my net worth. But it just made sense to max out all of my corporate retirement options assuming this would all add up to be enough. But after I formed my PC and began to pay for all of my retirement plans, I realized how the caps placed on those prior employer accounts, due to ERISA, would have never gotten me to the totals needed to support my desired retirement lifestyle.

When you are a traditional employee you will be limited to the amount you can save in tax-advantaged contributions to your retirement accounts. The 2022 cap with ERISA is currently $61,000 (a combination of employer and individual contributions). 

Using some simple math if you maxed this out with every paycheck, the 30-year total (without growth or interest) is $1,830,000. Although that is a lot of money it will only get about halfway to the estimated needed nest egg for most physicians which is $3-5 million. 

When I was a traditional employee I used to naively believe that maxing out my retirement contributions would be enough. I think many of you assume the same thing as you trust in the wisdom of our federal government and your employer to organize this for you. I think this is especially common early in your career and is easily missed if you don’t monitor your net worth regularly. 

One of the greatest benefits to opening your PC is that both you and your spouse (if they are employed by you) now have the opportunity to set up an individual defined benefit plan (like a cash balance plan) that allows for tax-advantaged contributions well over $200,000 annually (amount is based upon actuarial tables). 

This is over 3x the amount in comparison to a traditional employee and easily provides the estimated $3-5 million that you will likely need for retirement. 

The amount that you can contribute will be proportional to the size of your 1099 income that flows into your Private Corporation.

Retirement shortfall is an emerging problem in the employed physician world where it is estimated that most employer programs will only meet 25% -50% of a physician’s retirement needs as noted above. But through my PC, I will easily hit the needed Net Worth mark needed a full 10 years ahead of schedule. Financial Independence in my 50’s feels good!

When you own your Professional Corporation (PC), you have regained total control over your benefits which can be individualized in a package for your benefit. Now that is novel, a benefits package that helps you reach your personal goals.

Physicians fear having to resource their benefit plans due to time and knowledge constraints. No worries, there are plenty of companies that help small businesses do this. Hire one. For example, SimpliMD is a comprehensive physician agency that helps doctors do this. This is easier than you think.

The fact is that as a traditional employee you pay a growing portion of your employer’s benefit plan and yet have little or no control over how it is organized to meet your needs. The result is that you pay for things you don’t need, you will come up short on your tax-advantaged retirement funds, and miss out on fringe benefits that you could use. Although your employer’s benefit plan is turnkey for traditional employees, and usually comprehensive, it has significant limitations because it cannot be individualized for you and your family. Those limitations may not seem all that significant on the surface but as we will unpack it does have important implications for you. 

When you transition to a PC-employment lite contract you will now gain full control over the sourcing and creation of a benefit plan that is designed to individually benefit you and your household. In contrast to large employers, small businesses can provide their owners a host of unique benefits that include automobile expenses, unrestricted continuing medical education, cell phone-digital services, business expenses, home office expenses, private school reimbursement, employment of spouse and children, health, life, disability insurance, as well as unique retirement plans that allow for larger contributions than traditional employment contracts. Each benefit can be crafted around the needs of you and your family. Therefore your business only pays for the benefits you need.

Ultimately the fringe benefit plan offered to you from your PC should be designed specifically to benefit you and your household, and in turn, they are underwritten by the tax-advantaged framework of your individual-PC business structure.

When you sign a traditional employment contract, you also lose control over your income flow and therefore give away a lot of your hard-earned income to taxes and benefit plans that are organized for the masses, not for you individually.

In this arrangement, you have lost another piece of autonomy in your life. Control over your benefits. By taking over control of your benefits through your PC, you have cut another tie with those who try to control you.

Traditional employment contracts result in giving away millions of dollars during your career, in part due to the restricted benefit programs offered.

The fact is that you are a business, and you subjugate your right to organize yourself as a PC by engaging in a traditional contract with your employer.

Physicians are afforded unique treatment in the US tax code as simultaneously being an individual and a business corporation through what is called a Professional Corporation (PC).

When you form your PC, you now have two entities to flow your hard-earned income through, and this leads to individualized benefits and increased tax strategies.

So how do you regain control over your benefits, and also lower your effective tax rate through your PC?

You organize an employment lite contract (PSA) between your current employer and your PC and in the process take over control of your benefits. In this arrangement:

1. Your PC pays you an IRS-compliant reasonable salary for your professional services that are contracted out to your large corporate employer in a PC-employment lite agreement. Through the power of individual small business ownership, you will be able to lower your effective tax rate on this salary.

2. Your PC will now pay for your fringe benefits and this can be highly individualized to meet your household needs. Most PCs are set up as S-corps and can be organized to provide your desired benefits. I suggest you work with an attorney experienced with setting up PCs for physicians to maximize all of your tax-advantaged benefits.

3. Maximizing your benefits through your PC will reduce your out-of-pocket expenses as the business expense will ultimately reduce your pass-through (if you are an S-corp) taxation on your income. This ultimately reduces your household expenses for benefits (remember traditional employees pay for more and more of their benefits themself) and does it in a tax-efficient manner.

4. You can dramatically increase your tax-advantaged retirement funding through a defined benefit program such as a cash balance plan. This grows your net worth in a much more tax-friendly fashion.

5. Your PC can be used to employ household members such as a spouse and children. This allows you to keep more of your business’s resources within your home and opens up some unique benefit plans like a solo 401(k) for your spouse, Roth IRAs for your children, and private school tuition reimbursement benefits, just to name a few.

6. Your PC can pay for your entire CME expenses that occur anywhere in the world, assuming the CME is legitimate. This is one of my favorite benefits and I particularly like using CME Away out of Canada because they have a “spouse travels for the free program”. My wife and I have gone on several of these trips and thoroughly enjoyed the high-quality CME, as well as the business-covered travel costs.

All of these individualized benefits are possible when your form your PC and wisely leverage your dual tax code status as an individual and a business.

Now that you are aware of what is possible, you can reap the benefits of being both an individual AND a corporation.

Employed physician, you are more than an individual taxpayer, you are a business, and you should have your corporation (PC) to maximize your benefit and tax strategies.

Dr. Inc.

7 Personal Finance Tips for Physicians for a looming recession

7 Personal Finance Tips for Physicians for a looming recession

Jul 20, 2022

7 Personal Finance Tips for Physicians for a looming recession - Dr. Incorporated

The economic aftermath of COVID-19 and the current zone of rampant inflation have exposed the progressive ownership of the business of medicine to big stakeholders such as the government, hospitals, insurance groups, private equity groups, and big pharma.

The large ramp-up of resources and personnel associated with COVID-19 burdened the healthcare system over the past few years, and the financial effects were dire, even with a government bailout. Due to this, many health systems have emerged from these difficult times with a weary workforce and the need to make financial cuts and budget changes. Those cuts eventually roll down to each of us in medicine, including doctors. If you are employed by a large corporation you are particularly familiar with the refrain of “no margin, no mission”.

On top of this, I don’t have to remind you of how the downturn in the stock market has affected your net worth and your overall financial health.

Ultimately each of these forces converges to affect your finances and possibly negatively affect your financial well-being.

Here Are Some Tips For Managing The Economic Downturn:

1. Diversify Your Income Streams

Every doctor should have multiple streams of income in their home as a strategy for wisely growing their net worth as well as recession-proofing their life.

Those income streams should include active, passive, and retained income

  • Your Primary Job and complimentary Side Hustles represent your active income and require your time and presence.
  • Real Estate and Stocks power your passive income channels and don’t typically require your time and presence.
  • Owning your PC and channeling your professional income through it will allow you to optimize your retained income. and doesn’t require any additional time or work.

By proactively managing your diverse income streams you will arrive at financial freedom faster

When you choose to work for one employer, you have boxed yourself in. When increasing your active income channels through side jobs, and also adding in passive income, you significantly increase the number of sources for income to arrive in your home. These sources of income can help your home weather economic downturns.

2. Start A Business-And Start With Your Own PC

Small businesses create income and tax-advantaged channels that help your household finances in many ways.

The most important business that you could start is your professional corporation (PC).

The road to earning the right to form your medical professional corporation is both costly and difficult. It turns out that this small business power is one of the most valuable assets associated with acquiring your medical license, board certification, and professional skills. It unlocks multiple channels to efficiently add income to your household.

Both medical contractors & traditional employees are proxying their small business powers to their employer in exchange for a predictable paycheck. This leads one to forgo forming a PC due to your belief that PCs are associated only with a private practice and have little utility for the modern doctor whether you receive your income as a W-2 or 1099 sole proprietor.

It turns out this is a myth, both about your primary professional services as well as your side jobs. Starting a PC at the beginning of your professional life is one of the most important steps you could ever make to secure your control over your professional life.

It is unwise to work hard to earn an asset that you so easily give up as you enter the healthcare workforce.

PCs can be tightly associated with private practice and independent medical care.

Instead, what I am talking about is a modern version that is more of a virtual corporation that houses your intangible and tangible professional assets and in particular allows you to parse out your professional services, knowledge, and expertise in an increasingly diverse healthcare economy. This is now a global economy that is not constrained by local physicality but can now connect you to people and organizations who value your knowledge anywhere in the world. In many regards, traditional boundaries are being broken down.

In this context, your PC is not a brick-and-mortar business (private practice) but rather a virtual container for your professional life. Your PC or Private Corporation is uniquely yours and is unlike any other in the world due to your personal and professional skills and interests.

This uniqueness is in contrast to the commoditized view that employers often have of you. They see you as an interchangeable asset that they own. The truth is that your professional services can be parsed out to them, but it doesn’t have to be an all-or-nothing business relationship.

3. Purge Non-Necessary spending

Understandably in a doctor’s home, there can be some debate about what spending is necessary or not. Your spouse and children could view this differently than you. The point is that our high income can create unaccountable financial liberties for our dependents. You earn, they spend.

Now may be a good time to take a deeper look at your monthly expenditures in several categories, and then have a family meeting to discuss what is essential and what is not.

Here are some suggested household spending areas to evaluate:
  • Outsourced Services: Nanny, Housekeeping, Lawn Maintenance, Food services, Laundry, Dry Cleaning, Transportation
  • Education: Private school fees, school related technology, educational experiences-trips, College-Graduate tuition, housing & food, 529 plans
  • Health and Wellness: Virtual or Club based workout memberships-subscriptions, personal trainers, mental health counseling, food-meal subscription services, Country Club membership.
  • Technology: Any subscription service that is no longer essential whether it be phone, computer, or television based. Do you need streamed television in addition to Netflex, Hulu, Disney Plus, X-Box, and Amazon prime or could you consolidate a few of these for a period of time?
  • Food: How many days do you need to “eat out-take out” for breakfast, lunch, or supper? Do you need the meal subscription service, or need a personal chef? 
  • Travel: For this has naturally gone down due to the pandemic. But take a look at reducing or downsizing your travel schedule in the next 12-18 months as cost saving measure.
  • Big Luxury Items: Don’t buy on impulse, ever, but especially now. If you have been waiting to buy a boat, special vehicle, or vacation property, wait til your income returns to its normal state for at least 3-6 months before moving forward on these items. And while you tap the brakes, remember, the best plan to buy large items is with cash, rather than financing them.
  • Charitable Giving: You can suspend or reduce this for a period of time if cash flow is down, and then catch it up later in the year.

 

4. Save Your Money:

Now that you have begun looking at your monthly spending and income, try to save 10% as a starter, on top of your fully funded retirement plans. To do this, you must take it out of your checking account FIRST, or it will be spent on something else. Overall choose to curtail spending and increase saving.

This will move your closer to financial independence, which should be an attainable goal in your 50s, or earlier, depending on how determined you are. Saving money leads to increasing net worth, and net worth is the financial end game that creates freedom for high-income earners.

Financial freedom creates opportunities in both down markets and up markets. A fellow blogger, The Physician Philosopher, re-frames savings into a Wealth Accumulation Rate (WAR) which is inclusive of more than our savings.  He recommends 30% for our WAR.

5. Use Your Own Money

Rather than borrowing money from a bank, or using credit cards, look at your assets to see if you can free up cash for your needs. Hopefully, you put aside some money in an Emergency Fund that was meant exactly for this 3-6 month window. You can access your retirement and investment accounts before age 59.5 with some penalties, and you can now use more of your 401k or defined contribution plan for a Loan.

You can consider grabbing some equity from a refinanced house mortgage. You might even have an asset that you want to liquidate for the needed cash, but be careful, it’s truly a buyer’s market right now. Whatever you do, don’t stop funding your personal or corporate retirement plans and HSA.

6. Don’t Gamble In the Stock Market

Bear markets are unnerving no doubt about it. But in a market like this, your best option is to not try to outsmart the market, but rather it is to ride it out. You can do this by staying the course with your investment plan.

Much like a diet, the exact stock portfolio is less important, simply choosing one and sticking with it is the most important step.

You can write your investment policy statement, but here is a suggested portfolio if you are looking to start somewhere:

45% Vanguard Institutional Index Fund

20% Vanguard Mid Cap Index Fund

20% Vanguard Small Cap Index Fund

15% International Stocks

The best way to do this is to automate it monthly and don’t look back or micro-manage it.

I suggest integrating your stock funds into your net worth calculator and enjoying watching it grow over time.

7. Review Your Life Insurance and Estate Plan

Take a few minutes to find your will, life insurance, and estate plan, and then talk through this with your spouse. These financial structures are in place to safeguard your family from disaster, accidents, and significant life changes. They are critical to have in place for each of you. Your disability insurance plan should also be looked at for the same reason, it protects your family due to unforeseen downturns associated with your health.

Certainly don’t panic and try to make up for any losses

Look Back

Finally, as we have come through these last few years, make sure you take a look back. Much like a classic Morbidity and Mortality conference, we must use this unusual period as a learning lab.

Now is the time to, re-evaluate your current contract, and diversify your income source with a mix of active income (primary and side hustles) and passive income.

Ask yourself, how did it feel to be fully controlled by “the man” as a cog in their wheel during a pandemic, and now you are feeling more burned out than ever? Would you prefer more professional freedom? Check out a PC-PSA option, and keep pursuing well-being, balance, and personal and professional freedom.

Dr. Inc. is a practicing family physician, author, blogger, and podcaster. He is not a lawyer, accountant, or financial planner.

This is not personalized financial advice for you and is meant for your general education and entertainment purposes.

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7 Personal Finance Tips for Physicians for a looming recession - Dr. Incorporated

Dr. Inc.