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Let me start this post by bluntly saying if you are receiving your side job dollars as W-2 income, you are losing an increasing proportion of those dollars to taxes, and you are making a mistake.
This is a common mistake for a lot of you.
Retained earnings is a whole income category that is often hidden from industrious and hard-working doctors like yourself because you are conditioned to believe you can only add money to your household by doing more work.
In order to explain why W-2 workers are the biggest loser when it comes to side job income, I am going to use a social story. It will include a graphic depicting & contrasting 4 different doctors who are working within a corporate flywheel that generates income for them. I chose the corporate flywheel because it is the most common way that both W-2 and 1099 doctors will earn income—through their work for large corporations that control healthcare.
To start with, let’s look at the 4 types of doctors that will show up in the illustration.
Majority = W-2 Primary Job + No Side Job
The first doctor represents the majority of you, a traditionally employed doctor who doesn’t work a side job. This space represents roughly 60% of you. Because it does represent the majority I believe it’s important to place it in the comparison grid as the baseline standard, even though it technically doesn’t fit into our side job conversation.
Minority = 40% of Doctors Who Have Side Jobs
The other 3 doctor types comprise the 40% of you who work professional side jobs, of all types.
The combinations found within this 40% group are:
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W-2 Primary Job + W-2 Side Job
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W-2 Primary Job + 1099 Side Job
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1099 Primary Job + 1099 Side Job
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1099 Primary Job + W-2 Side Job
The latter group is so uncommon that I will not include it in our consideration.
The additional layer that we have to bring into the conversation is where the side job is located in reference to your primary work.
I think this is a very important topic and one that I rarely see discussed within the subject of physician side jobs. That is because the most common side job that employed doctors are likely to take is with their current employer. It’s often not labeled as a side job because it is funneled through as W-2 income. Therefore is not visibly distinct for tax purposes, but we all know it is “extra work” that provides additional income for you through your employer—thus eating the definition of “side work”.
With this in mind, I personally like to organize side jobs into two basic buckets:
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Side Jobs Through Your Primary Employer
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Side Jobs Outside of Your Primary Employer
Now let’s take a look at how all of this shakes out.
Side Jobs Through Your Primary Employer’s Enterprise
Side work within a primary employer’s enterprise is not uncommon because they create compensation channels for you that are additive to your primary job. From an employer’s perspective, you are a cheaper source of work than having to hire an independent contractor, therefore they prefer you to do the work. From an employee’s perspective, the convenience and ease of adding in extra compensation within a work structure and system that you are familiar with make it low-hanging fruit, and this includes built-in malpractice coverage for clinical services. When you throw in the added convenience of the compensation simply being added to your existing paycheck matrix, it’s the real winner.
The list of possibilities here includes:
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GME work
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Call coverage
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Mid-level oversight
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Medical Directorships
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Corporate Governance and Leadership roles
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Research
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Extra shifts
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Others
Technically the dollars earned in these roles come from the same corporate conglomerate and thus can be funneled into your W-2 compensation. However, in my experience, the actual payment is generated from a profit/loss center within the corporate enterprise that is separate from your primary job.
W-2 Primary Job + W-2 Side Job
This is the most common combination of primary job + side job duet—whereby you receive all of the income as W-2 income.
Although these side jobs can be interconnected to your primary job, they are separate and considered more temporary jobs, often being labeled as addendums to your primary contract. These jobs can be stopped or started based without jeopardizing your primary job in most cases.
As I will explain later, you should consider receiving this side income from your primary employer as a 1099 independent contractor rather than through your W-2 work. You can save money in taxes and you can retain more of what you earn as a 1099 worker.
You have been prepared for this moment, and request the 1099 designation from your employer. That is because their default mode will be to shove it through your W-2 paycheck—they keep more control over you this way, and it’s simpler for their accounting department.
If they agree to pay you via 1099, then you have to be prepared to complete a W-9 form which will likely indicate that you are either a sole proprietor or a professional micro-corporation. The W-9 form simply verifies that the income is being generated in a business-to-business relationship through your small business structure. Your employer’s enterprises should be willing to classify you as an independent contractor since the side work is technically non-permanent work and the funds often come from a different location in the enterprise than your primary employment. Here is what the W-9 form will look like, and it’s exactly the same form you will use with the next bucket of side jobs-those unrelated to your primary employer.
1099 Primary Job + 1099 Side Job
This is a less common combination as approximately 10% of doctors will stack these two together.
The 1099 employment lite + 1099 side income duet is my personal favorite combination within the side job space. That is what I do and love it. In the end, it maximizes both my tax savings as well as helps me retain $70,000 in income per year.
In my case, my employer-based side jobs include call coverage and pediatric hospitalist payments from my acute care hospital, and these dollars come from a different source than the payments that I receive from the physician network for my employment lite-based wRVU compensation. Both the hospital and the physician network are owned by the same enterprise, but they are separate corporations in the enterprise. Thus they generate separate channels of 1099 income for my corporation—that are deposited into my bank as separate deposits. Because they are all tied to my same TIN/EIN, my end-of-the-year 1099 form from the hospital has them all added together.
Side Jobs Unrelated To Your Primary Employer
A news flash for you, nearly all side job income unrelated to your primary employer will be designated as 1099 income. If you are currently doing side jobs outside of your primary employer, you know this.
In my case, all of my work is organized as independent contracting jobs, thus the work I do outside of my employer as a nursing home director is also received as 1099 income.
W-2 primary job + 1099 side job duet
The second most common income combination is the W-2 primary job + 1099 side job duet.
Side jobs are an increasingly common occurrence for our tribe, thus having some side income separate and unrelated to your primary job is not unusual. In fact, it is so normal that this subject is important for every doctor to grasp whether you are W-2 employed or not. I like my friend Dr. Jordan Frey’s list of common medical and non-medical side jobs for doctors if you need a little inspiration here.
In fact, Gen Z and Millenials continue to redefine and refine the combination of income sources that doctors receive while simultaneously the options for part-time and side job work grows within the physician labor market.
As this graphic illustrates, combinations of jobs are increasingly common for the younger generation of doctors.
4 Types of Doctors
Now let’s take all this information and return to our social story.
To start with it’s important to note that the graphic below demonstrates how the corporatization of medicine has brainwashed many of us into thinking of ourselves as laborers on a corporate flywheel.
Simplistically medicine has devolved to the point that we accept the fact that we are simply cogs in their corporate wheel and we contently accept this in exchange for a predictable fair market value paycheck.
So let’s take a look at the 4 different types of doctors who interface with side jobs and include rows that reflect their workload, household income, taxes, time, and energy for comparison’s sake.
W-2 Workers
By viewing ourselves as impersonal bots in a corporate flywheel we can psychologically compartmentalize this by justifying the loss of professional control as an employee as an exchange for having control over the workload and earnings created by our time within the wheel. In turn, those dollars earned are translated to a lifestyle that you fully control and are outside of the reach of your employer. In this mode, work is a transactional event that supports your end goal of a preferred lifestyle outside of medicine. Older doctors will tend to shake their heads at this, while younger doctors will tend to nod their heads in support.
Within this framework, the faster we go, the harder we push, or the more time we spend in the corporate wheel- it all gets translated into more dollars earned. We alone get to determine this—kinda. Over time, every employer will push you to perform at the 50% MGMA productivity level and snidely label you as a low performer, mid-performer, or high performer based on where you fall.
Even so, when you step into the flywheel, you indeed do have some autonomy to determine how fast and long the wheel goes—which translates into your compensation. The workload is mostly defined by your contractual terms but is also influenced by your staff support and the EHR clicks required of you. These latter two elements affect the efficiency of your flywheel.
When you take on side jobs for your employer, it increases your time or speed within the flywheel.
I would also add that it intensifies your interdependence on them and thereby their control over you.
Our productivity and bonus-incentivized employment contacts condition us to simply accept that this flywheel mechanism is the new way that money will end up in our household as a medical professional—essentially by spending time in your employer’s flywheel. They own the flywheel, and the more time or effort we put into the flywheel machine, the more money we’ll get.
W-2 Doctors Are Like Factor Workers
I come from a family of factory workers, and have worked in many factories myself over the years—this is the same paradigm used on the assembly line. The more widgets you can push through the assembly line during your shift, the more money you will make. Corporations have incentivized workers with productivity bonuses since Henry Ford brought the idea of auto-making over a hundred years ago.
The sad truth is that our tribe of highly educated professionals has allowed ourselves to be reduced to factory workers for large healthcare corporations. The only difference is that we are a factory machine within the assembly line, and the workload of that machine is partially controlled by us.
But the mindset that working longer or harder will place more dollars in your home completely ignores the small business superpowers that you have earned during your training. Those powers help you break away from the factory worker productivity paradigm.
The truth is that you are an individual professional micro-business and not just corporate machinery.
You have complete autonomy and power to activate this power at any point no matter what kind of job you have, including employment.
Your long medical training followed by corporate employment has brainwashed you into believing you no longer have this micro-business power.
It’s time to awaken the powers that lie dormant within you.
W-2 Primary Job + W-2 Side Job Ignoring Your Small Business Power
You will note that the first two slots of our social story diagram follow the pervasive brainwashed mindset of our tribe. The first mindset is that employment is your best option, and the second mindset is that the best way to earn more money is to work harder for your employer. But what you fail to recognize is that those dollars will arrive to you in a progressively less efficient manner due to the enlarging tax drag, and simultaneously will require more of your time and energy. In the end, your extra W-2 side work does add dollars to your household—but it comes with an increasingly burdensome cost including a tax inefficiency.
This is baked into our tax code—the rich will pay a greater proportion of taxes than the unrich. Doctor, you are considered rich by our government, and this is particularly true if you earn more the $400,000— as the Biden administration has declared you as a tax target. Let me warn you, if your earnings arrive as W-2 income, you have no chance to out-maneuver that target. I call you a sitting duck, and you are reminded of this every year about this time.
The default mode for most of you is to work harder by taking on side jobs, or even working more at your primary job. What most employed physicians fail to recognize is that their flywheel is rigged to increase its resistance(taxes) the faster or longer you are in the wheel. Thus it gets harder and harder to reach your visualized compensation goal the more you work at their wheel. You can still reach the goal by doing more work, but it comes at a greater cost to you—from time to energy, to taxes.
It should beg the question “Is there a better way?”
Doctors Need To Awaken Their Small Business Superpower
Every doctor needs to be awakened to the power they have earned during their long-hard-and costly medical training.
That power is your ability to incorporate yourself as an individual professional micro-corporation.
I am NOT talking about a private practice corporation, rather I am talking about a virtual corporation that totally individualized to be worn by you alone like a virtual, but invisible shield over you individually.
To most outsiders, it’s invisible. But to the government and business world, it’s like a geo-fence that communicates to others that you are both business and an individual. Depending on the situation you can lead with your business identity, or lead with your individual identity. In other words, you can choose to be a W-2 worker, or you can choose to be a 1099 worker.
You are among a special group of service professionals that the government allows for this dual identity that is associated with professional corporations.
Work Smarter, Not Harder
What many of you don’t realize is that this power provides you access to a small business space that can provide amazing benefits to you. Individual W-2 workers cannot access this space-it is locked off from them.
But the professional autonomy, tax, cash flow, and business expense tools in this small business space can significantly make your life better, and in the end, allow you to keep more of what you earn.
The small business tools actually confound the logic of the W-2 worker which is “Worker harder, make more money, and pay more taxes”
The small business mindset allows you to work smarter, use less time and energy, pay fewer taxes, and keep more of what you earn.
Those doctors are the latter two slots in our social story graphic.
In order to maximize the positive effect of the dollars earned in the flywheel, your first step is to stop earning them as W-2 income. The easiest place to do this is with your side income.
W-2 Primary Job + 1099 Side Job
Now you must remember that you are a business and start receiving your earnings as a 1099 worker. This will place you back in control of the flow of the dollars that you earn, and through wise small business structuring you will be able to retain more of what you earn, all while paying fewer taxes.
When you combine the power of these two thoughts and form your professional micro-business, then you place yourself in the position to hold onto more of the dollars associated with your hard work.
At this point, I recommend you read my 5-minute blog from last week about taxes and time—as it will set the table for understanding the graphics that will follow.
You Are A Business
In order to maximize your 1099 income you have to view yourself as a business, albeit a single-member version, but you still have to embrace your small business powers. This can either be a simple sole proprietor or a professional micro-corporation. I favor the latter but will unpack the nuances of that in my next blog post.
This is one of the most important messages I have for you with this blog: You Are A Business
The following concepts apply across the board for both the W-2 primary job + 1099 side job and the 1099 primary job + 1099 side job spaces because both of these types of doctors have chosen to tap into their small business powers.
Deductible Business Expenses
So now that you begin to visualize yourself as a small business, let’s make sure you understand the value and importance of deductible business expenses. W-2 workers are sealed off from access to most of these. But small businesses organized as sole proprietors and professional micro-corporations gain access to them—and they are the secret to lowering your taxes.
Sole Proprietors
Sole proprietors will get access to the following list of deductions which they can claim on their IRS Schedule C form.
Micro-Corporations Have More Business Deduction Options
Professional micro-corporations taxed as S-Corps get access to these same deductions as the sole proprietor.
However, they have additional deductions that are available to them that are not available to the sole proprietor, as noted in the graphic below.
Make sure to speak to your legal or tax professional about how to incorporate these into your micro-corporations. I suggest you work with an agency like SimpliMD which only works with doctors for this. Their experience will help you create an individualized business structure filled with fringe benefits that truly help your household. Don’t miss out on this!
Here is a list of some of the S-corp deductions available to doctors:
Wouldn’t you like to access some of these business deductions that can be flowed through your professional micro-corporations to help lower your taxes? It’s the ultimate win-win. You get the benefits and it simultaneously lowers your taxes. Wow!
I love having access to these fringe benefits through my Professional Corporation (PC) that have allowed me to purchase a company-owned Land Rover recently (section 179 deduction with bonus depreciation), and schedule CME on an African Safari and a two-week New Zealand cruise in the next 12 months. All of which are detected business expenses for my micro-corporation.
W-2 workers can get some benefits like malpractice coverage, retirement plans that won’t support their retirement lifestyle, and cookie-cutter insurance plans offered by their employer. But they can’t access the deductions available to sole proprietors and professional micro-businesses.
Business Tools Beyond Expenses
But even beyond business expense deductions, activating your small business power provides you access to other cash flow tools that are not available to W-2 workers.
For example, businesses can also set up retirement plans for themselves and their employees as well as can make use of different legal structures for their business operations. All of these tools give micro-corporations an advantage when it comes to taxes. Taxes ultimately can be greatly reduced by taking advantage of the numerous expense deductions that micro-corporations have access to.
On top of the business deduction advantages that a professional micro-corporation has over sole proprietors, they generally have far more tools in their box for tax savings, getting dollars into their household, and robust retirement plans.
FREE Business Coaching Session
I am so passionate about helping doctors maximize their side income, I’ll provide you with a free business coaching session worth $500 to review your situation.
I urge you to take the next step by signing up for this 45-minute of free business coaching. You can set it up at the following link.https://calendly.com/drinc/45min.
In the meantime tune in next week where I will take a deeper dive into comparing 3 doctors who have all earned $40,000 in side income. It will provide you with additional information about how you should manage your side job income.
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