My last blog post reviewed the new space of doctors as 1099 employees.
This week I want to explore how this space sets the table for you to use this non-employee compensation to reduce your tax burden.
The Best Choice For Lowering Your Taxes
The key step to maximizing your tax-lowering strategies is to start a small business and connect it to your 1099 income.
Today more than ever, you need to have options that help reduce your taxes due to the large amount that you pay annually in connection to your high income with the average doctor paying over $75,000 annually. On top of this, president Biden has individual taxpayers who make more than $400,000 a target for raising taxes.
Doctors as a whole are in the upper 10% of taxpayers in our great nation, and you are annually reminded of this burden during this time of the year
Filing your taxes inevitably brings up the question of how you can lower your tax burden.
So, before I dive into the tax considerations for 1099 workers, let’s review the options available to W-2 employees to lower their taxes. Each of these strategies will still apply to you as well.
High-Income W-2 Tax Lowering Strategies:
If you earn income as a traditional W-2 employee like the majority of doctors, you can reduce your taxes with some of the following itemized deductions and credits, assuming you don’t just choose standard deductions.
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Tax Deductions
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Tax-Advantaged Retirement Accounts
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529 Plan for child’s education
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Health Savings Account
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Charitable Giving
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Mortgage Interest* *Mortgage interest deduction limit is $750,000 mortgage
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Tax Loss Harvesting
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Tax Credits
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Child tax credit* *phased out for joint filing with >$400,000 in income
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Child and Dependent Care credit* *% based on adjusted gross income
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State and Local Tax Deduction (SALT)
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Solar tax credit for residential clean energy
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Electric vehicle tax credit
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For high-income earners like yourself, many of these deductions are phased out or are reduced in value as your adjusted gross income rises. This makes the number of tax moves available to you very small and has given way to other innovative options like real estate professional status, short-term rental tax loopholes, and land conservation easement just to name a few.
Your Best Tax Decision
But the best tax decision that a high-income W-2 employee can make is to start their own business because the non-employee income opens up so many additional tax strategies that are only available to small businesses.
So if you are currently a 1099 employee, or plan to be then I invite you to follow along closely.
Start Your Own Business and Lower Your Taxes More
Small business owners have significantly more options to reduce their tax burden than individuals.
The tax code is written to benefit doctors who own their businesses. For example, self-employed physicians receive a virtually unlimited tax deduction for business-driven expenses like travel, lodging, airfare, computers and mobile phones, office equipment, office supplies, medical equipment, board exam fees, licensing fees, continuing medical education expenses, and membership dues
The beauty is that you don’t have to go into private practice to do this.
Starting a single-member professional micro-corporation that acts like an invisible corporate shield around is the right and power of every physician.
I believe every doctor should activate this innate asset.
This is my foundational inspirational message to all of you through Doctor Incorporated.
You are a business
Every doctor is an individual corporation, and the tax code supports this through the entity known as a professional corporation (PC).
Professional corporations are a form of business that is limited to certain professions, such as accountants, lawyers, and medical practitioners. This type of business entity provides a number of advantages to its owners, including limited liability protection and tax benefits. In order to form a professional corporation, the members must meet certain requirements set by their state. These requirements vary depending on the profession but typically include having a specific type of license or certification in order to practice in that profession.
Professional corporations also offer tax benefits to their owners. They allow them to pay taxes at the corporate level rather than at the individual level, which can result in significant tax savings over time. Furthermore, forming a professional corporation allows its owners to share profits with shareholders.
You Are Special
You are part of a special club of professionals who can do this. It’s just a matter of whether YOU choose to incorporate yourself or not. You possess the sole power to make that decision.
This business power used to be synonymous with going into private practice. But now that traditional employment has become the dominant physician job model, and private practices are disappearing—many of you have forgotten about this special power that you possess. In essence it has become hidden from your view.
You Don’t Know What You Don’t Know
It’s one thing to know you have the power and choose to keep it dormant. But more alarming to me is that the latest wave of young doctors are unaware that they possess this power to incorporate all together.
It’s not just hidden, it’s been abandoned.
I am here to tell you that you do have this power.
Not only do you possess this small business power, but can and should unlock it to help you live your best professional life.
Starting your professional micro-corporation places your professional assets/professional services in a virtual container that can be parsed out to almost any job structure you can imagine in medicine.
This includes traditional employment through an employment lite contract which will rapidly scale up your tax strategies as all of your income flows through your small business.
It similarly can also include employment/partnership in medical group private practice where your micro-corporation becomes the entity that owns the shares of the group corporation. Again, this gives you more control of the cash flow into your home and allows you to reduce your tax burdens individually.
You may be very happy in your employed W-2 doctor job. In that case, you can start a small business for your side work. This will provide you with additional tax strategies in your financial portfolio.
Two Benefits of Incorporation
Incorporating yourself leads to two primary benefits: Preserving your professional autonomy, and small business tax advantages. Both are fundamental to helping you thrive as a doctor due to their positive effect on your well-being and financial health.
The downstream effect of tax savings is more retained income for your household with the end result being that it feels like you got a 10-15% raise without doing more work.
Micro-Businesses Add Tax Options
When you start a business, a whole new world opens up for you tax-wise that is not available to you as a W-2 employee!
Now you can deduct:
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A home office
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Car mileage
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Renting your home out to your business via the ”Augusta rule”
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Business expenses like medical equipment, board fees, licensing fees, membership fees, computers, cell phones, etc..
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Business trips
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Meals
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Life insurance, Disability Insurance, & Health Insurance fringe benefit programs
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CME that has no caps for location or dollar amount—for instance, I will be doing CME on an Iceland Cruise and Kenyan Safari this year.
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Defined Benefit retirement plans like a cash balance plan
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Automobile leasing
And this is just the tip of the iceberg!
In order to tap into this special pool of tax deductions not available to employees, you must begin earning what is called non-employee income— which for physicians is classic as a self-employed business owner.
Non-employee– what does that mean?
Non-employees are individuals who provide services to organizations but are not considered employees. These individuals can be categorized into three main types:
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independent contractors
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freelancers
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consultants
Independent contractors are self-employed professionals who provide services on a contractual basis, while freelancers provide services on a project-by-project basis. Consultants, on the other hand, offer their expertise in a specific area of business or industry. Each type of non-employee has its own unique set of advantages and disadvantages.
Most of you will act as independent contractors through the use of your professional service skills.
Non-employee Compensation
Non-employee compensation is a less familiar form of compensation for doctors who are primarily used to W-2 income. 1099 employment is a type of professional service earnings for you that will be framed as self-employment and is considered 1099 income.
Technically 1099 income and non-employee compensation are two different types of income that can be earned by individuals. 1099 income for you as a doctor will primarily be earned from self-employment activities through services as an independent contractor. Non-employee compensation is any type of payment made to an individual for services rendered that does not involve the employer/employee relationship. It includes payments for royalties, rent, prizes and awards, and other similar payments. Both forms of income are subject to taxes but have different reporting requirements.
For our purposes, I am talking about the 1099 non-employee compensation earned for your professional services as an independent contractor.
The simple and easy way to describe this type of professional income that you earn by receiving payments from any healthcare entity that you don’t own is to call yourself a 1099 employee.
As I will explain in greater detail in my next blog post, 1099 employees have far more, and far better tax-saving options than traditional employees. Those options are further multiplied if you connect it to a professional micro-corporation.
So tune in next week, and we’ll get into the weeds about tax entities, and business options and break down which is best for you.
