There are multiple myths about Employed Physicians:
- Employed physicians do not benefit from forming their own company (PC)
- Physicians choose to be either employed, or go into private practice, and only the latter need their own company.
- Starting your own medical practice business (PC) means you can’t be employed by a hospital-healthcare organization.
The majority of physicians have employment contracts that are organized like the diagram below. In this arrangement, there is no need for your own company, and your employer generates a W-2 tax statement for you. This is the dominant model and employers rarely offer an alternative to the standard contract. They have little incentive to do so.
Most physicians are unaware that they can form an “Employment Lite” contract with their employer through their own company called a PC. In this arrangement, your employer provides your PC a 1099 tax statement for earned income, and your PC employs you as their primary employee. So you get a W-2 from your PC. It looks like this:
The fact is that you are a business, and you waive your right to organize yourself as a PC by engaging in a standard contract with your employer.
A PC-PSA is the most important tax strategy that you are missing as an employed physician.
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).
Your W-2 can come through a standard employer who retains all the tax code benefits of a corporation and leaves you as an individual.
Or your W-2 can come from your own corporation (PC) giving you the tax flow options of both an individual and a corporation. Quite simply you have more strategic options if you form a PC.
Why is this important? Because your W-2 is the way the IRS documents your revenue for tax purposes. and it also documents how much you have already given to the government on a marginal tax rate grid. This is commonly known as your marginal tax rate.
The next step as you complete your tax form is the annual chess match associated with trying to get as much of your hard-earned money back through a series of “above the line” income adjustments and itemized deductions (or just take standard deductions).
This chess match represents a chessboard that is re-organized every year by the government through changes in the tax codes. They are motivated to mitigate as many of your adjustments and deductions as they can to keep more of your money for themselves! The end of this annual match represents ultimately what you pay in taxes, and thus becomes your effective tax rate.
Like pages in a book, each year’s tax code changes are laid on top of the prior year. Those codes then all meander through various corporate and individual taxable entities. The cumulative tax code is complex and has multiple treasures buried in it. This is why some accountants and attorneys specialize and devote their entire careers to this subject alone. As a high-income earner, I hope you understand this complexity is why you might need a trusted CPA in your life. A good CPA, or tax attorney, understands physicians and all the special tax codes that can be leveraged for you and your PC. There are far more options if you have formed a PC.
Turbo tax and others have tried to use a host of artificial intelligence algorithms to help the self-sufficient by leading them to the most common treasures buried in the tax code. Some of you find this to be sufficient for your needs.
Some of you just throw your hands up in the air and fill out a 1040 EZ.
Don’t give in to hitting the easy button. Simply taking a W-2 in a standard employee contract and then working the annual tax chess match is the easy button. This is what over 80% of you are doing if you are employed as a physician.
But if you form an “employment lite” contract with your employer (PSA). your own corporation, called a PC, actually employs you and issues you a W-2.
By doing this, you have two entities to flow your hard-earned income through, and now your tax strategies have increased dramatically.
Your employer pays your PC your earned income and issues your PC 1099. Your PC in turn pays you as an employee and issues you a W-2.
Now you are aware, you CAN be employed and form your own PC. This is not only for those in private practice.
Now that you are aware, you can reap the benefits of being both an individual AND a corporation.
Our friends in the legal, engineering, veterinary, and architecture profession have done this for years. It’s time for us to catch on.
Employed physician, you are more than an individual taxpayer, you are a business, and you should have your own corporation (PC) in order to maximize your tax and benefits strategies.
If you do this, the end result will be a massive increase in your net worth through greater retained income and through larger retirement savings.
Doing your taxes is an annual reminder that you must give our government its portion of your income, but it should also cause us to look at your global finances and track where your money is going and how that affects our net worth.
As a standard physician employee, you are hurting yourself if you have set the bar this low.
So how do you lower your effective tax rate in this arrangement, you may ask? Stay tuned for my next post.
Dr. Inc.
