Choosing a Business Structure as a Locums Physician

Do You Know the Right Tax Structure For Your Locums Lifestyle?

Sep 07, 2020 · White Coat Investor

This series is developed in partnership with Dr. Jim Dahle‘s The White Coat Investor, the leading source of financial tools and information for doctors, and Doximity Careers and Curative (a Doximity company), where doctors can find their next long-term or locum tenens position.

For many physicians venturing out into the locum tenens world, this is their first time working as a non-employee. A major benefit of being an employee is that the responsibility for running the business falls on your employer, allowing you to simply concentrate on doing the job at hand. The employer takes care of benefits, insurance, and payroll costs and hassle. You have regular paychecks of your net income deposited into your bank account and are issued a W-2 form at the end of the year, ensuring simple tax preparation.

The Independent Locums Contractor

However, the vast majority of locum tenens physicians are paid as independent contractors. Neither the locums agency that helped connect them with the facility in need nor the facility is actually their employer. They are in business for themselves. The locums agency serves as one of the clients of the business owned by the physician. As such, the agency sends your company gross paychecks and generally does not provide a traditional slate of benefits. Your company now becomes responsible for determining and paying any taxes due on that income. The agency will send a simple 1099 form at the end of the year as required by law. While some doctors mistakenly refer to themselves as “1099 employees”, they are not employees at all. They are a completely separate business.

As a separate business, it is a good idea to:

  • Get a federal Employer Identification Number (EIN), available from the IRS here.
  • Open a separate bank account and perhaps even a credit card for the business so that your personal expenses and income and the business’s expenses and income are completely separated.
  • It is also likely that you will need to make quarterly estimated personal tax payments to the IRS since there is no employer withholding taxes for you.

Many locums docs wonder what kind of structure this new business should take. The basic options include sole proprietorship, partnership, C corporation, S corporation, and limited liability company (LLC). In some states, a doctor providing physician services is required to form special entities called “Professional Corporations” or “Professional LLCs” (PLLC), however, there is little difference between a regular corporation or LLC and a professional one.

The Sole Proprietor

The simplest and easiest business structure is a sole proprietorship, and in fact, this is the structure that the majority of locums doctors will choose. So long as you have no employees, you do not even technically need an EIN with this structure. You can simply provide the employer with your name, address, and Social Security Number on a W-9 form and the paychecks and 1099s will be issued to you directly. You will report your business income and expenses on a simple Schedule C on your personal taxes. If your spouse is doing similar work, he can have his own sole proprietorship and when filing taxes you simply have two Schedule Cs included with your taxes. If you do not deliberately choose another business structure, by default you will be a sole proprietor.

What About Forming a Partnership With Your Spouse?

Some doctors wonder if a partnership might be the right business structure for their locum tenens work, thinking that if their spouse is doing something similar, they can just form a partnership and avoid a second Schedule C. However, the truth is that a partnership must file an entirely different tax return, a complex five-page partnership return (Form 1065). Thus, this is a terrible reason for forming a partnership. Other doctors might wish to have their spouse do some of the work of their business, perhaps arranging the various jobs, lining up travel arrangements, and doing bookkeeping. They reason that if their spouse earns some money, they, as a couple, will have access to another retirement account and perhaps a larger Social Security benefit down the road. Even if you want to have another retirement account, this is probably a bad way to go about it. You can always just form a sole proprietorship and employ your spouse or even contract with your spouse’s sole proprietorship to get another retirement account without having to do a Form 1065. However, even this is likely a bad idea for a one doctor couple because the cost of that retirement account is simply too high. If your spouse has no other income, you will need to pay Social Security taxes (both the employer and employee half, 12.4% total although half of it is tax-deductible) on all of their income up to the 2020 wage limit of $137,700. That cost is likely to be higher than the benefit of having another retirement account, or at a minimum, will dramatically reduce the benefits of the account.

Should You Form a Corporation?

Other physicians wonder if incorporating may reduce their liability and save them taxes. However, the main liability of a locum tenens doctor is malpractice liability, and malpractice is always personal. Forming a corporation does not protect you at all from malpractice. It can protect your personal assets from business-related matters and lawsuits, but these are incredibly rare in a simple locum tenens situation. A standard “C Corporation” does not necessarily save you any significant amount of taxes either. A C corporation pays its owners in one of two ways. First, it can hire them as employees and pay them on a W-2 like any other employee. If a C corporation pays you exactly what your sole proprietorship would make, there is no tax savings at all. Second, a C corporation can retain some of its earnings and pay taxes on it at the corporate tax rate of 21%. The C corporation would then distribute its earnings to its owner, where it would be taxed against at qualified dividend rates (up to 23.8%). This double taxation is obviously very unattractive, not to mention the organizational, maintenance, and tax hassles of running a corporation, including filing a corporate tax return.

The S Corporation

As such, most doctors who incorporate make an S election and become an S Corporation. An “S corp” is a pass-thru entity, like a sole proprietorship, partnership, or LLC. So the taxes are paid on your personal return at personal tax rates. This avoids the double taxation issue. Like a C corp, the owner-employee usually receives a salary on a W-2 each year. However, anything left over from business profits becomes a distribution to the owner. Unlike the salary, the distribution is not subject to payroll taxes such as Social Security and Medicare. Thus, the owner is incentivized to keep her salary as low as legally possible in order to minimize those taxes. The IRS does require a reasonable salary to be paid, which means a full-time locums doc is likely to at least be paid the Social Security Wage Limit of $137,700. This means that the only tax savings comes from saved Medicare taxes, less than 2.9% (since half of it is tax-deductible as a business expense) of the distribution. So unless the distribution is going to be quite large, at least a six figure amount, it likely is not worth the costs and hassles of incorporating. In addition, if a locums doc has another job as an employee, both employers will be required to collect and pay Social Security taxes, again creating a double taxation situation. While you can file to get the employee half of those taxes back, the employer half cannot be recouped. Thus it would be a very bad idea for a locums doc with another W-2 job to form an S Corp for her locums work as it would increase her tax burden rather than decreasing it.

The Limited Liability Corporation (LLC)

An LLC is a wonderful entity that can reduce business liability with much less hassle than incorporating. However, just like with incorporation, there is no protection afforded from malpractice. Malpractice is always personal. The IRS does not recognize LLCs either, so an LLC must choose to be taxed as a sole proprietorship, partnership, or corporation anyway. An LLC can be a great entity for a non-clinical side gig or to house your real estate investments, but there is little reason to form one just to do some locum tenens work. You will look plenty legitimate with an MD or DO behind your name; nobody is going to be impressed if it also says “Corp” or “LLC” there. However, if filing taxes as an S Corp makes sense for you, forming an LLC and then electing to file as an S corp may be less hassle than incorporating.

As you can see, most doctors doing locum tenens work should simply do so as a sole proprietor. However, if you are a full-time locums doc and can justify a salary significantly lower than your business profits to the IRS, you may wish to file taxes as an S Corp (probably by forming an LLC) in order to save a few thousand dollars on Medicare taxes. Whichever entity you use, be sure to treat it like a real business and keep its finances separate from your personal finances. This will prevent problems in an audit, allow you to capture all possible deductions, and facilitate easy preparation of your tax returns. If you are still unsure of the best path for you, discuss it with an accountant and business attorney in your state.

Explore your next locum opportunity today at Doximity Careers!

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