Preparing for Tax Season as a Locum Tenens Contractor

Preparing to file taxes for locum tenens is easier than you think.

As 1099 self-employed individuals, locum tenens physicians, advanced practitioners, psychologists, and social workers have distinct advantages and potential pitfalls to navigate when it comes time to prepare for tax season, not the least of which is that the rules can change from year to year. You have a complicated tax situation, all stemming from one fact: when you earn a paycheck, taxes are not immediately taken out of it. And this year, preparing for tax season might feel even more overwhelming due to the unique challenges caused by the COVID-19 pandemic.

Many independent contractors are caught off-guard when tax season arrives. They are stunned to realize how much tax they owe. If you would rather not be one of them, pay attention to these details.

You should have all your 1099-MISC forms in hand by early February.

If you earned more than $600 working for an employer during 2023, that employer will send you a Form 1099-MISC.

You must report your 2023 income to the I.R.S. on Schedule C or Schedule C-EZ (and you must also report it to your state's tax authority). Should you neglect to report any 1099 income, the I.R.S. will send you a letter noting the missing income and requesting the corresponding tax payment. ¹

Maximize your deductions.

As an independent contractor, you can deduct many things. This also applies if you own a sideline business. Fifty percent of the Medicare and Social Security tax you pay is deductible. Hardware and software expenses as well as work-related advertising, travel, phone calls, mailing expenses, and office supply purchases may be deducted. You can deduct rent you pay to house your business, the cost of books and publications you purchase for it, and legal and professional fees you pay on behalf of it. ¹

Maybe you pay for your own health coverage. Independent contractors who do so are eligible to deduct the cost of their health insurance premiums. You can even deduct Medicare premiums you pay for Part B, Part D, and the expense you pay for a Part C (Medicare Advantage) plan or a Medigap policy. ¹

If you have a sideline business, you are sure to receive Form 1099-K.

This I.R.S. form reports income from debit card, credit card, and third-party network transactions. Your Form 1099-K should arrive in early February. When you get it, confirm its accuracy by checking your gross receipts, payment card records, and merchant statements. See that it reports income generated through all payment avenues (PayPal or similar services, credit cards, etc.). ¹

The income amount reported on your Form 1099-K does not have to be reconciled with the gross receipts you report on Form 1040. This is because adjustments to sales income (such as chargebacks) are not reported on Form 1099-K. That fact noted, keep documentation handy to support both your income and any deductions you want to claim on your 1040 and your state tax return. ¹

Don't forget to make those quarterly estimated payments.

If your unincorporated business is turning a profit, you should be making quarterly estimated tax payments, for two reasons. One, your earnings are not being withheld. Two, your net earnings are subject to self-employment tax. 

Coping with quarterly self-employment and income taxes may become a little easier if you change your withholding at your regular job. If you (or your spouse) do that, you might free up the money to cover the taxes generated by your small business. 

You can also lower those taxes by creating, and contributing to, a qualified retirement plan linked to your business, such as a Solo 401(k) or Simplified Employee Pension (SEP) plan. Your contributions to these plans are tax deductible, and they give you a chance to boost your retirement savings at the same time. ¹

If your sideline business has a loss for 2023, that loss is only deductible as a business loss if the I.R.S. characterizes your business as an activity with a profit motive instead of a hobby. So, take a look at the hobby loss rules before trying to claim such a deduction. 

Incorporating your business

As a self-employed healthcare professional, there may be benefits to setting up an S-corporation to reduce your tax liability. Each situation is unique. You should speak to a tax attorney about the benefits of incorporating and take advantage of what the tax code provides for business owners. If you would like to discuss the benefits of incorporating, contact me directly using the information provided below.

Provided by: Scott Varon, CFP® Co-Founder, WealthMD
Email: svaron@wealthmd.com
Phone: 404-926-1312

Citations:

1. IRS [1/12/22]

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Additional Tax Infographics

Whether you're new to locum tenens self-employment or a seasoned veteran, take a look at our beginner and advanced tips. We've covered everything from taxes to incorporation, money management to retirement planning. These infographics sum up the most important tips for you to consider for 2024.