Business Entities And Tax Elections For Locums Docs

by | | Taxes

financial planning for physicians

New locums docs often wonder about business entities and tax elections. Should I form an LLC? What about an S-corp? And so on.

Business entities and tax elections are two different things. Below, we cover the basics. We assume the typical locums doc situation: just you, no partners, no employees.

Business Entity

“Business entity” refers to the type of entity you have. Only what you have, not how you’re taxed.

Business entity = What type of entity you have.

To narrow it down, a locums doc should either be a sole proprietor or form a limited liability company (LLC). Below are some comments on each. As always, we cannot provide legal advice, only general information.

Sole Proprietor

If you don’t create an entity, you’re considered a sole proprietor by default. This means there is no legal entity separate from you. You sign contracts in your own name, provide services in your own name, and get paid in your own name.

This is the simplest way to operate. What’s the catch? You also retain all liability yourself.

Limited Liability Company (LLC)

If you choose, you can form a business entity: a limited liability company (LLC) or a corporation. The LLC is the right choice for locums docs; a corporation is overkill.

People create a business entity for liability protection, NOT tax purposes.

It takes some work, but if you form a business entity and operate it properly, the entity (not you) bears liability, and people can’t sue you personally for liability related to your business.

What’s the GIANT catch for locums docs? Malpractice liability is always personal. A business entity can’t save you from it. And malpractice is by far your main source of liability. You don’t have an office where somebody could slip on a banana peel.

Important: LLC laws vary by state, and it appears that some states prohibit physicians from practicing medicine under a limited liability company (LLC) or limited liability partnership (LLP). Consult with an attorney and know the laws that apply to your state.

Tax Election

“Tax election” refers to how you are taxed.

Tax election = How you are taxed.

To narrow it down, a locums doc should either be taxed as a sole proprietor, or elect to be taxed as an S corporation. Below are some comments on each.

Taxed As Sole Proprietor

If you don’t make a tax election, you’re taxed as a sole proprietor by default.

Being taxed as a sole proprietor is easier because you don’t have to run payroll for yourself or file a separate tax return for your business.

Instead, you file a Schedule C to your Form 1040. On Schedule C, you report your gross revenue, deductible expenses, and net income.

Taxed as a sole proprietor, you have:

  • Higher self-employment tax (bad).
  • More income eligible for the 20% QBI deduction if you meet the requirements (good).
  • In some cases, a higher maximum contribution to your locums retirement account (good).

Taxed As S Corporation

If you wish, you can elect to be taxed as an S corporation instead of a sole proprietor. (You can also elect to be taxed as a C corporation, but that doesn’t make sense.)

When taxed as an S corp, your earnings are split into salary and profit. You pay yourself a salary for working in the business, and the rest of your income is treated as profit from owning the business.

Being taxed as an S corp is more complex because you have to run payroll for your employee salary and file a separate tax return for your business.

If being taxed as an S corp is more complex, why do it? The main reason is to save self-employment tax. When you’re taxed as an S corp, you only pay self-employment tax on your salary, not on your profit.

Taxed as an S corp, you have:

  • Lower self-employment tax (good).
  • Less income eligible for the 20% QBI deduction (bad).
  • In some cases, a lower maximum contribution to your locums retirement account (bad).

Beware: The self-employment tax savings can be offset by higher income tax in some cases. So, you or your advisors must do a cost-benefit analysis of your personal situation.

To learn more about locum tenens taxes, check out our complete guide.

Want a no-obligation review of your finances? Request a FREE Financial Pulse Assessment™ online. We’ll review your scorecard and send you a short video, including comments on your Tax Rate and how to reduce it. No need to talk with anyone unless you want to.

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