Locum Tenens Taxes: The Complete Guide

by | | Taxes

When you work locum tenens, taxes are more complex, but there’s more opportunity too. Not to worry: We’ve done the research for you and compiled it here.

This guide gives you the confidence to enjoy the flexibility and independence of locum tenens work.

As a result, you’ll direct your career from a position of strength. You’ll ask first: “What role can locums play for me?” Not: “How will locum tenens taxes work?”

Then, when you want to work locums, go do it!

Introduction

You’re On Your Own

Most people have tax withheld through their employer. As an employee, you get a W-2 at tax time.

In locum tenens, you’re NOT an employee of the hospital, the locums agency, or anyone else. Instead, you’re a self-employed independent contractor. You’re on your own to pay your locum tenens taxes, and you get a 1099 at tax time.

Bottom Line

If you want to skip the details, here’s the bottom line.

Locum tenens income does not have tax withheld. So, you must figure your net income, pay tax on it during the year, navigate retirement account options, and report everything correctly on your tax return.

You can do it yourself or hire a pro to help you. If you don’t want to deal with the details, jump to Hiring An Accountant and A Financial Advisor’s Role In Your Tax Picture.

The rest of this article will educate you about locum tenens taxes, whether you plan to hire a pro or do things yourself.

Tax Planning

The next three sections cover three separate tax-related activities: planning, payment, and preparation.

The planning section comes first because it’s the most valuable. Below, we discuss why tax planning is so valuable, and how to do it.

Why Tax Planning Is So Valuable

Locum tenens tax planning is so valuable because it’s proactive. You take action now, during the year, to save tax on the tax return you’ll file next spring. By the time you file that return, it’s too late to do planning. You’re just reporting what already happened.

As a physician, taxes are your largest expense. Plus, the self-employment tax makes tax planning critical for locum tenens docs. Self-employed people pay income tax AND self-employment tax.

How To Do Tax Planning

To do tax planning, project your taxes in advance, then test strategies to reduce your tax bill. This section tells you why and how to project your taxes.

If you use an accountant or a financial advisor, they should do your locum tenens tax planning for you. If they don’t, find new advisors!

Why Project Your Taxes

Projecting your taxes benefits you in many ways. You’ll avoid surprises on April 15th, know how much tax to pay when, and have a baseline to plan against.

Avoid Surprises On April 15th

Many locums docs wait anxiously for their tax return to be done. They have no idea if they’ll owe, or how much. If they owe a lot, they scramble to come up with the cash, then worry the same thing will happen next year.

Don’t be like them. Project your taxes in advance. You’ll know what to expect, and know you’re paying the least tax possible. How many docs can say the same?

Know How Much To Pay When

Since locums docs are independent contractors, the agency doesn’t withhold taxes from your pay. Instead, you must make tax payments on your own during the year. If you don’t know how much to pay when, it’s really hard to plan your cash flow.

Have A Baseline To Plan Against

Projecting your taxes gives you a baseline to plan against. “If my income is $X, my tax bill will be $Y.”

Now you can test strategies to reduce your taxes. “If I do this and this, my tax bill will drop from $Y to $Z.”

How To Project Your Taxes

To project your taxes, start with last year’s tax return, then change assumptions as needed for the new year.

Start With Last Year’s Return

Always start with last year’s return. If this year’s income and deductions will be similar to last year, and there are no major tax law changes, then you’re done. Last year is a good projection for this year.

Adjust Assumptions For The New Year

If anything is changing materially this year, then make a copy of last year’s return and build this year as a new scenario. If you do your own taxes, TurboTax won’t be updated for this year yet, so it will think you’re preparing another return for last year. That’s OK.

This year could bring changes to income, deductions, and/or tax payments you’ll make. For example:

  • Income: Up? Down? More 1099? More W-2? How about your partner if you file jointly?
  • Deductions: Expenses up? Down? Any change in retirement contributions? Self-employed health insurance deduction?
  • Tax payments: Any change in withholding on W-2 income? How much estimated tax will you pay this year on 1099 income?

Be conservative: project your income high and your deductions low.

If you’re not sure how many locums shifts you’ll work this year, assume high until you know otherwise. Later in the year, when you have a better idea of your actual locums earnings, you can update your tax projection.

Ways You Can Save Taxes

Here are three ways you can save taxes as a locums doc: keep good records, deduct all unreimbursed expenses, and maximize deductions related to self-employment.

Keep Good Records

Three reasons to keep good records:

With today’s technology, there are many ways to keep good records.

  • Run all locums revenue and expenses through a separate bank account and credit card (whether you have an LLC or not).
    • If you don’t have that many transactions, this may be all you need to do. Then, at tax time, export the transactions to a spreadsheet and label/sort as needed.
  • Use the note-taking app on your phone, or a separate notes app like Evernote (no financial relationship).
  • Keep a folder in your cloud storage.
  • For unreimbursed mileage and other travel expenses, use a mileage tracking app like TripLog (no financial relationship).
  • They still make good old paper folders.

Don’t spend much time setting up an elaborate system. Just try the methods above, then iterate and refine.

Deduct All Unreimbursed Expenses

To state the obvious, be sure to deduct all your expenses. This is why good records are so important!

To be deductible, an expense must meet two criteria:

  • Ordinary and necessary for your line of work. Solid gold stethoscope: Not so much.
  • Not reimbursed by the locums agency, or your W-2 employer if you have one. No double-dipping: You have to spend your own money to take the deduction. If you can get reimbursed, do that instead!

Here is a partial list of common deductible expenses if unreimbursed:

  • Travel, lodging, and 50% of meals (all if outside your home area)
  • Cost of operating your vehicle between home and your locums sites. Gas, maintenance, insurance, parking, tolls, etc. You can deduct actual expenses, but take the easy route and use the mileage method. Just multiply miles driven for locums by the IRS mileage rate (65.5 cents/mile in 2023). This adds up fast!
  • Cell phone, laptop, iPad, printer, toner, other technology.
  • Home internet and cell phone service.
  • CME, licenses, publications, dues.
  • Malpractice insurance.
  • Uniforms (lab coat, scrubs).

Word to the wise: The IRS wants to know date, business purpose, and who was present. These notes should be contemporaneous, a fancy way to say “keep the notes as you go,” don’t try to reconstruct them if you’re audited.

Maximize Deductions Related To Self-Employment

Any business can take the above deductions. Here are three big deductions that are specific to being self-employed, and one smaller deduction that too many people miss.

Self-Employed Health Insurance Deduction

When you buy health insurance on your own because you don’t have access to employer-sponsored health insurance yourself or through your spouse, your health insurance premiums are tax-deductible.

For quick math, assume the tax deduction saves you 35%. Example: A $20K annual premium really costs you $13K after taxes. $20K * (1 – 0.35) = $13K.

Self-Employed Retirement Account Contributions

You can use a self-employed retirement account to shelter some of your locums income from tax. You can create this account on your own or have a financial advisor do it for you.

The two accounts that a locums doc should consider are the SEP IRA and the solo 401(k).

Which one is best for you depends on your personal situation. The solo 401(k) is more complex, but may let you contribute more and has other potential advantages.

Qualified Business Income Deduction

The Tax Cuts and Jobs Act of 2017 (TCJA) created the Qualified Business Income (QBI) deduction. This lets self-employed people, like locums docs, deduct up to 20% of their self-employment income in some cases. A massive tax savings if you can get it!

As a locums doc, you need careful tax planning if you want to get the QBI deduction. This is because physicians can only take the QBI deduction if their taxable income is under a certain limit. The QBI deduction is so valuable that if you’re over the limit, you want to use all possible strategies to drive your taxable income down.

For 2023, single filers lose their QBI deduction between $182,100 and $232,100 of taxable income. Under $182,100 = full deduction. Over $232,100 = no deduction. For married filing jointly, the range is $364,200 to $464,200.

Notably, the QBI deduction goes away after 2025 unless the law is changed. The TCJA sunsets on 12/31/2025.

Home Office Deduction

The home office deduction isn’t huge, but locums docs and their tax preparers often miss it.

Self-employed people can take a home office deduction for the portion of their home that they use regularly and exclusively for business, if they don’t also have an office away from home for their self-employment work. As a locums doc, you don’t have an office away from home. The hospital where you work your shifts doesn’t count.

You can either deduct actual expenses associated with your home office, or use the simplified method. The simplified method is much easier, especially if you do your own taxes. Under this method, you can deduct $5 per square foot up to 300 square feet (maximum deduction $1,500).

Ways You CAN’T Save Taxes

Here are three ways you CAN’T save taxes as a locums doc: keep sloppy records, form an LLC, and deduct the kitchen sink.

Keep Sloppy Records

Don’t be like many self-employed people who keep sloppy records or none at all. At best, it’s a lot more work to get ready for tax time. At worst, you’ll miss deductions (paying more tax than you should), and risk losing the liability protection of your LLC if you have one.

Form An LLC

It’s a common misconception that forming an LLC will help you save on taxes.

This fits Merriam-Webster’s definition of “urban legend” to a T:

An often lurid story or anecdote that is based on hearsay and widely circulated as true.

In fact, forming an LLC in itself gives you NO tax savings whatsoever. Repeat: NO tax savings whatsoever.

Put another way: With or without an LLC, you can deduct all ordinary and necessary business expenses. Forming an LLC doesn’t wave a magic wand and make expenses deductible.

Deduct The Kitchen Sink

In the real world, you’re very unlikely to be audited. Still, keep your deductions to legitimate business expenses. Not your groceries, not your toilet paper, not the proverbial kitchen sink.

Peace of mind is very important when it comes to locum tenens taxes. You want to sleep well at night, confident that if you do get ever audited, all your deductions will stand up.

Tax Payment

OK, we’ve spent a lot of time on tax planning. Now let’s talk about tax payment. How do you pay your taxes as a self-employed locums doc?

“Pay As You Go” System

The United States has a “pay as you go” tax system. The government wants its money throughout the year, not in one lump sum on April 15th.

Employee = W-2 = Tax Withheld

When you work for someone else as a W-2 employee, your employer withholds income and payroll taxes for you and sends them to the government. “Pay as you go” is automated for you.

Locums = 1099 = No Tax Withheld

When you work locums, you’re self-employed and nobody is withholding tax for you. But you still must pay as you go. Remember, the government wants its money now, not later!

The question is, how and when do you make your locum tenens tax payments? Read on to find out.

Ways To Pay Tax On Your Locums Income

There are three ways to pay tax on your locums income: make estimated tax payments, withhold more tax at W-2 jobs, and just owe on April 15th. Estimated tax payments are the most common.

Make Estimated Tax Payments

If you have a decent amount of locums income, you’ll most likely make quarterly estimated tax payments. Here is when and how.

Due Dates

The due dates for estimated tax payments are below.

Due Date

For Period

April 15

Jan-Mar (3 mos)

June 15

Apr-May (2 mos)

September 15

Jun-Aug (3 mos)

January 15

Sep-Dec (4 mos)

How To Pay

There are two ways to pay estimated taxes: by mail or online. By mail is still more common, but online is more efficient and secure.

To pay by mail, you send in a check along with a payment coupon (Form 1040-ES). Your tax preparer or DIY tax software will generate Form 1040-ES for you.

We’re big fans of paying online. As of this writing, the URL is www.irs.gov/etpay. You can pay from your bank account, or with a debit or credit card. Perhaps the best feature is that you can schedule payments for a future date. If you know how much you want to pay for several future quarters, you can schedule it all at once and be done.

Two tips for paying online:

  • If you file taxes jointly, use the Social Security number of the person who is listed first on your tax returns. This ensures that the IRS will credit you properly for the payment.
  • You can modify or cancel a scheduled payment until two business days before the payment date. Ideally you won’t make any changes; if you do, don’t wait until the last minute.

Withhold More At W-2 Jobs

Another way to pay tax on your locums income is to withhold more tax at a W-2 job (yours or your spouse’s). Below, we discuss the benefits of this approach, when it works best, and how to do it.

Benefits Of Withholding More

Withholding more at your W-2 job is underrated. It has two key benefits:

  • Skip dealing with estimated tax payments, saving you valuable time.
  • Know that all your locums income is yours to keep, because the tax is covered already.
When Withholding More Works Best

Withholding more at your W-2 job works best when you do a modest amount of locums on the side. Since the locums tax isn’t huge, you’ll still have a decent W-2 take-home paycheck, even after increasing your withholding.

This concept matters most if you’re asking your spouse to withhold more at their W-2 job. Many spouses aren’t thrilled to have their take-home pay drop like a rock, even if it’s all going to the same place in the end!

How To Withhold More

You withhold more by making new withholding elections. Bottom line: Talk to HR at your W-2 job if you need help.

HR may ask you to fill out a new Form W-4 to change your elections. This form is so complex that the only result of filling it out is having zero confidence that your desired amount will be withheld!

Pro tip: Look at your current withholding and add a flat dollar amount. This is the only way to get your desired result the first time around. Say your current withholding is $1,000 per paycheck, and you want to go to $1,500. Tell HR to withhold an extra $500 per check. If you have to fill out Form W-4, line 4(c) lets you write in the extra amount you want.

Owe On April 15th

Whatever you didn’t pay with estimated taxes or W-2 withholding, you’ll owe on April 15th. That’s OK as long as you know what to expect.

You were supposed to pay taxes on your locums income throughout the year. If you underpaid, you may have a penalty added to your tax return. This sounds worse than it is, but it’s best to avoid a penalty if you can.

Tax Preparation

OK, we’ve covered tax planning and tax payment. Now it’s time for tax preparation.

Tax preparation must be done right, but it’s less valuable than tax planning. This is because preparing your tax return just reports what already happened.

You can do your own taxes or use an accountant. Either way, the cost is a deductible expense! Below are comments on both routes.

Bottom line: We recommend having an accountant prepare your returns. If you do your own taxes as a locums doc, you can easily spend a lot more time, do a lot worse job, and pay a lot more tax.

Doing Your Own Taxes

You can use any number of DIY tax software packages. Products we’ve used personally with success include TaxAct, TurboTax, H&R Block Online, and FreeTaxUSA (no financial relationship with any of these). Once you’ve chosen a product, don’t switch down the road just to save a few bucks.

Your time is valuable. It’s only worth it to do your own taxes if you truly have the time and energy AND you value learning about financial matters.

It also helps to have a financial advisor who knows locum tenens taxes, and will review a draft of your tax return before you file. We’ve saved more clients from paying tax on their backdoor Roth IRA conversions than we can count!

Hiring An Accountant

As noted above, hiring an accountant is well worth it. It’s an investment, not a cost.

Below, we discuss how to choose an accountant who knows locum tenens taxes, and how to work with them effectively.

Choosing An Accountant

How do you decide which accountant to hire? In short, they should know this article’s content off the top of their head.

One specific comment: Some accountants are unfamiliar with solo 401(k) plans, so they recommend a SEP IRA by default.

Working Effectively With Your Accountant

Even when you use a tax pro, you still need to do some work! Here are some tips for working effectively with your accountant.

  • Get your info in quickly; February is ideal. This puts you ahead of all the clients who wait till the last minute.
  • Send all your info in at once. Since your accountant won’t have to track things piecemeal, there’s less risk that something gets missed.
  • Respond to questions promptly.
  • Know that response time from February to April will probably lag. A CPA firm during tax season is like a jammed ED. Like it or not, triage needs to happen.

A Financial Advisor’s Role In Your Tax Picture

If you have a financial advisor, or are considering one, they should:

  • Know locum tenens taxes inside out.
  • Be actively involved in your tax picture.

MANY (if not most) financial advisors are neither. Below, we cover the locums tax expertise you should demand and the tax-related services your financial advisor should provide.

Locum Tenens Tax Expertise

In short, a financial advisor should know this article’s content off the top of their head. They should be a true locum tenens tax professional.

Tax-Related Services

A financial advisor should do your tax planning, handle your self-employed retirement account, and consult on locums vs. W-2 work. Some financial advisors prepare tax returns; most don’t (and that’s OK). See below for further comments.

Tax Planning

If you don’t use an accountant, your financial advisor should do your tax planning, tell you how much tax to pay when, review a draft of your self-prepared tax return, and do a Zoom screen share with you to fix any errors before you file the return.

If you use an accountant, your financial advisor should work closely with that person. Your advisor can still do your tax planning if your accountant just prepares your tax return.

Self-Employed Retirement Account

A financial advisor should handle your self-employed retirement account from start to finish. They should:

  • Compare a SEP IRA and a solo 401(k) for your individual situation.
  • Select the right account and set it up for you.
  • Calculate your maximum contribution each year and help you fund it.
  • Manage the investments in the account if you want them to.

W-2 vs. 1099 Work

A financial advisor should be able to answer this very common question for locums docs:

How much do I need to make per hour for locums work, to equal what I’d make at a W-2 job?

We get this one all the time!

With locums, you must pay self-employment tax, and you pay for your own benefits (unless you have benefits through a W-2 job already).

So, you need to make more per hour with locums than at a W-2 job. The question is, how much more? To find the answer, your financial advisor should compare two factors side-by-side: net cash flow and amount saved for retirement.

Net Cash Flow

The first factor is net cash flow. “Net cash flow” means spendable money in your bank account. Gross earnings – taxes, benefits, and retirement = spendable money in your bank account. It’s not what you make, it’s what you keep.

Amount Saved For Retirement

The second factor is amount saved for retirement. Usually, you can put away more for retirement with locums than with W-2. So, if a locums gig gives you less net cash flow because you’re socking away more for retirement, that might be just fine with you.

Tax Preparation

Some financial advisors prepare tax returns in house. Most don’t, instead referring to accountants they trust. In that case, your financial advisor should collaborate with your accountant so you get coordinated advice and a seamless experience. Your advisor should request a copy of your tax return from your accountant each year, and use the return to inform everything the advisor does for you.

A Word About State Income Tax

This guide focuses on federal tax, but you’ll also file a state income tax return in your home state, plus any other states where you do locums work. (Exception: the states that have no income tax.)

Your home state wants to tax all of your income. Another state will only tax the work you did in that state. You won’t pay state tax twice on the same income, because your home state will credit you for the tax paid to the other state.

Many states require you to “pay as you go” just like the feds do. You pay state tax the same way as federal: pay estimated taxes, withhold more at a W-2 job, or owe on April 15th.

Business Entities And Tax Elections

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.

Conclusion

We hope this guide has saved you time and energy, and given you the confidence to enjoy the flexibility and independence of locums work without worrying about taxes. When you want to work locums, go do it!

For help with your locum tenens tax strategy, schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.

Get new articles sent directly to your inbox.

The 5 Biggest Financial Mistakes ER Doctors Make And Simple Ways To Solve Them

 

You’ll also get new articles sent directly to your inbox.

Success! Check your email inbox for next steps!