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:
- Capture all the deductions you’re entitled to.
- Reduce the time and stress to compile your info at tax time.
- If you have an LLC, keep personal and business finances separate to preserve the liability protection you created the LLC for.
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.
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.