The text that follows is the tax guide for the 2015–2016 tax season. It is out of date.
For our updated tax guide, which applies to the 2016–2017 tax season, please download our new "Tax Guide for Locum Tenens Providers: 2017 Edition."
Locum tenens physicians and nurse practitioners are considered independent contractors. An independent contractor’s earnings are reported on form 1099, as opposed to form W2 traditional employees are accustomed to seeing at the end of each year. Unlike a traditional employee, taxes are not withheld from an independent contractor’s paycheck over the course of the year.
There are advantages to being compensated as an independent contractor. For example, independent contractors can deduct certain expenses that traditional employees cannot. However, an independent contractor’s tax return can also become a bit more complicated. As an independent contractor, you’ll be required to complete the 1040 long form, along with a Schedule C, Schedule SE, and whatever other tax forms and schedules might be required. Locum tenens providers who work in multiple states throughout the year will also need to file separate returns for each state.
Let’s take a closer look at what locum tenens providers can do to take advantage of the benefits of being an independent contractor!
One of the biggest advantages of being an independent contractor is there are fewer restrictions on deducting business expenses. This can go a long way towards reducing your taxable income.
Let's say you earn $10,000 as a locum tenens independent contractor, and have $6,000 of unreimbursed professional expenses. In this case, you'll only pay taxes on $4,000 of your net locum tenens income.
To qualify as an allowable deduction, an expense must be both "ordinary" and "necessary" in connection with your profession. For example, purchasing an iPad to use for work qualifies as ordinary and necessary, and therefore, is deductible. Purchasing a leather carrying case from Gucci, however, probably doesn't qualify. Even though you may view your Gucci carrying case as necessary, it most likely doesn't meet the ordinary test.
You are also not allowed to deduct any expenses that are reimbursed by the locum tenens agency or the facility where you work.
Let's look at some of the professional expenses commonly incurred by locum tenens providers:
As long as you're not covered under an employer sponsored health insurance plan, being an independent contractor allows you to write-off 100% of your health insurance premiums paid during the year. This only applies if you do not have access to an employee-sponsored plan.
For example, if your spouse has access to health insurance through his or her job, or if one of your employers offers you insurance under its plan, but you opt to pay for your own independent plan, your premiums are not deductible. Premiums paid for Medicare also count for this tax break.
Travel, Lodging, and Meals
Unreimbursed travel, lodging, and 50% of the cost of meals incurred during a locum job outside the general vicinity of where you live is deductible. However, the job must be for a specific period of less than one year, and you must intend to return to the city that you were living in prior to the assignment. You are not allowed to deduct any expenses that were reimbursed by the locum tenens agency or facility at which you were assigned.
One option for taking advantage of these deductions is to keep track of the eligible expenses incurred during your assignment, either by keeping all your receipts together, or by charging everything on one credit card. At the end of the trip, simply tally up what you spent.
A second, easier option is to use per diem rates. Per diem rates are lump sums designed to cover eligible expenses for an entire day. They are an easy way to calculate meals and incidental expenses associated with a locum tenens position without the hassle of saving receipts.
Each year, the federal government assigns one of six per diem rates to every metropolitan area in the Continental United States and posts them at http://gsa.gov. The Department of Defense sets the per diem rates for travel to Alaska, Hawaii, and the US Territories, and makes them available at www.defensetravel.dod.mil/site/perdiemCalc.cfm.
Please note that you can only use per diem rates for meals, incidentals and business entertainment. While the per diem tables do include daily rates for lodging, these rates are set to be used by companies to reimburse their employees for their lodging. Locums can only deduct actual housing costs incurred that are not reimbursed by the agency or client.
Driving between job sites is deductible. So is driving between your home and a temporary job site, job interviews, and conferences. Commuting between your home and a regular place of business generally isn't tax deductible. If you traveled to a locum tenens job using your own car and were not reimbursed, you can deduct automobile expenses. There are two ways for you to calculate your automobile expenses.
First, you can use the standard mileage rate for each business mile driven, which can be found on the IRS website. For 2014, the standard mileage rate for business purposes is 56 cents. You can also include tolls and parking costs associated with any assignments.
The other option is to base your deduction on the percentage of miles your car was driven for business multiplied by the actual costs incurred during the year. Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.
Generally, unless you drive your car relatively few miles each year, with most of those miles being allowable business miles, you're better off basing your deduction on the standard mileage rate.
Education, Licenses, and Examinations
Costs incurred in connection with improving your skills in your current profession (e.g., continuing medical education) are generally deductible.
It’s critical that you keep records of your business expenses throughout the year, including receipts. For more information on deductible expenses common to healthcare professionals as well as a handy Excel Spreadsheet to help you track your expenses, check out the Further Reading section below.
Independent contractors have the option of establishing and contributing money into a pre-tax retirement account based on net locum tenens income. This is a great because contributing to a retirement plan is one of the best tax shelters available to people during their working years.
When you contribute to a retirement plan, the taxes you save provide you with an immediate return on investment. Let’s assume you’re in the 28% federal tax rate, and you live in a state with a 5% rate. Each additional dollar of income you earn is taxed at 33%.
In this scenario, you would earn an instant 49.25% return on your investment by contributing to a retirement plan. That’s because it only costs you $670 in after-tax dollars for every $1,000 that is invested. You’ve already earned a whopping $330 on the $670 you invested. Yes, you’ll owe taxes on the money in your retirement accounts when you take distributions down the road, but you get to keep the compounded growth on the tax savings as long as the money remains invested.
Contributing to a retirement plan is also one of the best ways to build a nest-egg to fund your post-working years. Unless you work for a government employer or a business that provides a lucrative pension, it’s up to you to make sure you have enough money set aside to fully fund a comfortable retirement. The earlier you start building our nest egg, the better chance you give yourself to reach your retirement savings goals.
You have until April 15 to set up and fund a SEP IRA for the previous year, and thus stash up to 20% of your net locum tenens income. Amounts contributed to the account reduce your taxable income and grow tax-deferred. Solo 401k accounts and sophisticated plans such as Defined Benefit Plans generally allow for larger annual contributions.
Other pre-tax savings opportunities available to independent contractors include SIMPLE IRAs and Solo 401(k) plans.
Health Savings Accounts (HSA) helps people not only reduce their health insurance premiums but also build up money within a tax-advantaged savings account.
Only individuals or families covered under a high-deductible health insurance plan during the year are eligible to contribute to an HSA, and thus take advantage of the following tax breaks:
- Money contributed into an HSA is tax-deductible.
- Money invested within the HSA is your money and grows tax-deferred. Unlike Flexible Spending Accounts (FSA) offered as part of employee benefit packages where you set aside a set amount of money to pay for your family's healthcare costs with pre-tax dollars, there is no "use it or lose it" pitfall with HSAs.
- Money can be withdrawn tax-free from your HSA at any time to pay for your family's healthcare expenses.
Any money remaining in your HSA upon your reaching the age of 65 is available to subsidize your retirement.
To take advantage of this you will need to switch to a high-deductible health insurance product if you are not already using one. If you switch, you will immediately realize a sizeable decrease in your monthly premium that is generally equivalent to the increase in your annual deductible.
Assuming you and your family have a relatively healthy year, you will end up ahead of the game, since you get to keep all the money leftover in your HSA at the end of the year. If you happen to incur substantial healthcare costs, you could possibly deplete your HSA. But once you spend the full amount of your annual deductible, your insurance takes over and protects you against any further financial hardship.
While not having taxes deducted from your paycheck can be a good thing (bigger checks), it also requires a bit of responsibility on your part.
Independent contractors are generally required to pay estimated taxes on a quarterly basis. This is because the government doesn't want you to write them a big check on April 15th. Depending on how much you earn doing locum tenens work, you may be required to send estimated quarterly tax payments to the IRS and the states where you live and/or work. Estimated tax is the method independent contractors use to pay Social Security, Medicare, and income taxes when sufficient taxes aren’t otherwise being paid in through withholdings from your salary or your spouse’s salary. To figure out what you owe, if anything, you will need the following:
- Last year’s annual tax return
- Form 1040-ES, Estimated Tax for Individuals (PDF)
Use last year’s return to complete the worksheet in Form 1040-ES, and determine your estimated quarterly tax.
If this is your first year being an independent contractor, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
If you decide not to pay estimated quarterly taxes or if you find you didn’t pay enough at the end of the year, you will be subject to a penalty when you file your annual tax return. You can
figure out the penalty using Federal Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (PDF).
Further Reading: Estimated Taxes (IRS)
The taxes you'll owe on your locum tenens income are easily manageable if you plan ahead. Here are some tips to keep in mind.
The 40% Rule: To be safe, it's generally a good idea to set aside 40% of what you earn for taxes. Remember, you'll owe federal taxes, state taxes, and self-employment taxes on your earnings
Submit quarterly estimates: Take the time to calculate what you owe in estimated quarterly payments. This will help prevent the need to write a check to Uncle Sam at the end of the year. It will also eliminate or minimize IRS and state underpayment penalties.
Track your professional expenses: Use this handy spreadsheet to keep track of your monthly professional expenses so you can easily deduct them from your income at the end of the year. Professional Expenses Tracking Sheet (XLS)
Keep good records: When tax time rolls around, you want to make sure you have the paperwork from any significant financial events such as buying or selling real estate, starting or closing a business, or inheriting money. Also be sure to report any earnings from savings accounts or investments.
Take advantage of tax shelters: Retirement accounts and HSAs are a great way to reduce your taxable income and improve your overall financial viability.
Consult a tax professional: The tax code can be confusing and is constantly changing. With that said, it is in your best interest to consult a tax professional or CPA who can advise you based on your unique tax situation.
Disclaimer: The information provided in this guide is meant for informational purposes only and should not be considered tax advice. It is in your best interest to consult a tax professional or certified public accountant (CPA) who can advise you based on your unique tax situation.