Locum tenens can offer physicians the perfect blend of flexibility and autonomy, especially in the current healthcare environment, where many physicians find themselves burned out with their current career choices.
Before a provider can enjoy the benefits of locum tenens, there’s a long list of financial planning considerations to navigate, from selecting the appropriate business entity to effectively managing taxes, insurance, and retirement plans.
In a Nov. 15 webinar titled “Finances of Locum Tenens: Taxes, Benefits, and Beyond” hosted by Weatherby Healthcare, three advisors from Personal Choice Financial broke down these considerations for locum tenens physicians.
Step 1: Setting Yourself up as an Entity
According to CEO and founder of Personal Choice Financial, Chris Hansen, one of the first things a physician should do before signing a locum tenens contract is set themselves up as an entity because “you don’t want to set up payments, contracts, and so forth and then find out later you should have done it a different way,” he says.
Physicians choose between three options when setting themselves up as an entity: Sole Proprietorship, LLC, or S Corp.
- A Sole Proprietorship: This entity has the lowest barrier to entry and is most common for providers, according to Hansen. A Sole Proprietorship is a business structure where a single individual owns, manages, and is personally responsible for all aspects of the business, including liabilities and debts. It is the simplest and most common structure chosen to start a business.
- LLC or PLLC: A provider can choose one or the other, but each chosen entity depends on a state’s requirements, Hansen explained. A Limited Liability Company (LLC) is a business structure that provides personal liability protection to its owners while offering the operational flexibility of Sole Proprietorship. A Professional Limited Liability Company (PLLC) is a special type of LLC formed for licensed professionals like doctors, where state laws often require specific formation and operational standards. LLCs can offer added credibility as a business and would be needed if a provider partnered with someone in this business venture.
- Incorporation or S Corp: An S Corp is a type of corporation designed to avoid the double taxation drawback of regular C corporations. An S Corp allows profits and some losses to be passed directly to the owners’ income without being subject to corporate tax rates. Hansen said this was the most complicated of the three entities. An S Corp is expensive and requires legal and accounting fees on top of having to file business tax returns, which are also costly.
Hansen says a Sole Proprietorship is the best option for most physicians until they start making more than $400,000 annually.
“We almost always recommend Sole Proprietorship, or if you want a couple more of the benefits and your state is good with setting it up, then you can do it as an LLC,” he says. “We do not talk to many people about the S Corp as entities. If you choose to go as a Sole Proprietor, this is one of the best options for up to about $400,000 [of annual income].”
There are a few more considerations for a Sole Proprietorship. Hansen recommends checking with your state and local government to see if there are specific things you need to register. He also recommends getting an Employer Identification Number (EIN). While only sometimes required for Sole Proprietorships, an EIN helps you open a business bank account and handle taxes.
Step 2: Selecting Your Benefits
Locum tenens physicians work as independent contractors, so they are responsible for arranging their own healthcare coverage and retirement planning. Ben Dobler, the director of Financial Planning for Personal Choice Financial, discussed types of benefits that are each provider’s responsibility — something that an employer typically covers as a traditional W2 employee.
Dobler broke these down into three different categories:
- Life and disability insurance: This insurance protects your income if unfortunate events occur. Selecting the right coverage and how much you need depends on each provider’s unique situation and whether or not you have someone dependent on that income if something happens, he says.
- Health or malpractice insurance: These protect you from financial events that can be life-altering. Health or malpractice coverage ensures you won’t have to cover these expenses in full or at all. Physicians can purchase malpractice insurance independently, but those who work with a locum tenens staffing agency are covered under their medical malpractice insurance plan.
- Retirement plans: Some of the most popular choices among locum tenens physicians include individual retirement accounts (IRAs) and a solo 401(k) plan.
There are a number of IRAs a provider can choose from, too.
- A conventional IRA is a retirement account where contributions may be tax deductible, depending on the individual’s income, tax filing status, and other factors.
- SIMPLE IRAs (Savings Incentive Match Plan for Employees) are designed for small businesses and self-employed individuals. SIMPLE IRAs allow employees and employers to contribute to traditional IRAs set up for employees.
- SEP IRAs (Simplified Employee Pensions) work for self-employed individuals and small business owners. SEP IRAs allow employers to contribute to their own and employees’ retirement.
“Which one is better? It really depends on your situation,” Dobler says. “In particular, what are your tax rates now versus what will your tax rates be down the road in retirement?
“If your tax rates are higher today, you’ll want to go more into the pre-tax side because you’ll get more of those tax savings now, and then down the road, you’ll pay a lower tax rate when you take that money. If the opposite is true, if your taxes are going to be higher in retirement, you’re going to want to prioritize Roth contributions as much as possible so you can pay those taxes when your rates are lower now.”
Many factors can influence the type of retirement plan a locums provider chooses, so seeking a financial advisor like Dobler will always be your best bet before making this life decision.
Step 3: Paying Your Income Taxes as a Locum
As a locum tenens provider and independent contractor, you are technically self-employed. A locum tenens provider’s earnings are subject to self-employment tax, which includes Medicare and Social Security taxes. According to Dobler, you are taxed 12.4% on up to $160,000 for Social Security, and Medicare is taxed at 2.9%. For income over $200,000, there is an additional 0.9% tax, he says.
“The biggest problem we see on the tax front is there’s no withholding taken out of your income, so you need to figure out how to make these estimated tax payments,” Dobler says.
These tax payments will be due quarterly on the 15th of January, April, June, and September, Dobler explains. He recommends factoring in your income and estimating the taxable amount based on that expected income to ensure your bases are covered and don’t end up with a surprise tax bill and penalty at the end of the year.
“That’s the federal side,” he says. “State and local [taxes] will be fairly similar without Social Security and Medicare. This is going to vary a lot by state and city, depending on where you live and where you work. Not every state and city is going to have taxes. If you live and work in different states, you are going to have to think about both of those.”
Dobler explained that more commonly, a provider will be taxed by the state they work in, and then if they live in another state, there’s “a credit to help offset” the cost. But these are still things providers will have to consider when filing tax returns.
Working as a locum tenens physician can undoubtedly be financially rewarding. However, providers need to understand these essential expenses, particularly those not aligned with a staffing agency. Consulting with a tax strategist or certified professional accountant is crucial to maximizing the benefits of being an independent locums contractor.
