Locum tenens physician taxes: A beginner’s guide

Locum tenens is an exciting career alternative for physicians, giving you the freedom to choose where you work and set your own schedule. However, it also means the process for filing and paying taxes will be different. Don’t worry! As long as you're aware of the differences and plan for them, it shouldn’t be a big deal. The road to mastering locum tenens physician taxes starts here. 

Locum tenens physicians work as independent contractors. What does that mean?

Most locum tenens physicians work as an independent contractor. That means you’ll most likely receive a 1099 form to report your income, as opposed to the more common W-2. This might sound daunting, but really, it isn’t.

Jerry Callahan, a director at Pearce, Bevill, Leesburg, and Moore, a tax firm that specializes in physician taxes, points out two important things to keep in mind if this is your first time filing with a 1099.

First, a 1099 independent contractor is responsible for paying both portions of the Medicare and Social Security taxes. This is something that W-2 employees don’t have to think about because the payment is taken out of their paychecks automatically by their employer. In addition — and this is the second key difference, says Callahan — 1099 independent contractors are typically required to pay quarterly taxes. This means paying an estimated tax payment four times a year.  

You may wonder why independent contractors have to pay in spring, summer, fall, and winter when everyone else seems to be paying only once. The answer is actually quite simple: If you were a W-2 employee, your employer would be subtracting an appropriate amount from each of your paychecks and making those payments for you. You’re just taking over that responsibility.

Dollars and cents: How does locum tenens pay and salary work for physicians?

Make a budget to pay your locum tenens physician taxes

The moral of the story here is that locum tenens physicians need to be a little more proactive with their budgeting — calculating what they’ll likely owe and putting it somewhere safe until taxes are due. Callahan suggests opening a second bank account and regularly setting aside an appropriate amount. Avoid putting these funds into potentially volatile or even long-term investment vehicles such as stocks or even ETFs.

Your quarterly taxes as a locum tenens physician are only estimates. The dollar amount doesn’t have to be exact. Just take the percentage of your income that you paid in taxes last year, plus the amount paid to Social Security and Medicare, and divide by four. The answer is your quarterly payment. If your income is significantly more or less this year than last, you may want to confirm that you haven’t slipped into an adjacent tax bracket, in which case you’d need to adjust your calculations accordingly.  

Of course, mixed in with these numbers is the possibility of tax credits, deductions, and refunds — not to mention paying income tax in the various states you might have worked (in some cases, a city or municipality might have additional tax requirements to consider).

This extra expense will often save you money in the end and prevent you from making any mistakes. Callahan recommends choosing a licensed CPA who has worked with locum tenens physicians' taxes before and is familiar with the industry.

Dr. Marye McCroskey, a family medicine physician, agrees. She works with a professional to handle her taxes while working locum tenens. “I’d highly recommend getting an experienced accountant,” she says. “At the moment, I’ve got income from several different contracts, and it’s easier to have someone who specializes in physician taxes.”

Does a locum tenens physician need to start his or her own business entity?

Locum tenens physicians often wonder if they need to set up an S-corp or LLC to make sure that they’re not paying too much in taxes. They may have heard from a friend or relative that the legal arrangement will somehow lower their taxes. According to Callahan, this usually isn’t the case. Whether you set up a business entity or not, your taxes will be essentially the same.

What an S-corp can do is insulate your medical career from other income-generating activities you might be involved in, and vice-versa. Think real estate, for example, or some other investment. Callahan recommends talking to a professional to find out if the extra hassle makes it worth it or not. Generally speaking, the benefits become more tangible the more valuable the other investment or activity is.

Dr. Jim Mock, emergency medicine physician, uses an S corp to take care of his income from locum tenens. By paying himself a monthly base salary and doing a shareholder distribution, if he exceeds his salary, he’s able to take advantage of some tax benefits.

Make sure you’re covered: How to get health insurance as a locums physician

Take advantage of tax deductions for locum tenens physicians

Locum tenens physicians have several expenses they can deduct from their taxes, beginning with the cost of their premiums for health and dental insurance. Other common expenses to deduct include cellphones, computers, iPads, lab coats — anything you use or wear at work that you pay for out of your own pocket.

As Callahan points out, the IRS used to categorize these items as “mixed use,” meaning the taxpayer had to estimate how much of the item’s expense was for work and how much was for personal activity. “They finally gave that argument up a long time ago,” he says, “because the fact is either you have a phone or you don’t, so there’s no way to really estimate that.”

Just keep track of your receipts. The IRS doesn’t accept credit card statements as proof of purchase. In fact, Callahan even suggests jotting down a note or two on the back of the receipt to bolster the documentation even more. For example, say you have a meal expense that you want to deduct. On the back of the receipt, you might write the name of the person or people who attended and even a sentence or two on what was discussed.    

Locum tenens physicians should also consider deducting contributions they make towards retirement —Roth IRA, IRA, and 401(k), for example.

In fact, you’ll likely have more freedom arranging and managing these accounts on your own, as a self-employed individual, than you would if you were working for a large company as a W-2.

Ready to conquer your locum tenens physician taxes?

Okay, maybe “conquer” is too strong of a word here. But at least you have a sense of what the primary concerns are when it comes to planning for and paying your taxes as a locum tenens physician.

No matter who you are, taxes can be overwhelming and stressful. With a little more research and consultation with a qualified tax consultant, you’ll be able to handle your locum tenens physician taxes while reaping all the advantages that this exciting career path has to offer.

Want to work for yourself? Learn why one physician thinks locums is a great low-overhead solution to self-employment

This article was updated on 1/17/2024.

The information contained herein is general in nature and is subject to change. Tax information contained in this document is not intended to be used and cannot be used by any person as a basis for avoiding tax penalties that may be imposed by the IRS or any state. We recommend each taxpayer seek advice based on their circumstances from an independent tax advisor.