For concierge physicians, proactive tax planning is essential to help maximize your income and stay compliant with IRS regulations. The concierge medicine model allows physicians to benefit from a more consistent and reliable stream of revenue, and proper tax planning can enable you to keep more of that revenue when tax season comes around.
1. Consider filing as a S-Corp
For tax filing purposes, most concierge physicians are considered self-employed, whether they are independent contractors or own their business. As a self-employed physician, you will need to determine how to incorporate your practice. Choosing the most appropriate business entity for your practice could help you save on your tax bill.
The most popular options for concierge physicians are limited liability companies (LLCs) and corporations. An S-Corp, short for small business corporation, is a designation that you can choose for tax filing purposes whether your practice is an LLC or a corporation. Many doctors choose to establish a practice as an LLC taxed as an S-Corp rather than establishing a true S-Corp.
Both LLCs and S-Corps are pass-through entities, which allow any income generated from the business to “pass through” to the individual owners, rather than requiring separate filing for the business as a traditional C-corporation would. For physicians, the primary benefit of S-Corp status is that it allows you to split your income into two categories: income and distributions. As a business owner, you are not responsible for payroll taxes on corporate income in the form of distributions. Thus, the more you are able to pay yourself in distributions, the lower your tax burden can be for payroll taxes such as a FICA, self-employment, Medicare, or Social Security.
You may be wondering, “Why wouldn’t I just pay myself only in distributions? Or why couldn’t I set my traditional income at a low amount to maximize the remaining amount paid in distributions?” In short, the IRS stipulates that you must be paying out “reasonable wages” when receiving pass-through income as an S-corp. This rule ensures that you are paying an appropriate minimum amount of payroll taxes. You should pay yourself and any other shareholders a salary commensurate with industry norms based on their training and experience as well as their duties and responsibilities. A CPA or financial professional can help you determine a reasonable salary according to IRS definitions. Once you have paid yourself a reasonable salary (and the associated payroll taxes), you can pay out the remaining profits in the form of distributions.
To determine whether your practice could benefit from S-Corp tax status, talk with your financial team. If your concierge practice is yielding relatively low levels of gross income, the S-corp designation may add unnecessary legal complexity with minimal tax benefits. However, if you are producing enough income to pay reasonable salaries as well as substantial distributions, the S-corp designation could help reduce your tax burden.
2. Reduce your taxable income
Your tax planning strategy should include maximizing deductions to reduce your overall taxable income each year. Concierge physicians can deduct the following major expenses to lower their tax burden:
- Retirement Contributions. Contributions to retirement savings are typically among the biggest deductions for physicians. 1099 physicians commonly use SEP IRA or Solo 401(k) accounts. In 2020, the maximum deductible contribution to these accounts is $57,000 for physicians under the age of 50. Physicians over the age of 50 can contribute up to $63,500 to a solo 401(k).
- Health insurance premiums & HSA premiums. Generally, self-employed physicians are allowed to deduct all healthcare insurance premiums from their taxable income. However, if you are eligible to receive coverage from another source such as an employer or spouse’s employer, you may not be allowed to deduct your premiums. If you are eligible for a Health Savings Account (HSA), you can benefit from tax deductible contributions and withdrawals for approved medical costs. Once you reach age 59.5 you can then use those dollars for retirement just as you would from an IRA or your other retirement plans without being subject to penalties. It is another reason accumulating cash in an HSA can be a useful retirement planning tool.
- Deductible Business Expenses. See Point #3 below for more on deductible business expenses.
- Qualified Business Income (QBI). Whether you are a shareholder in an S-Corp or a member of an LLC, QBI may allow you to deduct up to 20% of your business income on your tax returns. If your income is below the defined threshold, you can deduct the lesser of the following two values:
– 20% of your qualified business income + 20% of your qualified REIT dividends & PTP income OR
– 20% of your taxable income minus your net capital gainsTalk with your financial team to determine how much QBI you may be eligible to deduct from your taxable income. There are very specific rules governing what can be deducted under the QBI category so be sure to check with your advisor first before assuming you qualify.
3. Track your deductions carefully
If you plan to claim itemized deductions instead of the standard deduction for your tax bracket, you need to diligently record your eligible business costs.
Common deductions for self-employed physicians include:
- Fees for lawyers and accountants
- Business insurance
- Rent, mortgage and utility costs
- Employee wages and benefits
- Office supplies
- Business travel (including mileage)
- Internet and technology expenses
- Education and training costs
- License renewal fees
The large number of deductible business expenses is helpful for maximizing tax savings but can also become overwhelming to track over the course of a year. For a small operation, a simple spreadsheet may be sufficient for tracking deductions. As your business grows, it is worth investing in filing systems, accounting software, and mileage tracking apps that streamline your recordkeeping and help you claim all eligible deductions.
4. Start tax planning early
Create a schedule to ensure that you do not fall behind on tax planning throughout the year. Physicians Thrive’s team of tax experts recommends the following guidelines for a planning schedule:
- Establish your completed tax plan early enough in the year to ensure you have time to take advantage of any deductible contributions before year end. Remember that many strategies require implementation of certain steps by October 1st.
- As a self-employed physician, prepare to make quarterly estimated payments. While concierge physicians tend to have more stable and predictable income than other self-employed physicians, it is important to work with your financial team to ensure the right amount of money is being withheld throughout the year.
- Meet with your tax team as soon as possible after April 15th to begin planning for the new year.
A precise, forward-looking tax plan is essential for concierge physicians. Waiting too long to make a plan may mean a lost window of opportunity for tax savings. Imprecise tax estimates throughout the year may result in financial strain waiting on a refund check at year’s end. Meet with your tax team to map out a proactive tax planning schedule that will maximize your savings and minimize your stress.
5. Understand deductions if family members are on your payroll
Concierge physicians who are independent contractors, sole proprietors or part of a partnership may be able to reduce some of their taxable income if their dependents are on the payroll. If you have hired a dependent who is suitable for the job and are paying him or her a reasonable salary, you can reduce the income that would otherwise be taxed at your rate of your own tax bracket by shifting it into your child’s tax return. Depending on the salary paid to your child, tax liability on this income may be significantly lower, or eliminated.
For example, a concierge physician who qualifies for the 37% tax bracket hires his two children and pays each a fair salary no greater than the 2020 standard deduction: $12,400. The standard deductions protect the entirety of these wages from income tax liability, resulting in over $9,000 in tax savings annually.
Keep in mind that any wages paid to a dependent must be reasonable for the child’s age and skill level. If you have hired family members to work at your concierge practice, talk with your tax team to ensure all proper documentation is in place.
Proactive tax planning can help you avoid costly errors and take the stress out of tax season. At Physicians Thrive, we offer proactive tax planning services to integrate your long-term investment strategy with your annual tax planning for maximum savings.