What physicians need to be aware of when it comes to tax breaks for alternative forms with physician employment.
Side gigs and the pursuit of extracurricular, non-medical passions are growing to be more of an occurrence in the typical physician’s profile. However, some doctors are concerned that bringing in more money will overload their tax burden. According to the founder of Career Money Moves, LLC, Altelisha “Lisha” Taylor, MD, MPH, increased income does not imply that all earnings will go to taxes. Extra income will be taxed at its bracketed rate, so if income earned outside of the physician sphere is in a higher tax bracket than a physician’s income, only that extra income will be taxed in the higher bracket. In simpler terms, the physician’s career income will still be taxed in its appropriate tax bracket. As such, Dr. Taylor urges doctors to not let taxes keep them from striving to earn additional money from a side gig.
Physicians can adopt certain tactics to lower tax burden and raise financial success with side gigs. For example, Dr. Taylor suggests that doctors raise the tax withholding at their primary job, thereby removing the possibility of both a large tax bill and paying quarterly estimated tax payments on a side gig. Doctors can accomplish this goal by altering their W4 forms so that their employer holds more money from their paycheck, accounting for taxes that must be paid from any secondary income.
According to Dr. Taylor, another strategy for lowering physicians’ tax burdens would be to prepare in advance by reserving money for taxes in a high-yield savings account (HYSA) or money market fund (MMF). Physicians working side gigs earn income as 1099 contractors, and they get paid the full amount, without taxes subtracted from their paycheck. It is the physicians responsibility to pay approximately 30% of their income or more in taxes. By reserving 30% of any money earned from a side gig and placing it in an HYSA or MMF, physicians can ensure that their money is safe, while simultaneously earning interest on it.
Dr. Taylor also recommends opening a solo 401K as a tax-burden lowering strategy. Pre-tax 401K investments get deducted from taxable income, thereby lowering the tax rate. IRS rules dictate that, when it comes to employer contributions like solo 401Ks, investors can have multiple contributions, as opposed to employee contributions like to a job’s 401K or 403b plan, which only allow one contribution annually. Dr. Taylor suggests that physicians make an employee contribution to their primary job’s 401K or 403b and then get the “match” from their job. This would allow physicians to invest approximately 20% of revenue in a solo 401K employer contribution.
As physicians obtain various sources of revenue, tax scenarios may get increasingly complex. It is at this point that Dr. Taylor suggests hiring a solid, year-round accountant. It is imperative that physicians make sure they are paying the correct tax amount. A quality accountant can check this, but they can also help doctors to potentially ease future tax burdens while building their net worth. What’s more, a year-round accountant allows physicians to take a proactive approach to their finances, thereby opening up the possibility of benefits like deductions and tax breaks.
Physicians earning side-gig income may be able to deduct expenses on taxes. For instance, Dr. Taylor notes that a doctor whose side gig is contract work at another hospital might choose to deduct costs like those paid for medical licensing fees or uniforms. Physicians should be sure to optimize timing on revenue and costs. Dr. Taylor suggests strategies like delaying end of year payments out until January and situating the bulk of costs in December, which helps to reduce taxes.
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