5 Ways Independent Contractors Can Shrink Their Tax Bill
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There can be several moving parts to building a tax plan as an independent contractor physician. However, careful considerations can lead to dramatic savings once you break it all down into manageable steps. Start with these categories, following specialized advice from the professionals at Financial Designs, Inc.
Retirement Savings
Contributions of up to $58,000* per year to a tax-deductible retirement account like a SEP IRA or Individual 401(k) are permitted for independent contractor physicians. This means if you are in the 24% tax bracket, you could save over $13,920 in federal taxes alone (if you max-out your retirement contribution). If you live in a state that requires you to pay state income tax, there would also be additional savings.
And the good news – you don’t have to stop there. If you want to further accelerate your retirement savings AND further shrink your tax bill, you can deploy strategies like hiring a spouse or using a Defined Benefit Plan. By using these strategies, you can save over $100,000 in a tax-deductible capacity.
Qualified Business Deduction
As of 2018, 1099 physicians can qualify for a 20% pass-through deduction which can save you upwards of $15,000 in taxes in a year. For specific QBI qualification guidelines, review details here or contact a FDI representative.
Business Expenses
As an independent contractor physician, tax deductions begin with your business expenses. These items can add up, and it’s not uncommon to deduct $15,000 per year. If your primary office is at home (without an additional office space provided at the workplace), you can deduct your at-home office space as well as the commute to and from work.
Independent contractors may also deduct the cost of items such as licensing fees, cell phone bills, CMEs (including travel), scrubs, etc. A full list of deductible business expenses should be available through your financial advisor.
Social Security & Medicare Tax
As an independent contractor you have to pay more in “self-employment” tax because you have to pay Social Security/Medicare tax as the employee AND the employer. However, the IRS allows you to deduct 50% of this (essentially the “employer” portion) which can save you a few more thousand in taxes. Typically, the other financial benefits of being an independent contractor outweigh the fact that you have to pay more in Social Security/Medicare taxes.
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Health Insurance Premiums & HSAs
As an independent contractor physician, you can deduct the money you spend on your health insurance premiums and the money you contribute to HSAs which also grow tax-free. These expenditures can add up to significant savings as you tally each amount.
Additional strategies are available pursuant to individual circumstances. For more information about identifying the most effective 1099 deductions for physicians, contact your tax professional or the Financial Designs, Inc. team.
*$64,500 for those over the age 50 (in 2021)
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ApolloMD Disclaimer: The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding federal tax penalties. Described in this text are some of the many advantages of being paid as an independent contractor (IC). The scenarios provided regarding tax saving and retirement planning strategies are neither recommendations nor suggestions but are merely examples. Individuals are encouraged to seek advice from their own financial advisor, CPA and/or legal counsel.
Financial Designs, Inc. Disclaimer:
Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge does not offer tax advice. Financial Designs, Inc., Financial Designs Tax Services, LLC and Financial Designs Legal Services, LLC are not subsidiaries or affiliates of Cambridge Investment Research Advisors, Inc.
