Physician Series Part 1: Tax Strategies for Self-Employed Doctors & 1099 Physicians

EP 23 Transcript
00:00:17:04 - 00:00:40:06

Kevin

Welcome to the Hidden Money podcast. Today we are going to talk to a specific demographic and demographic that we rely on almost every day with children, families and everything that we rely on their expertise. And hopefully y'all can rely on us. And that's physicians and doctors. You'll provide such a great service to, communities and to families.

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00:00:40:09 - 00:00:59:10

Kevin

We also want to serve you in the way we're going to do that is the next three podcasts are going to be revolved around physicians and physicians alone. You all are in a very unique situation. Y'all are typically either high income earning, y'all might be coming out of, school and just have a massive amount of debt. And how do we tackle that?

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00:00:59:10 - 00:01:22:18

Kevin

How do we tackle, structuring your income in a most tax efficient way as you grow in your career and your income starts going up, you're going to be hit with some tax bills. And so that's what we're here to do today, is we just want to hit those physicians that may own their own family practice, that may be, partners in another medical practice with other doctors.

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00:01:22:18 - 00:01:42:23

Kevin

And y'all are strictly what we would call 1099 or self-employed physicians. These aren't this this episode is not going to be geared towards the W-2, doctors, but we're going to cover that in the next episode. But for this one, I'm excited because there are so many things you could do when helping those doctors who are running their own practice.

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00:01:42:23 - 00:02:06:16

Mike

this. The topic for this series really hits home for me. My father was a doctor. He worked his entire career and tail off saving people's lives, teaching other doctors. And it was in a lot of ways, it's a thankless job. When he started practicing in the mid 70s, doctors pay was really good relative to the rest of the society.

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00:02:06:16 - 00:02:47:12

Mike

You could make a better than good living. Sometime in the late 80s, they passed this law that prevented doctors from having any ownership in the hospitals that they practice at. And really, ever since then and now with private equity instead of physicians generally having good pay, and being able to work reasonably less hours once they got out of their internships and residencies, with private equity coming in and just turning them into hourly employees that have to work every hour just to make a dollar, they're trading time for money, and it it's a tough position, and we need these doctors.

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00:02:47:12 - 00:03:06:08

Mike

Let me just add, thank God, in the last ten days, I have not had to be in an emergency room. But prior to ten days ago, in nine days, I had to go to the E.R. three times. Once for my wife. Kidney stone. Thank God it was only that, once for two of my three sons.

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00:03:06:11 - 00:03:07:08

Kevin

Just being boys.

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00:03:07:13 - 00:03:08:02

Mike

I am

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00:03:08:02 - 00:03:16:11

Mike

so thankful for physicians. What they do. They don't always make the easiest clients. Honestly, they make some of the toughest clients because they don't want to

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00:03:16:11 - 00:03:18:19

Mike

Need to

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00:03:18:19 - 00:03:34:03

Mike

to us if they want to reduce their taxes. But yeah, I'm excited about this series and really excited about today's topic. As you said, doctors that aren't a W-2 employee, there's a lot of we call them locum doctors or just contract doctors.

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00:03:34:05 - 00:03:43:08

Mike

They receive 1090 nines. And how often do we see one of those walk through our door or have an initial consult, and they are paying way more in taxes than they should

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00:03:43:08 - 00:03:44:22

Mike

pay.

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00:03:44:22 - 00:03:54:01

Mike

to pay. Drives me not. So physicians, please listen to us. I know most of you probably have the God complex. You need that when you're making life and death situations.

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00:03:54:01 - 00:04:12:14

Mike

Maybe, but but just consider some humility and humbleness right now as we try to change the way you think about tax. Unless you love paying all the tax that you're paying, unless you don't mind it taking forever to pay down that student loan debt. Listen to us, please. Doctors.

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00:04:12:17 - 00:04:32:08

Kevin

Yeah, because the tax strategies that we recommend to doctors, they differ from, you know, a dentist or a physician that I, I mean, y'all's industries are way different. And your income levels are different too. And if you're sitting there with some a massive amount of debt, hopefully you're not. But if you are, the more you save and tax, the more you can get out of debt.

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00:04:32:08 - 00:04:51:07

Kevin

I mean, if we save you a 5100 grand a year in taxes, you could think of how quickly you can eliminate some of that, some of that debt. So to start off, I would just like just structuring wise, if you're a 1099 doctor, you should not just fill out your paperwork and have that 1099 go into your personal bank account first and foremost.

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00:04:51:07 - 00:04:53:04

Kevin

One, it's a huge liability issue.

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00:04:53:13 - 00:05:10:20

Kevin

You need to have an LLC set up so that you can actually partition that income away from your personal income. You don't want to going into that same personal bank account. It just wouldn't. Hence the name Limited Liability Company, LLC. You do not want that to go in there and,

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00:05:10:20 - 00:05:28:07

Mike

here though. Kevin and I are not licensed attorneys. We're not competent to provide legal advice when you're discussing liability things, that is legal advice. Please understand we're speaking as CPAs and always consult with your attorney on legal advice. We're focused on tax, but he's right.

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00:05:28:10 - 00:05:46:08

Kevin

Yes. Yeah. I've been in rooms. I've been doing this for 20 years. I know what an LLC works and does. But before you actually go do the LLC, we always advise to go with an attorney. But generally speaking, if you get an LLC set up, that's step one is let's limit our exposure. Being in the medical industry, you're going to be exposed to a lot of liability.

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00:05:46:10 - 00:06:03:22

Kevin

So you need to partition that. And on top of that you're going to have your professional liability insurance. You're going to have your malpractice insurance. All those premiums are tax deductible. So make sure once you set up this LLC, you're running all your income and all your expenses out of that LLC bank account. Get your personal assets away from this.

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00:06:04:00 - 00:06:22:20

Kevin

That's always step one. Then step two is I like to just think think of your life as a business. Now you have a cell phone, you have an iPad, you have a computer. How are you doing billing. You have admins. You have all everything that you're doing to run this business is going to be an active tax deduction.

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00:06:22:20 - 00:06:41:07

Kevin

And that is what we want to start looking at when, where we're seeing any new physician transition to self-employed is because they're like, what can I deduct? I had, a client, the new client come in yesterday, and I don't know if you've ever seen the show Schitt's Creek. It's it's I think it's on. I think it's on HBO.

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00:06:41:07 - 00:06:53:12

Kevin

But one of the characters in there, I guess, he was just talking about they own a business, and he's just like, I'm just going to write it off. And the dads are like, what is really? Do you even know what that means? He goes, I don't know. Someone just writes it off. You just write stuff off, right?

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00:06:53:12 - 00:07:12:12

Kevin

He didn't even know what the term right off was. That's what this client said. They're like, what? What is a write off? What can I do? And that is very similar to what we see with a lot of new people transitioning to being self-employed. They don't know what what can I do and can't I do. And the general rule is anything ordinary and necessary for you to generate income is going to be an expense.

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00:07:12:15 - 00:07:15:10

Kevin

And in this time and age, you need a cell phone. You need,

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00:07:15:10 - 00:07:39:08

Kevin

computers, you need all the equipment that you have, all the supplies, everything that's ordinary, necessary, your vehicle, possibly. You can even make an argument. Your kids are ordinary, necessary, or if you're sitting well, you know, you have 2 or 3 kids. I'm sure they're they can help somewhere in the practice, and we can shift some revenue and some income out of your 37% bracket to their 0% bracket, and keep the money in the family.

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00:07:39:13 - 00:07:44:07

Mike

Yeah. And especially when you're considering you're probably already paying your kids an allowance, you may

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00:07:44:07 - 00:07:45:16

Mike

as well be able to write it.

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00:07:45:17 - 00:07:47:13

Kevin

Yeah, write it off.

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00:07:47:13 - 00:07:59:22

Mike

on it before you go any further on the structure. And I just want to add a lot of states. Physicians prefer to use something called a PA, a professional association. Mainly here in Texas we go with plaques or LLCs.

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00:08:00:00 - 00:08:24:04

Mike

But PA, same thing. But be careful with the PA when you create it if you're not immediately creating an selection. So when Kevin mentioned LLC is it can be an LLC, a PLC or a PA, just be very careful. The PA, some states immediately tax those as corporations. So if you create a PA and you don't know what you're doing and you're not working with a tax strategist, you might suddenly find yourself getting double taxation.

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00:08:24:04 - 00:08:30:03

Mike

So make sure you talk with the tax professional before you create your entity.

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00:08:30:03 - 00:08:46:11

Kevin

But yeah, after step two is if we're running our life as a business, we have an LLC, we have a PA, we have some sort of LLC structure in place, some sort of liability structure in place. We're deducting as much as we can. We're fine tuned our expenses to get our net income as low as possible.

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00:08:46:16 - 00:08:48:19

Kevin

We also can think about what Mike already

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00:08:48:19 - 00:08:51:20

Kevin

mentioned is the S Corp. S Corp are huge now

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00:08:51:20 - 00:09:21:03

Kevin

in your industry there's there's some issues with some S Corp, that we come across. One if you are strictly family practice, more than likely it's not going to be an issue for you if you're in control of the revenue, the billing, and you're in control of everything, you are the, owner of your practice now going to be an issue if you're a doctor that has been is a partner of a bigger medical group such as THC, Texas Health Care, Baylor, whatever.

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00:09:21:03 - 00:09:46:05

Kevin

If you're part of these bigger conglomerate groups, more than likely they may not for their liability issue their liability reasoning may not be able to allow you to invest or own your partnership interests in an escort, because what happens is, in this big partnership, let's say you're a partner of THC, your income that you earned is subject to income tax and self-employment tax.

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00:09:46:07 - 00:10:08:01

Kevin

S is really help with point number two of self-employment tax. So if you can own your interest in your, your practice in an S Corp, you're going to save so much in self-employment tax just by simple restructuring. Then once you're in control of your own s-corp, you could do so many tax things, with salary cubii, deduction, partitioning and of income, which we can get into as well.

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00:10:08:01 - 00:10:08:10

Kevin

But.

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00:10:08:10 - 00:10:25:19

Mike

yeah, it's funny how you keep bringing up THC. I guess we somehow we ended up 5 or 6 years ago getting a lot of physicians, a lot of the younger ones from THC. And we were pushing to get them to create s-corp and then go back to the partners and the finance committee say, no, we're not going to pay an S-corp.

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00:10:25:19 - 00:10:44:19

Mike

You have to be employed directly with us as an individual. We even got the CFO on the line once. He was another physician, but he was the finance partner or whatever. I can't remember his title. And we asked him, why do you not allow them to own their interest? And s-corp, he's like, well, we've been doing this for many, many years.

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00:10:44:19 - 00:10:45:10

Mike

It's been older.

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00:10:45:10 - 00:10:46:03

Mike

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00:10:46:03 - 00:11:13:15

Mike

And we're just not going to change. This is the way we do it. So I just want to add on to Kevin's note. If you go to your partnership and ask them, please let me on it and ask them. And they say, no, don't just assume that it's truly no. We have been successful in working with some of our physicians to help convince their managing partners or the management committee or however your, your, conglomerate is run to understand the tax benefits of it.

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00:11:13:15 - 00:11:22:02

Mike

And we've been really lucky with one of them. I remember there's about 90 docs and they would not listen. At first they said, no, we're not changing the ways that was run by, you

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00:11:22:02 - 00:11:22:12

Mike

know. Yeah.

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00:11:22:12 - 00:11:24:14

Mike

physicians 30, 35 years

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00:11:24:14 - 00:11:25:01

Mike

Yeah.

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00:11:25:10 - 00:11:37:20

Mike

It took us three times to illustrate, even though we didn't get that the general partners or the managing partners business as a client, we walked him through the tax savings he would have.

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00:11:37:22 - 00:11:53:12

Mike

He didn't care about all the other physicians. But once he realized that it was okay, now every state's different. There might be, like Kevin said, liability reasons. There might be insurance reasons. They won't let you do it. Generally, it can be done. Don't just accept no as an answer if you are a partner in a group.

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00:11:53:16 - 00:12:14:12

Kevin

Yeah. And even if they say no, we've worked with clients on how to get it, even around some self-employment tax issues. Even if they do say no. So never take no. That's mechanized kind of caritas. Don't ever accept no as an answer. When it comes to tax planning, there's almost always a way, which is really fascinating in our in our line of work is it's very creative.

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00:12:14:12 - 00:12:21:04

Kevin

A lot of people don't think of CPAs, of having to be creative or think outside the box. That's all we do every day.

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00:12:21:06 - 00:12:26:04

Mike

A lot of people don't know is an answer all the time. Yeah, we're working with

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00:12:26:04 - 00:12:39:09

Mike

guy, CPA. We did his business, his CPA did the 1040. They were under an audit and I told them and show them, hey, you can take this deduction and treat it this way. I make a big tax difference.

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00:12:39:09 - 00:12:44:10

Mike

He said, we can't do that. I said, why not? He said, well, I asked the IRS agent and he said no.

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00:12:44:20 - 00:12:50:12

Kevin

Yeah, go ask them. That's like asking your mom and dad for cookies at midnight. No, you're not going to get it.

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00:12:50:12 - 00:13:14:10

Mike

just want to stress again that most tax law is not black and white. Unfortunately, most CPAs and tax preparers practice like it is the IRS. Most of those agents definitely think it's black and white, but the fact of the matter is, most of it's a gray area. And even if the IRS says no, talk to a tax strategist not to prepare a strategist because there's a good chance IRS is wrong.

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00:13:14:16 - 00:13:41:22

Kevin

Yeah. And, so to go back to that K-1, that ownership, if you're a doctor and you receive a K-1 every tax year and that K-1 is issued to your personal Social Security number, and on that K-1 in box 14 of that K-1, if it's a number, there that's self-employed, that's your earned income subject to self-employment. If you have a high number in box 14 of your K-1 every tax year, you're doing something wrong.

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00:13:42:00 - 00:13:50:06

Kevin

Or you I won't say you're doing something wrong. You're doing something that could be changed. Something could be done to better wipe away some of that box 14 income.

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00:13:50:10 - 00:14:11:15

Mike

just unwrap real quick the self-employment income thing. I know we've had multiple episodes where we talk about it in detail, but just in case we have a physician listening here that doesn't fully understand it. Quick, 101 on self-employment tax. If you're not paid W-2, the IRS wants you to still pay your payroll taxes, your Social Security and your Medicare.

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00:14:11:17 - 00:14:38:01

Mike

If your W-2, when you receive your paycheck, your your boss or whoever you're working for withholds Social Security and Medicare from you, and they turn around and match it. Total of 15.3% up to a certain threshold if you were self-employed, like receiving, line 14 income on a K-1 or guaranteed payments from a partnership that is subject, generally speaking, subject to self-employment tax.

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00:14:38:01 - 00:14:50:05

Mike

So you're going to pay your normal income tax plus guaranteed 15.3% on the first about 170 grand. This year. So now that we've talked about that, we're going to Kevin's going to get

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00:14:50:05 - 00:15:12:16

Kevin

Yeah. And that only doesn't cover the questions it covers for you self-employed, your 1099 contractors, you business owners who own your own practice. All of that is subject to self-employment tax too. So we were kind of talking about big conglomerate ownership in a partnership. But this this applies to you physicians that own your business as well. If you're earning money self-employed, you're subject to income tax and self-employment tax too.

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00:15:12:18 - 00:15:23:22

Kevin

It's almost, almost a no brainer to do an S corporation with. And but there's a lot of rules with S Corp and we would need to make sure that you're coached and trained up on those. Number. Yeah. Go ahead.

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00:15:23:22 - 00:15:42:19

Mike

we're throwing out these term self-employed business on our partner. The way the IRS sees it, even if you're working in a big conglomerate or even if, you're 1099, but working at the same hospital all the time, or you own your own practice. The IRS sees that all as self-employed.

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00:15:42:19 - 00:15:49:20

Mike

It's treated that way whether or not you see it that way. That's how the IRS sees it. So we just want to get you on the same language that Kevin

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00:15:49:22 - 00:16:11:22

Kevin

Yeah. Self-employed covers that big broad brush. So we got our LLC set up. We are deducting every expense under the sun that we can get away with. That's ordinary necessary. We have structured hopefully into an S corporation if it makes sense, which is a broad statement because you might have other employment income anywhere. So this is just broad strategy.

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00:16:12:00 - 00:16:46:11

Kevin

What would number four be? I would say the equipment, if you are self-employed and you are buying medical supplies, equipment, you know, whatever would be. Yeah, I mean the machinery is super expensive. Be on the lookout for this tax law change, with this big, beautiful bill that's coming through, you're going to have 100% bonus depreciation. And what that would mean is if you buy a $100,000 machine, whatever, you know, industry you practice in, that machine is typically depreciated over 5 or 7 years.

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00:16:46:13 - 00:17:08:19

Kevin

So that means if you buy a $100,000 piece of machinery for your practice that you need, then you're going to just divide that by five or divide that by seven. And you, this is very broad, but that's how much deduction you get every year over the course of its useful life. 100% bonus depreciation does with this bill is you get a write off all $100,000 of that machine in one year.

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00:17:08:19 - 00:17:11:05

Kevin

It's not spread out.

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00:17:11:07 - 00:17:19:22

Mike

On term even if you're leasing it. As long as you work with strategies to make sure your lease qualifies as what we call a capital lease.

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00:17:20:00 - 00:17:39:11

Kevin

The whole thing. Yeah. And then that's where the the coaching comes in a little bit here too, is because if you get $100,000 right off in the first year, that's going to save you $37,000 in tax. That's great. But now you're paying for that note. If you finance this piece of machinery, you may be paying that piece of machinery over the next five years.

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00:17:39:13 - 00:18:02:00

Kevin

So in year two through five, as you're paying the note on this piece of machinery, you've already deducted it. So you're not going to get a tax deduction for the no payment. So now you have cash leaving your LLC or your PA bank account, but your tax liability is not going down with the cash. So there could be depending if you buy a lot of equipment and you could see this mis mismatch in tax versus cash.

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00:18:02:02 - 00:18:25:15

Kevin

So that's just something to be wary of. But generally speaking, you want to take as much tax deduction today so that you can save $37,000 today. Reinvest that 37 to either more machinery hiring or your own distribution. But then you can kind of grow that $37,000 saved into more, in the next 2 to 5 years.

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00:18:25:17 - 00:18:26:06

Mike

It is a

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00:18:26:07 - 00:18:33:01

Mike

timing issue. And you remember, we had that one huge real estate client once that said, I don't want to take bonus

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00:18:33:00 - 00:18:33:17

Mike

depreciation.

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00:18:33:19 - 00:18:34:17

Kevin

He's still a client.

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00:18:35:03 - 00:18:38:22

Mike

dozens and dozens, I mean, hundreds of millions a year in

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00:18:39:05 - 00:18:40:18

Kevin

We couldn't convince them.

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00:18:40:20 - 00:18:41:18

Mike

And he said, no,

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00:18:41:19 - 00:18:44:15

Mike

I don't want to because all it's doing is delaying the taxes.

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00:18:44:15 - 00:19:11:22

Mike

And it might delay it into a year when the taxes are higher. So I don't like it. Let me put that myth aside. I mean, that is true. But here's the real facts in your example, that $37,000 you save, go put it just even if you put it in a money market account, it earning interest for the next, whatever, five years or eight years or whatever, you've deferred the taxes as long as that, then you could pay the tax, but you'll always have those earnings forever.

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00:19:12:00 - 00:19:37:08

Mike

Now, in reality, you're not going to just get straight line interest, right? If you make good investments with it, you're going to make a lot of money on it. And you always get to keep that. That is ignoring the likelihood and possibility, especially if you are working as a tax strategist or working with a tax strategist. When it comes time to pay that tax, you're going to have more strategies to mitigate that tax, and you're kicking the can down the road hopefully until the day you

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00:19:37:07 - 00:19:37:12

Mike

die.

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00:19:37:16 - 00:19:56:11

Kevin

Yeah. And not only let's say you finance a piece of equipment at 8 or 9%, which isn't uncommon, or maybe 12%. I don't know what to your terms are. Let's say you say you buy a $100,000 piece of equipment. It saves you $37,000. You could take that 37 and pay down that note. There's an 8% ROI or 12% ROI just on that interest.

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00:19:56:12 - 00:20:16:20

Kevin

So you can there's one way you can kind of consolidate debt. You can use those tax savings to pay off your student loan debt, if that's high. I mean, we can kind of roll some debt elimination in this too. But the debt elimination is not going to provide a tax break either. But there's a mixture of, you know, hey, we want to save taxes, but we also want to be wise with our money and grow our wealth to.

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00:20:16:22 - 00:20:17:22

Mike

Keep these episodes

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00:20:17:22 - 00:20:37:05

Mike

down to around 20 minutes. But the fact is we could go on for three hours and not even cover 70% of the deductions and credits available to physicians who are in, quote unquote, self-employed. I do want to make sure we clarify the whole reason the C tax or self-employment tax gets saved.

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00:20:37:05 - 00:20:58:20

Mike

When you create an S-corp, you're still going to pay some payroll tax. But what you have to do when you have that s-corp is you have to issue yourself. The IRS requires you to pay yourself a reasonable wage that shows up on W-2. So the wage you're paying remember reasonable check out we're have other episodes of what reasonable wages as an S corp's reasonable is a gray area.

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00:20:58:20 - 00:21:20:12

Mike

It's not black and white. It's a gray area. But you got to pay yourself some W2, so you're going to pay some self-employment tax. But everything over and beyond the W2 you're paying yourself is not subject to the tax. That's the big trick there. And I think finally, Kevin, one thing that I love you physicians, we've already explained how much we appreciate you guys.

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00:21:20:14 - 00:21:48:01

Mike

We understand you're working hard at your practice. You don't have the time or the energy to focus on a lot of details. But as Kevin was mentioning, you create your entity, make sure every income and expense item for your practice or your practices goes through that one entity. Don't be mixing your personal expenses with your business expenses. Don't be using 20 different credit cards that you forget to tell your bookkeeper about.

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00:21:48:07 - 00:22:11:20

Mike

We've had so many issues with physicians. With us, you're losing deductions. Just try. We call that co-mingling. Don't co-mingle keep all your income, all your expenses, and one business. And seriously, if this s-corp or having your own practice is saving you hundreds of thousands of dollars in taxes each year, consider hiring a good bookkeeper that knows physician practices.

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00:22:11:20 - 00:22:23:18

Mike

There are thousands. Well, there's hundreds of really good ones out there. There's tens of thousands of bookkeepers. Get a bookkeeper. It will save you so much more in taxes than it will ultimately cost you to pay for that

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00:22:23:19 - 00:22:42:16

Kevin

But that's right. And, you know, feel free to reach out to us. We can handle the tax strategy, the set up. We can handle the accounting. We can handle the payroll s-corp election. We can cover every aspect that we talked about. And then in our next episode, next week, tune in because we're going to be talking about, okay, now I fine tune my business.

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00:22:42:22 - 00:23:12:13

Kevin

I've got my S Corp set up on my and I've got my business income as low as possible legally that I can now I still owe tax because it's going to me personally. What can I do personally to reduce my physician income. And then we're going to speak to the W-2 physicians and self-employed people. Y'all still pay attention to this episode because you're still going to owe tax when it comes down to your personal tax return, we're going to fine tune the business, but then we still have taxes at the personal level now, there's still so much we could do at the personal level to reduce our taxes.

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00:23:12:13 - 00:23:25:01

Kevin

So stay tuned for next week, because now we need to look at the big picture. So thanks for joining us today. And yeah, make sure to like, share, comment and subscribe to us and we'll see you all next week.

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