A growing number of doctors add side practices such as consulting, teaching, telemedicine, or a small clinic to their primary work. Although these side practices can increase earnings, they also introduce additional tax complexity. Effective planning can lower tax liability, protect cash flow, and keep you compliant with federal and state rules. This is a practical guide to navigating tax planning for doctors with side practices.
The Importance of Side Practices A side practice transforms the tax nature of your earnings. Income that would otherwise be taxed as salary becomes self‑employment income subject to the self‑employment tax (Social Security and Medicare). A blend of W‑2 income from your primary job and 1099 income from a side practice produces a hybrid tax environment. Each type of income has different deduction rules, reporting requirements, and timing considerations.
Essential Tax Concepts for 法人 税金対策 問い合わせ Physicians 1. Self‑Employment Tax (SEAT) – 15.3% on net self‑employment earnings. 2. Qualified Business Income deduction – up to 20% of QBI under Section 199A, subject to limits. 3. Corporate Tax Rates – incorporation can offer lower rates and separate liability. 4. State taxes – numerous states tax medical earnings differently; some provide special exemptions or reduced rates for medical professionals.
Choosing the Right Entity
Sole Proprietorship
Most straightforward to establish; income appears on Form 1040 Schedule C. All expenses are written off on the same schedule; no separate corporate filing needed. Self‑employment tax applies to the net profit.
Limited Liability Company (LLC)
A single‑member LLC is treated as a disregarded entity, identical to a sole proprietorship unless corporate taxation is elected. Multi‑member LLCs submit Form 1065; each member gets a K‑1. Offers liability protection without corporate formalities.
S‑Corp
Pay yourself a reasonable salary (W‑2) and take the rest as shareholder distributions. Salary is subject to payroll taxes, but distributions are not subject to SEAT. Requires payroll setup, quarterly payroll tax filings, and compliance with IRS reasonable‑compensation rules.
C Corporation
A distinct legal entity; profits taxed at the corporate level (21% federal) and again upon dividend distribution. Useful for larger side practices or when planning to reinvest profits. Demands detailed corporate governance and annual meetings.
Best Practice: Most physicians opt for an S‑Corp or LLC with an S‑Corp election to balance simplicity, liability protection, and tax efficiency. Nonetheless, the choice relies on revenue, number of staff, and future goals.
Deductible Cost Items
Rent or Lease of Office Space
Utilities, Internet, and Phone
Liability Insurance for Professionals
CME and Licensure Fees
Medical equipment and supplies like instruments and computers
Marketing and Advertising expenses
Depreciation of Capital Assets
Premiums for Health Insurance when self‑insured
Travel and Meals related to business (50% meals deduction)
Home Office Deduction if you have a dedicated space for patient care or admin tasks.
Remember: All expenses must be ordinary, necessary, and directly related to the side practice. Maintain detailed records, receipts, and a mileage log when claiming a home office or vehicle deduction.
Timely Self‑Employment Tax Payments
- Quarterly estimated tax payments (Form 1040‑ES) are required if your side practice produces $1,000 or more in self‑employment tax.
- Apply the safe‑harbor rule: pay 90% of last year’s tax or 100% of this year’s tax, increasing to 110% if AGI > $150,000.
- Automating payroll for an S‑Corp lowers the chance of underpayment penalties.
QBI Deduction
- QBI permits a 20% deduction on qualified business income from a pass‑through entity.
- Doctors with higher incomes encounter limits: wage and capital caps, and the 20% ceiling.
- Reviewing your total income and side practice type is crucial to maximize the deduction.
Health Insurance & Retirement Planning
- If you are self‑insured and pay your own premiums, you can deduct 100% of those premiums from your gross income.
- Set up a Solo 401(k), SEP IRA, or defined‑benefit plan to defer income and lower taxable wages.
- Contributions to these plans are limited by IRS rules; a financial advisor can help you stay within those limits.
Recordkeeping and Documentation
- Use distinct bank accounts for primary and side practices.
- Keep a detailed ledger of all income and expenses.
- Use medical‑practice‑specific accounting software to track reimbursables, deductions, and tax documents.
- Store records for at least seven years to cover possible audits.
State and Local Issues
- Certain states like Texas, Florida, and Nevada impose no state income tax, simplifying your setup.
- Others (e.g., California, New York) impose additional taxes on medical income.
- Look into local licensing fees, business taxes, and health department permits that could apply.
Timing Strategies
- Defer income: Move large invoice receipts to the following year if permitted, lowering current year tax.
- Accelerate deductions: Pay rent or purchase equipment before year‑end to increase deductions.
- Think about a cash‑basis entity to align income and expenses more closely.
Hiring Workers or Contractors
- Hiring employees triggers payroll taxes, benefits, and labor law compliance.
- Independent contractors (1099) can reduce payroll burden but increase audit risk.
- Hire a qualified tax professional to classify workers correctly and dodge penalties.
Partnering with a Tax Professional
- A CPA or tax lawyer experienced in medical practice taxes can guide you in entity selection, deduction optimization, and compliance.
- Partner with a professional who can assist with quarterly estimates, payroll setup, and audit defense.
- Frequently review your tax strategy.
Common Mistakes to Avoid
- Combining personal and business expenses in one bank account.
- Not maintaining detailed mileage logs for vehicle use.
- Underestimating SE tax and missing quarterly payments.
- Ignoring QBI limits and not structuring the side practice for qualification.
- Neglecting state‑specific tax rules applicable to medical professionals.
Conclusion
Operating a side practice can boost your income considerably, yet it brings a variety of tax obligations. Choosing the right entity, maximizing deductions, managing SE tax, and using retirement and health‑insurance plans lets you retain more income. Ongoing partnership with a qualified tax professional and thorough recordkeeping underpin solid tax planning for doctors running side practices. With the right approach, you can focus on delivering quality care while minimizing your tax burden.