Income Tax Strategies for 1099 Locum Tenens
April 15th has come and gone, but many taxpayers are still assessing how they did in 2018 and considering how best to navigate the new tax laws for the current year. As a recruiting agency, TinkBird Healthcare Staffing places both permanent W-2 healthcare providers, as well as temporary (locum tenens) providers, many of whom work as 1099 contractors.
This article is the first of a two-part series looking at the current tax laws, specifically focusing on the 1099 workers. Part two will address W-2 providers.
Changes to 1099 filing
The majority of locum tenens providers file taxes as 1099 independent contractors. For 1099 filers, there were two significant changes in 2018 that carry over for the current tax year:
First, the standard deduction for taxpayers has increased, making it almost twice what it was previously. Although the standard deduction has nearly doubled, the personal exemption has been removed.
Second, “pass-through income” is now only 80 percent taxable. This 80 percent rule applies to self-employed sole proprietorships and S corps. It also applies to partnerships that have qualified business income (QBI). QBI is essentially the net business income, adjusted by unreimbursed partnership expenses, business interest expense, deductible portion of self-employment tax, self-employed health insurance deduction, self-employed SEP, SIMPLE, and qualified plan deductions in addition to other adjustments. Amounts received as guaranteed payments and payments received by a partner for services are not QBI and are not eligible for the deduction.
How the tax break works
Locum tenens providers, as well as other 1099 healthcare providers, are eligible for savings from pass-through income. When you are filing your return for the previous tax year, you will generally deduct 20 percent of your QBI, leaving the other 80 percent of your income to be taxed.
The biggest takeaway from this is that locum tenens providers will now be able to deduct up to 20 percent of the QBI from their tax return, with some limitations.
Limitations on high earnings
The amount you earn throughout the year will also come into play for locum tenens providers and other 1099 filers. Because healthcare is a service industry, all the income is generally produced by the owners; therefore, the new law issues these limitations to the new QBI tax break. If your yearly earnings equal less than $157,000 as a single filer or less than $315,000 filing jointly as a married couple, no limitations apply. However, if you earn more than this, the deduction will phase out until your QBI reaches $207,500 for single filers and $415,000 for married filers. After these yearly incomes are reached, the 20 percent deduction is gone.
During the phase-out period, the limitation will increase by the greater of 50 percent of any W-2 wages paid to employees, including yourself, or 25% of wages plus 2.5% of UBIA (unadjusted basis immediately after acquisition of all tangible property subject to depreciation).
For locum tenens purposes, it is essential to note that the 20 percent deduction of QBI includes income tax calculations but not self-employment tax. This means that the total net income is still subject to self-employment tax.
Tips for taxes … and more
So, as a 1099 provider, what actions should you take to optimize your tax position and set yourself up for a secure financial future?
- Take advantage of the pass-through income tax advantages
- Avoid penalties by making adequate quarterly estimated tax payments
- Offset your tax liability – and save for the future – by contributing annually to a retirement account
- Document all business expenses for potential deductions (i.e., home office expenses, mileage logs, uniforms, professional licenses, professional insurances, etc.)
- Contact your tax planner to find out if establishing an S corporation would be more beneficial than sole proprietorship (to avoid self-employment tax on some of your income and to potentially increase your QBI).
Learning more about 1099 status
If you are looking for more information about taxes, our medical recruiters can cover the basics about tax implications for locum tenens practitioners. We routinely place physicians, physician assistants, nurse practitioners and other medical professionals in locum tenens jobs, so we know the ins and outs of being a 1099 contractor. For a deeper diver, this article from The White Coat Investor is a great resource, and always consult with your tax planner to make the final call.