Welcome to the world of self-employment. As an independent contractor physician or locums physician, you are in the enviable position of being in high demand.
Being self-employed creates a series of challenges that your peers who aren’t independent contractors might not experience. One of these challenges is finding and funding your own “company” benefits.
To help you out, we have created a list of the benefits that you will need to address.
1. Establish Your Emergency Fund
One of the first things you want to do is to establish an emergency fund. Your employment is at the will of the hospital administration, and things can change very quickly. If you find yourself unexpectedly unemployed, you want to be in a position to look for new employment that is a good fit for your skills and personality. You don’t want this decision influenced by your next mortgage payment due date.
Often, the classic emergency fund of three to six months of income is a bit too conservative for physicians working as independent contractors. If you are living within your means and saving toward financial independence, you probably do not need that much money sitting around in low-interest liquid assets.
Determine your Minimum Viable Income or MVI
Your MVI is the amount of money required to cover all your necessary expenses plus a bit of cushion. You may be surprised how much lower this is than your current monthly income. Look at your budgeting or cash flow tracking to get an idea of what expenses must be covered and which ones can be put on hold. You need to meet all of your debt payments, insurance payments, utilities, food, taxes, etc. If necessary, you can pause contributions to your retirement plan, savings plans or stretch goals. Once you have determined your MVI, make sure you have enough to cover six months.
Invest this money in something liquid that you can get to quickly. Short-term bond ETFs or CDs are your best bet here. Some online banks pay as much interest on a money market account as a local bank may pay on CDs. Your emergency fund is not money you want to risk. Don’t get too caught up in chasing interest rates. A tenth of a percent increase in interest does not add up to that much money. Be mindful of how much of your limited time you spend pursuing interest rates.
2. Deal With Student Loans
Make sure you have a good plan for retiring your student loans. If you are pursuing Public Service Loan Forgiveness, start with this article on the first thing you need to do for PSLF. If you are not eligible for PSLF, make getting these loans paid off as quickly as possible a priority. The best plan is to live for one or two more years like a resident and get rid of these loans.
Look into refinancing the loans with a private lender. There are many good lenders around with good rates and reasonable disability and death benefits. Head over to The Student Loan Planner and start the loan process through one of their affiliate links. They make a couple of bucks to keep the site running, and you will get around $300 as a refinance bonus.
3. Plan For Your Taxes
Typically, an employer pays one-half of your social security and Medicare taxes. Since independent contractor physicians are self-employed, you are now responsible for the entire amount. For 2019, that is an additional 7.65% of income up to $132,900 in salary and 1.45% on income above that limit.
You will want to pay your taxes quarterly. The first payment for the tax year is due April 15th. Subsequent payments are due on June 15, September 15 and January 15 of the following year. Estimate your taxes including both halves of social security and Medicare and send them in a timely fashion.
4. Select Insurance Coverages
You will need to provide your benefits since you have no employer. The nice thing is that you can design your insurance coverages based on your needs and goals not those of everybody else at your workplace.
Health insurance is one of the first and most important items you will need to deal with.
Usually, the best option is to join your spouse’s health care plan. If this is not available, you will need to seek out your own plan.
Typically, a Health Savings Account or HSA is an excellent option for an independent contractor physician. You can deduct the cost of your insurance premiums, and you can deduct your contribution to your HSA account. For 2019, the contribution limit is $3,500 for individuals and $7,000 for families. There is also a $1,000 catchup for people 55 years or older.
This money is triple tax-deferred as long as it is used for medical expenses. You don’t pay taxes on the money you contribute, you don’t pay taxes on its’ growth, and you don’t pay taxes when you withdraw the money for eligible medical expenses.
When you apply for health insurance, start with a broker who can get you quotes from multiple carriers. If you can purchase your insurance privately, it will generally be much less expensive than through the Health Insurance Marketplace.
Property Casualty Insurance
Your business structure and medical malpractice insurance will protect you from medical related events, but that can leave significant gaps. You need personal liability coverage for anything that happens outside of your medical practice.
You need to get an umbrella policy for at least $1M, but $2M would be better. If you are liable for somebody’s injury, it only takes a minute or two online to find out you are a physician. Unfortunately, many people will see this as an opportunity. A $1M umbrella policy will typically cost just a couple hundred dollars a year which is very cost effective.
Your knowledge and skills are the most significant assets that you own. You need to protect them. A disability policy is something you should invest in and keep active until you are financially independent.
You are going to want a good policy structured for physicians with an own occupation definition. There is too much information to go into in this article, take a look at our Seven Must-Have Benefits For Physician Disability Insurance for more details.
5. Choose A Business Structure
Next big decision you need to make is how you are going to structure your business. Are you going to be a sole proprietor or an S-Corp?
S-Corp vs. Sole Proprietor
An S-Corp allows people to save on taxes by paying part of your income out as dividends instead of as ordinary income. This structure can lower taxes in two ways:
- By lowering your income below the social security maximum thereby saving on FICA taxes.
- By taking advantage of special tax rates available on dividend income.
You will find numerous articles on the web advising you to reduce your social security tax by lowering your income substantially below the $132,900 maximum social security income. This advice makes no sense for an independent contractor physician. The IRS uses S-Corps as a red flag for audits. They will require you to justify your low income, and you will not win this one. Your employment contract is significant evidence that your entire salary is reasonable compensation.
Some doctors will take a more reasonable route of reducing a smaller portion of their salary and distributing dividends. This technique also has a relatively low chance of success. If you do manage to convince the IRS this is a reasonable split between income and dividends, the taxes you save will be largely offset by the additional costs and time required to manage all of the necessary accounts, tax returns and fees/expenses needed to maintain this structure. Generally, not worth the effort.
What about an LLC?
You will also find advice to set up as a Limited Liability Company or LLC. As an LLC, you can choose to be taxed as a partnership or as an S-corp. This structure adds a layer of complexity that won’t provide much protection for independent contractor physicians. An LLC will not provide any shelter from malpractice, and any other protection it may provide can be covered by purchasing the umbrella policy discussed above.
Working as a sole proprietor is straightforward; even tax filings are simple. You pay quarterly taxes, and it requires minimal effort on your part (or your CPA’s).
6. Establish Your Retirement Plans
Now that you have chosen your business structure, you need to decide your retirement savings plan.
Choose a Plan type
You want to consider either a SEP-IRA or an Individual 401(k) also known as a solo 401(k) for your retirement plans.
The SEP-IRA is the more straightforward option. You can put up to 25% of your income into a SEP-IRA to a maximum of $56,000 in 2019. The 25% limit is before you make your contribution. The actual percentage based on “profit” is approximately 18.6%. There is no company contribution to calculate or worry about. The paperwork will take you just a few minutes to set up.
Opening an Individual 401(k) requires more paperwork. Additionally, you need to pay more attention to your choice of a custodian. Vanguard, for example, will not allow you to roll over an existing IRA into your Individual 401(k). Your company can contribute up to $56,000 a year into an individual 401(k). If you took the advice above and are structured as a sole proprietor, it is all the same money anyway. A benefit of an individual 401(k) is that you can use it to consolidate your conventional IRAs if you want to do a backdoor Roth IRA.
There are some other benefits to an individual 401(k) such as slightly higher allowable catch-up contributions, you can take loans from a solo 401K (don’t do it), you can make Roth contributions and you have some better asset protection is some states.
Contribution limits can be calculated at various online calculators. In most cases, you will be capable of maxing out your contribution with either account.
Where to open your account
You need to find an excellent custodian to set up your retirement account. Of the big four, (Schwab, TD Ameritrade, Fidelity, Vanguard) I prefer Schwab and TD Ameritrade. Vanguard will not allow you to roll over an existing IRA to their solo 401(k) and they don’t allow any other investments other than their own. My experience is that Fidelity is just plain difficult to work with, (Your Mileage May Vary).
7. Develop Your Investment Philosophy
One of the most import things you can do is to take the time and write down your investment strategy before you start investing. Have a plan of action in place for the next time the market tanks. Don’t change that plan during the market correction. To get some ideas, check out our ten investment beliefs that will make you a better investor.
Hopefully, you find this advice helpful as you start your journey as an independent contractor physician. Although the tasks and the options can seem overwhelming, it is good to know that these are your plans and benefits, and you can design them to meet your needs. If you need any help with any of these, please feel free to contact us.
Good thoughts re: LLC as an S-Corp. Many of my physician colleagues are structured this way. I’ve considered this route, but really don’t want to get audited. On another note, I’d recommend ETrade for Solo 401k. They check all the boxes for features one might want, and are very responsive on the front end getting set up.
Thank you for explaining it so simply and so well.