As tax season gets underway, now is the perfect time to put systems in place that will set you up for success for the rest of the year. Here are some strategies to keep in mind as you plan your financial future.
1. Set up quarterly payments.
If locums work is your primary source of income, or if you owe $1,000 or more in taxes, you will likely need to set up estimated tax payments.
Paying quarterly taxes eases the burden of a large tax bill at year’s end, and allows for better budgeting throughout the year.
Instead of waiting to pay your taxes until the end of the year, independent contractors can pay their estimated tax payments on a quarterly basis––typically on the 15th of April, June, September, and January.
Hiring an accountant is the best way to monitor these payments and stay on top of your finances. Your accountant should be able to estimate how much you’ll owe on each of your quarterly payments, and prepare the necessary paperwork for you to file each payment.
We recommend setting aside a percentage of each paycheck, so your quarterly taxes don’t take you by surprise. It’s also a good idea to mark the due dates in your calendar, to help you avoid any late penalties.
2. Find an accountant that specializes in multi-state taxes.
Locums providers often work assignments in multiple states in any given year, which creates the need for additional tax filings. The more states you work in, the more states you’ll need to file in––which can make filing your taxes much more complicated.
Finding an accountant with expertise in multi-state taxation is the best way to make sure you have all of your bases covered. If you’re not sure where to find one, try asking one of your fellow locums physicians or advanced practice providers for a recommendation––that way, you can ensure that your accountant has experience working with locum tenens.
3. Create a tracking system for your expenses.
We’ve all found ourselves scrambling at the end of the year to track down receipts or scouring bank statements for work-related expenses. Setting up a system for tracking expenses now will save you stress when it comes time to file next year’s taxes.
The first step is to review your work-related expenses with your accountant to maximize this year’s rebate (check out this year’s tax guide for a list of common deductions for locums providers!). Then, set up a system for categorizing and tracking the types of expenses that come up regularly during locums assignments.
Regularly scanning your receipts will also help you stay ahead of the game when payments come around. The IRS doesn’t accept credit card or bank statements, so it’s crucial to make sure you’re saving any receipts related to work expenses you’re hoping to deduct. You can scan and save your receipts with a home scanner or with one of the many mobile apps available to help with receipt tracking.
4. Consider an LLC.
Especially if you’re a full-time locums physician or advanced practice provider, starting an LLC may be a good option to consider. LLCs can give locums providers even better tax benefits, and in most cases, LLCs allow for pass-through taxes so you won’t get double taxed as both an individual and a business.
As an LLC, you can choose to be taxed as an S corporation, which can save you more on taxes by reducing your self-employment taxes, as well as offering other potential benefits. Here’s how it works: any 1099 income is paid directly to your LLC. As a business owner, you must pay yourself a salary based on industry standards. Any income above that level is not subject to payroll taxes like Social Security and Medicare, which offers opportunities for tax savings.
LLCs aren’t for everyone! Locums physicians or APPs who work as a W-2 employee elsewhere may not see the same benefits, as you may end up double-paying on Social Security taxes. But if locum tenens accounts for the bulk of your income, it may be worth considering!
5. Plan for retirement.
Given that independent contractors can’t rely on an employer 401(K) program, it’s important to make sure you’re saving for retirement.
Reserving a portion of each paycheck to contribute to a retirement account like an IRA or Solo 401(K) will help you plan for retirement without stress. The best part? Most of these contributions are tax deductible, so your accountant can use them to help maximize your savings on next year’s tax bill.
6. Invest in an HSA.
Investing in a Health Savings Account may also be a smart financial choice, especially if you work locums full-time! HSAs offers a triple tax advantages for locums physicians and APPs, including:
- Tax-free withdrawals for qualified medical expenses, like copays for medical appointments, prescription medications, dental appointments, optical care, and even health insurance premiums, in some cases.
- Tax-deductible contributions to your HSA
- Tax-free growth on interest and investments, since you can invest contributions in mutual funds or ETFs and realize tax-free gains if they are used for qualified medical expenses.
You can contribute to an HSA as either an individual or through a business entity like an LLC. Because HSAs are owned by you as an individual, as opposed to multiple employers, you can carry it between assignments. Investing in an HSA can help you reduce your taxable income, and give you peace of mind about any current or future medical expenses that might come up.
