The Independent Contractor’s Checklist
✓ CHOOSE A BUSINESS STRUCTURE
Typically, there are two types of business entities that independent contractor physicians will choose from.
Sole Proprietor: The simplest choice for most single member emergency medicine practices. Set up federal tax ID, also known as an EIN, for business bookkeeping. (No additional set up is needed.)
Limited Liability Corporation (LLC): The LLC may also be considered. This structure provides flexibility with tax filing options. LLC’s can file taxes using different models: S-Corp, LLC or C-Corp. How do you decide? Review your options with a trusted CPA. Requirements and legislation vary from state to state. Ask your CPA also to calculate possible tax benefits for each option.
✓ SET UP A BUSINESS CHECKING ACCOUNT
As an independent contractor, you are a business owner. Keep your business accounting separate from personal & household funds. Use your business checking account to deposit all paychecks and pay all business related expenses. When tax time arrives it will be much easier (and accurate) to tally up year end income and expenses.
✓ CALCULATE ESTIMATED TAXES
Year 1: You are not required by the IRS to send in estimated tax payments your first year of business. However, it is in your best interest to save ahead for taxes. The entire tax bill will be due April 15th for the prior year.
Years 2 +: Your business now has an income track record. You are now responsible for sending estimated tax payments to the IRS each quarter. The first payment is due April 15th. (You owe BOTH prior year taxes and Q1 estimated taxes on April 15th.) Subsequent payments are due on June 15th, September 15th and January 15th. Make sure to include Social Security and Medicare taxes with your payments (often referred to as self employment taxes).
✓ SECURE HEALTH INSURANCE
As soon as you leave your residency or fellowship, your health insurance terminates. You will need to secure your own health insurance. (If you are married, examine joining your spouse’s coverage.) You may use COBRA if you have a gap before your new coverage begins. Insurance options vary state to state. Consider joining a local small business association as they may offer health insurance packages to their members. This may provide a “group” option even when you are self employed. If you purchase your insurance privately, work with a local broker who can quote multiple carriers. Make sure your personal physicians are “in network”, compare deductibles, maximum out of pocket expenses, co-insurance percentages and availability of an H S A plan.
✓ EXAMINE H S A PLAN OPTIONS
This is a tax free savings account option that is associated with high deductible health care plans. Please note: You must have a high deductible health care plan in the same year you fund the H S A. Typically, this a cost saving option for the self employed. Contributions are fully tax deductible, growth within the plan is tax deferred, and withdrawals for eligible medical expenses are tax free. The funds may remain in the account for an unlimited amount of time, until medical expenses are paid from the H S A account. In 2019, families can deduct up to $7,000 (individuals up to $3,500).
✓ PROTECT YOUR INCOME WITH DISABILITY INSURANCE
Employer disability coverage ends with residency and fellowship. Purchase an “own-occupation” specialty specific disability insurance policy. These policies will replace a portion of your income if you become ill or injured and cannot work in your specialty. Disability insurance policies provide income to pay your mortgage, car payments, medical bills and daily expenses. Work with an independent agent that compares policies from multiple companies.
✓ ESTABLISH A RETIREMENT PLAN
As a self employed physician, you can set up your own tax deductible retirement plan. These plans can provide significant tax savings during your working years. Your income, future savings goals, and Roth IRA funding goals (via conversion) are factors that can help “tilt” the decision between the retirement plan options.
SEP-IRA: Self-employed physicians can contribute approximately 18.6% of “net income” to a maximum of $56,000 (2019 limit). The deadline to fund a SEP IRA is your tax filing deadline (4/15 of the following year). If needed, filing an extension will allow you to delay your tax return and extend your SEP IRA funding period until 10/15. Funds owed to the IRS are still due by 4/15.
Solo 401 (k): Self employed physicians can contribute up to 100% of income capped at $56,000 (2019 limit). The deadline for plan opening and employee “election of funding” is 12/31. Funding may follow up to the tax filing deadline (4/15 of the following year). Filing an extension will allow you to delay your tax return and extend your 401(k) funding period until 10/15.
Defined Benefit Plan: An option to “super-charge” retirement savings for tomorrow and tax savings today. Self-employed physicians can potentially contribute more than $100,000 per year. Funding limits are determined through actuarial factors such as age. Defined benefit plans are recommended after all other retirement savings options have been maximized, excess cash flow is significant, and a history of income stability has been established. Defined benefit plans require a “commitment” to the IRS to fund for at least 5 years.
✓ SECURE MEDICAL MALPRACTICE INSURANCE
Medical malpractice insurance is a specialized type of professional liability insurance that covers physician liability arising from disputed services that result in a patient’s injury or death. In many states and medical systems malpractice insurance is a requirement to practice. Make sure to understand the difference between “Claims-Made” and “Occurrence-Based” policies. If you are practicing in multiple states, make sure your policy provides coverage in all states that you practice medicine.
✓ ASSESS LIFE INSURANCE NEEDS
Along with your income rising, so may your new expenses. Are you moving or buying a new home? Family growing? Life changes are an appropriate time to assess your life insurance coverage. If you died, how would your family be financially impacted? Purchasing 20 & 30 year term insurance can help protect those who financially depend upon you as your wealth builds.