Physicians often wonder if it’s worthwhile to incorporate in order to protect themselves against liability. As a clinician your individual person and medical license would be at risk no matter how many corporations or partnerships you are behind.
A simple example would be a case where a physician is an employee of a large medical group and a malpractice case ensues. If the matter was clinical negligence then the physician will always be sued – always. The physician is always responsible.
If you own your own medical practice and have an LLC or S-Corp and multiple irrevocable trusts and a patient sues you for medical malpractice then you – whatever your birth-name is – will be the entity that’s sued.
The reason that your medical practice – whether you’re employed or own the business – might be mentioned as well is only there to extract more dollars should the lawsuit exceed the common $1M ceiling (rare).
The Physician Employee
Physicians prefer being employees because we offload a lot of the headache of practicing medicine on the employer. We don’t have to worry about the EMR or management of staff labor laws.
We like being employees because we don’t have to handle marketing and we don’t have to shop for the equipment for the medical offices nor worry about the legal paperwork.
As such highly paid employees we are also offered a lot of employment benefits such as:
- retirement plans (401k’s, 403b’s, pensions, cash balance plans)
- health insurance
- long-term disability insurance
- life insurance
- workman’s comp
Our taxes are also automatically deducted and estimated taxes are sent on our W2 form to the federal and state agencies. This theoretically makes filing taxes really easy.
It’s rare to find physicians nowadays who have their own medical practices. The common ones might be dermatologists, plastic surgeons, and a few primary care doctors.
The independent physician may not own their own business and instead be a locum tenens worker, a moonlighter, or a per diem – whatever term you use, this person is essentially an independent contractor though that doesn’t always mean that they are paid as such.
Worst Case Scenario
The absolute worst case scenario is when you are an independently practicing physician who is doing some locum work for a medical group but you are paid as an non-benefited employee.
Because you aren’t a staff physician and can pick up hours at-will you aren’t considered a part-time or full-time employee. However the medical group has decided to pay you on a W2 tax form in order to decrease their risk.
When you are paid on a W2 then you are essentially considered an employee and your write-offs become extremely limited. Not to mention that you get none of the employment benefits I mentioned above.
This is how Kaiser Permanente currently pays their per diem physicians and a few other large medical groups do the same.
I have written about this a lot but to review, as an independent contractor you are paid on a form referred to as 1099-MISC and you are paid your gross wages without anything withheld.
This same form which is sent to you is also sent by the paying entity to the IRS. That’s how the IRS knows how much you got paid and of course they expect you to pay state and federal taxes on that income.
Because you are an independent contractor then it’s assumed that you will incur costs in order to provide this service for the medical group. Your write-offs might include:
- your medical license
- your laptop
- cell phone
- some medical equipment
As an independent contractor you are essentially a business owner. You can have employees and you can have rent an office or whatever you need to do in order to earn that independent dollar.
The independent contractor designation isn’t really a business entity. An S-Corp or an LLC would be the business entity. And certainly plenty of doctors create an S-Corp so that they can pay themselves as an employee to save a little on payroll taxes.
Another business entity is the sole proprietor entity.
A Little About Sole Proprietorship
I’m a sole proprietor. I earn my money as a moonlighter and get paid on a 1099-MISC. I own my own business as an unincorporated entity. It doesn’t even have a name.
I would still file my 1040 form for personal federal income taxes but I would write off my expenses on the more tax-favorable Schedule C (pdf) instead of a Schedule A as you earthlings do.
So what’s the liability of a sole proprietor business? Well, whatever the business does that could create liability and since you’re a physician then it’s whatever you do with or to a patient.
You can rent an office and even throw up your own name or assume a business name though you may need to register that with your state in order to not compete with another similar-sounding name.
The best thing about a sole proprietor designation is that you don’t need to file any paperwork with the state other than getting your medical license. You don’t need an EIN, you don’t need a specific license, and you don’t have to pay any annual business fees like you do with an S-Corp nor keep any particular records.
The sole proprietor designation is by far the easiest designation to use for a business. In fact, if you start doing business and don’t register your business then it’s assumed that you are a sole proprietor.
It’s still advisable to run your business separate from your personal life which not only makes filing taxes easier but also creates a much simpler audit process should it ever come to that.
Choosing Your Business Structure
If you ask me then I’ll tell you that as an independent contractor physician all you need is a sole proprietor business structure. But I’m not a CPA, not a lawyer, and have never been sued as a sole proprietor – yet.
If you ask a business lawyer or a CPA they will likely tell you that you need a complicated S-Corp structure because 1) there is nothing wrong with having one, 2) they will make more money if you structure such a business entity.
The SBA website has a fairly simple overview of the various business structures. They are a free organization so I’m sure they will be more than happy to advise you on the matter.
75% of the US businesses currently filing taxes are sole proprietor businesses.
Sole Proprietor Facts
Taxes are pretty easy as I alluded to. You fill out a Schedule C and list all the money that came in and deduct everything you spent to run the business and whatever is left over – net profits – will be taxed.
You can deduct… well, you can deduct whatever the fuck you want but the following likely won’t get you audited by the IRS:
- business start-up costs
- research and development
- operating expenses
- travel expenses
- some business meals
- business assets
- health insurance premiums
- office rent
- home-office costs
The potentially biggest downside to a sole proprietor entity is that you get taxed on the individual level using the marginal individual tax rate. So if you have a ton of income then you might end up in that ugly 39% tax bracket.
With the recent Tax Cut and Jobs Act (TCJA) you might benefit from its fixed 21% corporate taxation rate. However, before reaching for your CPA’s phone number to establish a corporation it would be wise to do the math and see which option truly would save you more.
1. Estimated Taxes
Every US citizen who owes taxes to the IRS needs to pay estimated taxes, even if they are an employee. It’s just that as an employee your estimated taxes are already withheld by your HR department.
As a sole proprietor business entity you will send estimated taxes to the IRS as well as your state 4x a year based on what you expect to owe.
2. Self-Employment Taxes
If you look at your W2 paycheck then you’ll see some money goes towards Medicare and Social Security. You’ll be doing the same as a sole proprietor except that you no longer have your employer paying the other half for you.
This will come out to somewhere around 15.3% and it will likely change from year to year. 12.4% will go towards Social Security up to a little over $120k of income (it’s capped) and the other 2.9% goes towards Medicare (not capped).
In order to figure out how much you owe you can fill out Schedule SE or just have your tax software figure it out for you.
It’s also worth mentioning that you can deduct half of your self-employment income against your taxes.
3. 20% Pass-Through Tax Deduction
As a sole proprietor all your income is considered to be pass-through income and if you have enough income then you could deduct up to 20% of your profits and write that off against your personal income taxes.
This was a tax deduction which the Tax Cut and Jobs Act created. There is a really good explanation of this 20% tax deduction on the Nolo website.
Don’t worry, your tax software should handle this just fine.
4. Business Losses
I had an interesting situation when I did my taxes in 2017. Because I had to pay fat dollars to a lawyer to handle my medical board investigation I ended up paying more out of pocket to run my sole proprietor business than I earned from it.
Even if you didn’t earn money to cover your various expenses you can deduct the overage from any future income in the following tax years. This is a great thing to jot down somewhere if you are doing your own taxes so that you can remember this beautiful deduction for the next year.
For example, let’s say I earned $50,000 as a per diem physician but had to spend $30,000 on miscellaneous business expenses and another $30,000 for a lawyer. That’s a -$10,000 business loss which I can write off the following year assuming I make a profit.
5. Having Employees
If I had kids or a non-working spouse then I might make them my employees of my sole proprietor business which could keep some of the money in the family. They can then open an IRA or I can enroll them in a 401k.
In order to have employees you will need to establish an EIN (employer identification number) which can be done online for free. Be careful when doing a search for this – be sure to go to the IRS website directly or you’ll get scammed to a private website.
6. Liability Insurance
If you are going to be using another company’s EMR and then another company’s supposedly HIPAA compliant telemedicine app and your ass gets sued for breach of data then your ‘business’ is liable.
Remember that you don’t have an LLC or S-Corp so your individual person would be sued directly. However, you can still obtain liability insurance for such events.
Most good malpractice insurance companies will now offer you protection against such problems but you may have to purchase something separately if necessary.
If you are offering consulting advice as a physician and not doing much clinical work then you might have to consider getting an Errors and Omissions policy. I don’t know enough about this stuff to advise you but a competent lawyer should be able to help you identify the risks you will be exposed to with the kind of business you are planning on running.
As a sole proprietor you can have the sexiest of retirement benefits for yourself without needing an employer.
You can have a pension, a cash balance plan, a 401k, or an IRA. I have discussed all these options in various posts but I’ll say it one more time, there is nothing your employer can offer you in terms of retirement benefits which you cannot create for yourself.
You can also set money aside in your own HSA.
6 replies on “Sole Proprietor Designation for Physicians”
Yes! Physian friends/colleages are always asking these questions and think incorporating somehow protects them from malpractice and allows them to make more deductions. Now I can direct them here! And my accountant would agree with all that you have said. Not worth the fees unless you make more than a certain amount. I’m staying a sole proprieter for now. If I somehow manage to make really big bucks, I will reevaluate. Apparently, if you make in the neighborhood of 4-500k+ there may be some benefit to incorporating (according to my accountant anyway).
This year I will be getting some w-2 income so I may save a little on the self-employment taxes, but I will also have 1099 income so will still be able to make the usual deductions. We’ll see how it goes.
Good luck. For those who have both W2 and 1099 income it’s worthwhile mentioning that if your sole proprietor business loses money for whatever reason then you can deduct that loss against your W2 income. Back in 2011 I started an auto mechanic shop and bought a ton of equipment and therefore had a $15,000 loss that year in that business. I was able to write that loss off against my W2 income.
received income on 1099 as a physician in 2016 along with w-2, but in 2017 no 1099 income , only w-2 income , can i still claim business expenses in 2017 , such as cme , licensing etc ?
If you had business expenses then you can claim it. If you operated a business then you’d have gotten paid as such (likely on a form 1099) – against which you can deduct your relevant business expenses.
Do you recommend personal liability insurance or just malpractice? I have started a Sole Proprietor practice and work in various locations paying rent.
If you have an office which you are paying the rent for then you need to have coverage for that space for anything that might happen there. If one of your employees or patients injures themselves on that property or sells meth to minors or starts shooting pedo porn, you need coverage. If you are paying rent then you have partial responsibility of that space. Your business insurance should cover you but you need to make sure that your underwriter/agent knows of all of the places you work at.