Doctors beware: There’s a $400,000 target on your back [PODCAST]

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“President Joe Biden recently signaled that a multi-trillion-dollar spending plan for our country should be paid for by the rich corporations and wealthy individual Americans who make over $400,000. Doctors fit the latter category and should tune in.

Beyond the government, the unique qualities of doctors make us a target for many who want to access our high income and our business revenue. Our passivity to these poachers places us at great risk because they recognize that we lack the time and proficiency to avoid them. Add our financial illiteracy to this, and you have a recipe for stakeholders reaching into our paycheck every pay period and inconspicuously taking their share from us.

Let’s take a look at the stakeholders who are targeting us.”

Tod Stillson is a rural family physician who does surgical obstetrics and teaches residents and medical students. He is also founder, SimpliMD, Doctor Incorporated, and The Employed Physician’s World Facebook group. He is also the author of You Are a Target
Strategies For Doctors to Keep More of Their Money.

He shares his story and discusses his KevinMD article, “Doctors beware: There’s a $400,000 target on your back.”

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Hosted by Kevin Pho, MD, The Podcast by KevinMD shares the stories of the many who intersect with our health care system but are rarely heard from.

Transcript

Kevin Pho: Hi, and welcome to the show, where we share the stories of the many who intersect with our health care system but are rarely heard from. My name is Kevin Pho, founder and editor of KevinMD. Today on the show we have Tod Stillson. He is a family physician, and he wrote the KevinMD article “Doctors beware: There’s a $400,000 target on your back.” Tod, welcome to the show.

Tod Stillson: Hey, Kevin, it’s great to be with you today and to talk a little more about the article that I wrote for you.

Kevin Pho: So we’ll get into the article in a little bit, but first off, can you share your story and journey to where you are today?

Tod Stillson: Yeah, Kevin, I’m a rural family doctor in the Midwest. I live in Indiana. I’m kind of a traditional country doc. I do a little bit of everything. I did an obstetrical fellowship that allows me to do surgical obstetrics, and so I live my best life, quite honestly, in the Midwest, taking care of families from babies all the way to folks in the nursing home. I have a family of five, married, and I just love the rural gig, honestly. It’s a good life that I have, and really, I think being a physician is one of the greatest vocations in the world. I love our little tribe of people called physicians.

Kevin Pho: Now, some would say that rural physicians, and especially family physicians who do it all like yourself, are part of a dying breed. Tell me some of the challenges that you face practicing rural medicine every day.

Tod Stillson: Yeah, we are a little bit of a dying breed. First of all, I would say recruitment and retention. It’s a common thing among employed physicians, and that is trying to get young doctors to come live in rural areas and to practice medicine there in a comprehensive, kind of holistic, broad way. We’ve seen the migration over the last generation of physicians not doing inpatient care, not doing acute hospital care, really sort of navigating toward a more balanced life, if you will, where sometimes there’s a greater distinction between your predictable life and your unpredictable life. And so when you live in a rural setting and you do it all, you have a lot of unpredictability to your life. So I think that’s the greatest challenge, just the lifestyle that people choose to join me or not join me with.

Now, I’ve become adapted to it. I like it, and I’ve learned to live with it. However, I will say, Kevin, that I’m probably in a 10-year window of when I’m going to retire, and I do sort of look forward to someday that unpredictable life going away, and then I have a little more predictability to my schedule. But yeah, the unpredictability is probably the biggest challenge associated with living in a rural setting.

Kevin Pho: Now, for those medical students and residents who may be listening to this podcast, give us a little flavor of a typical day, and perhaps some of the cases that you may see that we may not be aware of in a rural setting.

Tod Stillson: Yeah, you know, first of all, I work at a primary care clinic, and my day starts at 7:30 in the clinic. Now, what I don’t know is when my day is going to start at the hospital, because when you admit patients, or have a team of people that you work with, that you share call with, and they admit patients for you, you don’t know what that day is going to start with. So I would say most days I round at about 6:30 in the morning. I go through my hospital, which is about three minutes from my home. Again, living in a rural setting, that’s kind of nice. My practice is about two minutes from my home, again, very nice in a rural setting. So I have that tight circle that allows me to kind of do things a little more efficiently.

So then I round in the hospital and go see my patients in the clinic. I have about 5,000 patients in my patient panel. Again, I have a large practice in that rural setting, so I take care of it all. And during the day or during the night, I might deliver a baby, I might do a surgical case, and then round in the evenings and come home and enjoy my family and enjoy time kind of unplugged a little bit as well.

But being in a rural setting, quite honestly, everywhere you go you’re pretty much on, because most people know you, know you as the doc in the community, and you kind of learn to live in that glass house, so to speak. Speaking of that, I live right on Main Street in the little community I live in, so most people know where I am and know where I live. That’s just kind of the real vibe that comes with being in that setting.

Kevin Pho: All right, let’s transition into the KevinMD article that you wrote. It’s titled “Doctors beware: There’s a $400,000 target on your back.” Now, for those who didn’t get a chance to read that article, can you just walk my audience through it and share the story of why you decided to write it?

Tod Stillson: Yeah, I think a lot of our doctors in the audience are hopefully aware by now that our current administration with Joe Biden has sort of decided that they’re going to focus on those who make $400,000 or more as one of their opportunities to gain some more taxes, and for a lot of doctors, that fits you. And that kind of got me thinking about the different people who, throughout the years, have kind of poached their little part of my life away from me.

One of those is the government, which kind of feels like they can dip in anytime via taxes to take some control of my money or income. Another is corporations. I’m an employed doctor, and when you work as an employed doctor, you begin to understand that you lose a little bit of autonomy and control, because now they control your medical practice, and you’re sort of a slave to the third parties that control medicine. You don’t have the autonomy that you used to have back a generation ago as a doctor.

Let’s begin to understand as well that patients sort of have been empowered a bit. First of all, they can review you and record how they feel about you in a public setting and on today’s social media channels. But also, they have some control over you because of the legal aspects of malpractice. They really can dip into our income and our salaries via that malpractice channel, and unfortunately, that’s something that many of your listeners may have experienced as well.

And then the last, I would say, is just the financial industry. The financial industry really sees us as being financially illiterate, which, quite frankly, a lot of us are, and they kind of reach into our pockets unknowingly and take a little bit of our current and future income in the process. That could be the banker, that could be the investor, that could be a host of people in the financial industry. So really, as I’ve been in practice now for about 30 years, I realized that each one of those stakeholders sort of has their inroads into getting into my pocket, and I think there are some things that doctors can do to help keep that from happening.

Kevin Pho: You mentioned that a lot of physicians can do better when it comes to financial literacy, and certainly that’s my experience as well. I do have a lot of physicians who talk about financial literacy on this podcast and on my blog. I try to get them up to speed with all the tax changes and just basic personal finance. Now, you mentioned a few ways in general, but what are some examples? What are some specific ways that these stakeholders are coming after the salaries of physicians?

Tod Stillson: So let me just start with sort of a simple case study in regard to the new tax code that’s, you know, being proposed. If you were a physician that made 500 at this time, have a couple of children, live in a doctor’s house with a doctor’s mortgage, and maybe are generous and contribute money to charities of your choice, this current tax change would amount to costing you about $23,000 more out of your pocket, because the government has to fund their programs. Now, that number is not a small number, to be honest with you, and you kind of have to work your way back to figure out how they got to that point.

Well, first of all, within the tax code, if you’re in particular a W-2 wage earner, and a lot of employed doctors now are W-2 wage employees employed by large C corporations, this change in the tax code to increase your tax rate to 39.6 percent for a person making $500,000 would cost them about $4,000 more in income tax. But the other little element, well, there are actually several other elements that affect physicians when it comes to that, because $4,000 doesn’t equal $23,000.

The other element is the Social Security wage taxes as well. Currently, you pay your Social Security at about a 12.5 percent rate, up to about $142,000 of your income. This new tax code is going to create a donut between $142,000 and $400,000, where there are not extra Social Security taxes that you pay, but after $400,000, the switch is turned back on, and you begin paying Social Security taxes again. This particular change would have cost the doctor making $500,000 a little over $12,000 more in just Social Security tax, because the reality is that our Social Security fund is being diminished and has to be refilled some way. And so this administration’s chosen physicians and those who make more than $4,000 to do that. There are also several itemized deductions that we can lower our taxes with that this new tax code sort of takes a bite out of for physicians as well, and it’s going to cost you some money in the process.

And so there are some things that doctors can do that will help kind of reduce the amount of money the government can get to, if you will, in the tax code. But as a W-2 employee, and I was a W-2 employee for a large C corporation for 10 to 15 years of my career, it wasn’t until I hit an almost burnout point working for that C corporation that I began to realize that there’s a whole lot more that I have control over if I sit down and think about it. Through the helpers and consultants in the team that I built around me, I was able to discover sort of a different path and channel.

Now, let me start by saying, if you’re a W-2 employee, there are some opportunities you have to sort of eliminate or lower your tax liability, even with these new changes. First of all are kind of above-the-line choices you can make. That would be: Maximize your HSA account. Number two, maximize your 401(k), 403(b), or 457 plan. And the other would be to sort of max out your IRAs, OK? If you do that, the tax code is still very friendly to you in that way, and so that’s going to help reduce your bottom-line adjusted gross income.

Then there are itemized deductions that a lot of doctors take advantage of, but again, as a W-2 employee, quite honestly, those are shrinking dramatically. One of those that a lot of doctors enjoy is the mortgage interest on your primary house, right? By the way, that is in the crosshairs of this Biden plan as well, by reducing the amount of money you can deduct from your mortgage, and for a doctor, that might be a significant amount, as much as a $5,000 or $6,000 difference. But there are a host of other things that you can deduct, from medical expenses to a home office to your charitable contributions. All of those sort of reduce your adjusted gross income, but again, as a W-2 employee, those are shrinking.

The switch I made about 10 years ago was to form my own professional corporation, or PC, and then transition that into an employment-like contract. When you do an employment-like contract, you’re in essence acting like an employee, as you have been for the C corporation that you work for, but now it’s actually your corporation that’s in a contractual relationship with that C corporation, not you individually. Then your PC sort of employs you. Now, that little sort of restructuring of your life allows you to have a lot of opportunities for small business cash flow and tax liability strategies that significantly help you. And that’s another solution that doctors can make, sort of in this new world of taxes: to consider making a transition to a professional corporation, an employee-like contract that affords you greater opportunities to have some tax strategies.

I would say as well that doctors can also make some changes in their work life. One of the changes that a doctor can make is just to change jobs. There are some states that are much more tax-friendly. A couple of states that aren’t very tax-friendly are California and New York. A lot of doctors live and work there, but those aren’t such great tax-friendly states. A lot of the Midwest and Southern states tend to be more tax-friendly.

You could also make a change to begin to go off the grid. You could decide that you’re not going to take insurance and kind of move into that cash-pay system. A lot of concierge doctors or direct primary care doctors are doing these sorts of moves, and in essence, what they’re making in exchange is they’re going to make a little bit less money. A lot of the doctors who are making those changes are typically going to fall under the $400,000 mark, but what they’re gaining is more time, more balance, more sort of control over their lives. So really, there are a host of changes that a doctor could make, and that would include changing jobs, maybe changing your business structure, changing what you’re doing, all the way down to just making some personal finance changes that allow you to sort of navigate through this.

Kevin Pho: Now, I want to talk about changing business structures and physicians forming their own corporation. Does that apply to pretty much any physician who’s employed in a W-2 job? It could be employed by an academic medical center or hospital. Is it applicable to any physicians in those scenarios?

Tod Stillson: Absolutely. That’s applicable to everybody in that situation, and it’s really what I call a more progressive model of employed physician life. The key here is that your employer has to be willing to cooperate with that, and a lot of employers prefer a more traditional relationship because, quite frankly, they feel like they maintain greater control over you as a doctor. But in an employment-like contract as a PC, you regain a great deal more of your autonomy. The truth of the matter is, though, in an employment-like contract, the employer wins, because they get to maintain their alignment and market share, which is critical to them. It’s still the same as it was before. But the physician wins, because you’re able to gain a lot more control over your personal finances as well as your professional life.

And, you know, quite honestly, the loss of autonomy is one of the great driving forces that push doctors toward burnout. The 50 percent rate of burnout, to me, is just astonishing. And what’s most astonishing to me, Kevin, is that when I look at the young doctors coming out, and frankly, the studies show that about 90 percent of them are choosing an employment model of some type, not private practice, but just going to work for a C corporation, if you figure that about 50 percent of those doctors making that choice end up burned out within five to 10 years, that’s an incredible statistic. That’s just like rolling the dice: Which way am I going to land?

What I do know is that when I made that transition to a PC, an employment-like contract, it changed my life dramatically. It lifted the burden of burnout and gave me control over my life again, and I believe that’s one of the channels that a lot of doctors can take, both from a lifestyle standpoint, but from a well-being standpoint, but even from a financial standpoint. There are a lot of wins in that. But to answer your question, it is available to everybody. You just have to have a cooperative employer who’s willing to work with you on this.

Kevin Pho: Knowing that every physician, of course, has individual financial circumstances, in general, how much tax could they be saving if they went to an employment-like contract?

Tod Stillson: Yeah, so my effective tax rate has been lowered to about 13 to 15 percent by making this transition to a PC, an employment-like contract. That’s in comparison to what would be 23 to 25 had I not made that transition. So when you make a transition to a PC, an employment-like contract, there are three things that kind of happen that are really beneficial to you.

Number one, you have a significant amount of retained savings and retained income in your household. That number for me was really over $100,000, easily, which is a significant amount of money in that transition.

The second element that happens is that you’re able to really formulate some tax liability strategies that allow you to lower your effective tax rate in some regards. I’m all for paying taxes. I live in a great country, and I want to contribute my fair share to it, but I also want to take advantage of any of the opportunities that exist for us within the tax code to legally organize ourselves. And the tax code still somewhat has some good, favorable views for small businesses, and this is basically a lot of small business strategies when it comes to that.

And then the third is that you’re able to, I guess, regain autonomy again. You know, that’s such an important factor for doctors to live their best life. When we feel like we regain control over our life, we’re able to function and thrive and really be all that we are meant to be.

A funny thing happens, I think, as we go through our training experience. Each level sort of brings that desire to live a more autonomous life. In other words, you’re not having somebody micromanage you, not somebody looking over your shoulder, not having to sort of answer to the person next in line above you. And what we realize is that when we are striving for that, we can’t wait to get to becoming an attending physician, right? When you’re becoming an attending physician, you’re like, “Finally, I’m not going to have to answer to everybody around me, and I’m going to be in control of my own life.” Well, guess what? When you sign that W-2 employment agreement with that C corporation, yeah, that really is what happens. You have now kind of given yourself control of that corporation. And yes, you have some professional autonomy, but if anybody out there who is listening works for, you know, a C corporation, you begin to realize there are more and more ratchets being placed on each one of us in terms of our micromanagement. And again, that’s just a gradual, year-by-year loss of our autonomy, and I believe that’s one of the driving forces toward burnout for a lot of doctors.

Kevin Pho: What are the disadvantages, if any, for a physician going to a PC, an employment-like contract?

Tod Stillson: Yeah, so I think that there are not a lot of disadvantages, other than, I think, if you’re a do-it-yourselfer, there’s some complexity to it, OK? And there’s a lot to learn. There’s a big learning curve, and knowing that doctors tend to be a little bit financially literate overall, I would say that their business savvy is probably even a little notch below that at times, OK? Doctors are smart, and they can figure things out, and you can read a lot of blogs and you can watch a lot of YouTube videos and figure things out, like listening to KevinMD. But at the end of the day, what doctors really are best at, and take advantage of, is if they are willing to let others help them in the process.

And that’s where I would say really hiring a team of people to work with you, an accountant, a lawyer, and a financial planner, all working together to sort of help you build the ideal business structure and the ideal small business structure that facilitates your best life as a PC doctor, I think is really the wise step. So I would say consider outsourcing it, because the biggest mistake, I think, is that you try and figure it out yourself, and that can be a little complicated. And that’s really the heart of one of the things that I’ve kind of done as a side gig: I’ve sort of created a physician agency that helps doctors in that process, because I think it empowers doctors to live their best life.

Kevin Pho: We’re talking to Tod Stillson. He’s a family physician, and he wrote the KevinMD article “Doctors beware: There’s a $400,000 target on your back.” What would you say are some of your top financial tips for physicians that they may not be aware of?

Tod Stillson: Yeah, so I would say, first of all, understand that when you sign up to be an employed physician in a traditional contract, your employer and their legal department are not looking out for your best interest as a doctor. The first step is for you to consider hiring an agency or a representative to help you look at how you are going to be best positioned in that contractual relationship with that employer. I think if you can do that and are willing to invest in that, you’re going to come out ahead and sort of build the right structure. I happen to believe, as we’ve mentioned before, that an employment-like option is a more progressive model that allows you to really have greater control over your life but still be aligned in an employment agreement. But first of all, ask for help from others. I would say that is one of the things that doctors really miss out on. They just think, “Well, I just sign up, and my employer is going to, you know, really do the right things for me.”

I would say also, understand that there are unscrupulous financial people out there, and those people who come to you trying to sell you insurance or trying to sell you investment products often aren’t doing it with your best interest in mind. They’re really doing it with their best interests in mind. And yeah, you might benefit a little bit from it, but at the end of the day, they’re trying to skim a little piece of your future earnings out of the investment that they’re making through you.

The last thing I would say is be aggressive with dealing with debt. You know, a lot of doctors come out of med school with a large debt, and we become debt-insensitive, quite honestly. And so when you’re becoming an attending physician with those large student loans, it’s pretty easy to go buy a house, because you’ve been waiting for a long time, and some don’t choose to buy it incrementally. They buy that big doctor’s house because, quite honestly, the banker, again looking at your future income, says, “You know what? I’m willing to gamble on this doctor and give them a really, really large loan,” that you probably shouldn’t have, but they’re going to give it to you because you’re a very low-risk investment for them. And so, you know, don’t fall into that trap of buying the Tesla your first year as an attending physician, or buying that doctor’s McMansion, and all that sort of stuff. Really aggressively try and live like a resident, and pay down your debt, and that’s going to help you surge toward financial independence, which is one of the great plateaus that doctors can reach that provides, again, freedom and autonomy for them.

Kevin Pho: And my final question: What’s your take-home message that you want to leave with the KevinMD audience?

Tod Stillson: Yeah, my take-home message is that a lot of people in a whole bunch of industries are really trying to take their piece of your life. And doctors, I encourage you to be empowered to take control of your own life and do things that are not passive but do things that are active. I happen to believe one of the best choices you can make is to consider forming your own personal corporation that allows you the greatest maneuverability and the greatest autonomy in your professional life, but still be employed and happily live within the current health care market.

Kevin Pho: And how can people reach you?

Tod Stillson: People can reach me two ways. One is through my social media channel called Doctor Incorporated, where they can learn more about kind of the life as a doctor that’s incorporated. And the other is through my physician agency, called SimpliMD.com. There you can learn more about a group of professionals that have teamed together to really act as an agent on your behalf, to help you live your best life.

Kevin Pho: Tod, thank you so much for sharing your time and insight, and thanks again for being on the show.

Tod Stillson: Thanks, Kevin.

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