As a dedicated professional, your work is incredibly challenging as you strive to maintain your primary focus on providing excellent patient care. Your inherent business powers that generate revenue make you a highly valued asset in the health care marketplace. This is why many large corporations have offered financial incentives for you to join their employed workforce. As a result, you can expect a predictably substantial paycheck deposited regularly into your bank account. Additionally, you are absolved of the responsibilities and challenges of managing a small business operation and its employees. In exchange for this, they get to control you professionally and have the authority to treat you as a commodity or faceless business asset. Physicians completing their training are now being herded into these pens, once considered safe harbors, like a flock of sheep. Unfortunately, with the rising rates of burnout, these spaces are no longer as safe as they used to be.
However, the risks associated with this employment arrangement go beyond just the loss of professional autonomy. It’s worth noting that with a high income, you may become a target for the Internal Revenue Service and politicians such as Joe Biden, who have expressed their intention to focus on individual taxpayers earning over $400,000. The real issue arises when you, as a high-earning W-2 employee, find that your strategies to address these challenges have been systematically dismantled, leaving you vulnerable and without effective recourse.
Don’t misunderstand me; achieving a sufficient income to be among the top 10 percent of individuals in the U.S. definitely leads to a great life. However, during this time of year, we are often reminded of the principles embedded in our tax code, which emphasize the notion that those who earn more are expected to contribute more to our federal and state governments. Filing your taxes and observing your higher tax bill serves as a reminder of your significant moral and fiscal responsibility for being a resident of this great nation. However, it often raises the burning question of how you can navigate the complex terrain of taxes to ensure that you maximize your financial well-being.
I will cover some suggested solutions with you, but let’s first assess the status quo as an employed doctor who works at one job.
Employed doctors have shrinking tax strategies.
Three-fourths of you feel as though you are currently being overtaxed, according to Medscape’s 2023 “Physicians and Taxes” report, which surveyed over 1,200 physicians across 29 specialties. Currently, the average physician pays about $83,620 in federal taxes annually, and an additional $12,952 in state taxes. The total of nearly $100,000 annually can certainly cause concern for all of us, whether you are employed or self-employed.
Employment has become the prevailing job model for many in our tribe, and you are probably aware of the higher tax burdens you face in comparison to your self-employed peers. Self-employed individuals have more business deductions and tax planning options available to them. The U.S. tax code tends to favor small businesses over individual taxpayers, particularly in the case of doctors.
Let me take a few moments to review some key factors contributing to why you often pay substantial taxes if you are traditionally employed:
High income levels. You earn a lot of money, especially those in specialized fields. Higher incomes generally correspond to higher tax brackets in our graduated tax system that is meant to insure the rich support the poor with their fair share—with the result being a larger percentage of income being paid in taxes.
Limited deductions and business expenses. Unlike self-employed contractors or those running their own practices, employed doctors may have limited opportunities for certain tax deductions and business expenses. They may not be able to write off as many work-related expenses, potentially leading to a higher taxable income.
Tax treatment of employee benefits. While employed doctors receive benefits such as health insurance, retirement contributions, and other perks, some of these benefits may be subject to taxation. The value of employer-provided benefits can actually increase the overall taxable income for employed doctors. This in contrast to self-employed doctors who have more planning options for deploying highly individualized tax-advantaged fringe benefit plans that can often be deducted as a business expense.
Limited control over income structure. Employed doctors often have less control over the structure of their income compared to those who are self-employed. Self-employed micro-business owners may have more flexibility in how they receive income, potentially optimizing their tax situation.
Limited access to certain tax strategies. Some tax strategies and deductions are more readily available to self-employed individuals or business owners. Employed doctors may not have the same level of access to these strategies, impacting their ability to minimize their tax liability.
Student loan interest phaseout. While employed doctors often carry substantial student loan debt, there is a phaseout limit for deducting student loan interest based on income. High-earning doctors may find that their ability to deduct student loan interest is reduced or eliminated, contributing to a higher tax burden.
Additional Medicare tax. Employed doctors with high incomes may be subject to additional Medicare taxes. The Additional Medicare Tax, which applies to earned income above a certain threshold, further increases the overall tax liability for high-earning individuals.
State and local taxes. The tax burden for employed doctors can vary based on their location. State and local taxes can significantly impact the overall tax liability, and doctors practicing in areas with higher tax rates may experience a heavier tax burden.
It’s important to note that individual circumstances vary, and employed doctors may have opportunities to optimize their tax situations through careful planning, the use of available deductions, and seeking professional tax advice.
However, if you are a W-2 employee, your unreimbursed work-related expenses will not be deductible for you, even though you are a professional and act like a business by generating income for your employer.
Your tax-planning deductions will be relegated to the standard deduction, 401(k), IRA, child tax credit, home mortgage interest, student loan interest, and charitable donations—all of which have various phase-outs as your income increases. In summary, you have shrinking tax deduction options.
In the dynamic landscape of taxation, being proactive and informed is the key for employed doctors. You should empower yourself with financial knowledge to ensure a prosperous and fulfilling career in health care.
I once found myself in a situation similar to yours, feeling targeted and helpless, yet paradoxically grateful for my financial success. However, I was fortunate enough to discover that there were options available to help alleviate my tax burden. I am delighted to share some of my personal insights and discoveries, which have been enriched by conversations with hundreds of doctors across the country.
The secret involves learning how to maximize your deductions, and the most important principle for that strategy is to avoid being an employee and instead choose to be a micro-business owner. When I made the change to micro-business status 10 years ago and transitioned to long-term independent contracting instead of being an employee, it significantly benefited my net worth by a million dollars over that decade. I didn’t work harder, longer, or more—I simply learned to work smarter—and as a result, I retained more of my earnings.
A possible path
Before you dismiss the idea and say that you can’t start a micro-business because you’re already committed to being a W-2 employee, let me encourage you to consider the following strategy sequence that many doctors all over the country are beginning to embrace.
First, start a professional micro-corporation for your present and future 1099 income.
Consider downshifting your 1.0 full-time equivalent (FTE) W-2 primary job to a part-time position at say 0.7 or 0.8 FTE, allowing room for job stacking alongside your 1099 work. It’s worth noting that nearly 50 percent of doctors engage in side work of some type, and the opportunities are growing rapidly, thanks to the rise of location-independent professional work. With this flexibility, you can customize your income by combining both W-2 and 1099 earnings to align with your desired lifestyle and quality of life. With more than 50 percent of doctors now being women, this type of downshifting has become much more common as women strive to balance personal well-being with career and family obligations.
The decision to reduce your W-2 FTE (full-time equivalent) income alone will decrease your taxes due to the reduction in your unrecoverable dollars that flows through this channel. In summary, the less you earn as a W-2 employee, the lower your tax liability will be.
After freeing up the workspace from your primary job, you can then fill it with 1099 income that flows through your micro-business.
Now, you will unlock two separate tax channels for income in your life: both as an individual and as a micro-business. This special power of simultaneously being both an individual and a micro-business taxpayer is often overlooked or minimized by doctors. However, this combination can greatly multiply your tax planning options and open the door for business deductions and fringe benefits that are not available to high-income W-2 employees.
Your 1099 income will by default flow through a pass-through business entity called a sole proprietorship. Now, all business-related expenses can be deducted from your 1099 income on Schedule C. It’s beyond the scope of this article, but if your 1099 income is greater than $25,000, I recommend you consider micro-incorporation.
In the end, if you feel overwhelmed by your tax burden as an employed physician, remember that you are not alone. There are options available to help reduce your W-2 tax burden, even if they may be small. Furthermore, there are alternative options that do not require you to leave your employed position in order to take advantage of tax-saving strategies. These strategies are available to independent doctors as well as those who are micro-incorporated, and they can be combined with your traditional employment.
It is important to note that the information provided is based on my personal experience and my role as the president of SimpliMD, where I inform and inspire doctors about their micro-business powers. However, it should not be considered as legal or financial advice. It is recommended that you seek independent professional advice from a licensed and knowledgeable individual in the relevant field before acting upon any opinion, advice, or information contained herein.
Tod Stillson is a family physician, entrepreneur, and Amazon best-selling author of Doctor Incorporated: Stop the Insanity of Traditional Employment and Preserve Your Professional Autonomy. He can be reached at SimpliMD. Follow him on Facebook, Instagram, and X @DrInc9, or join his Facebook community for doctors, Every Doctor Is A Business.
Dr. Stillson is the founder of SimpliMD, an exclusive physician community that supports doctors on their journey to micro-business competency through community, courses, content, coaching, and consultation. At SimpliMD, he inspires and informs doctors about the benefits of micro-incorporation through his content and regular blog posts titled The Truth.
Schedule a business consultation meeting with Dr. Stillson to discuss how micro-incorporation can help you.