Financial Considerations for Moonlighting Physicians

[Editor’s Note: Today’s guest post was submitted by both regular reader Joshua White, a 2019 DO graduate from Midwestern University who is currently a PGY-2 in Emergency Medicine in Corpus Christi, TX, and his mentor Michael Brodeur, MD, who is a Core Faculty and Assistant Clinical Professor at the CHRISTUS Health/Texas A&M Emergency Medicine Residency Program. We have no financial relationship.]

As a resident new to moonlighting as an unbiased contractor, I’m amazed at how a lot adjustments financially whenever you each have a major alteration in revenue and develop into an unbiased contractor. This put up is meant to assist all those that are present process this course of to know what to do and learn how to put together.

Taxes actually improve in complexity whenever you get hold of a few of your yearly revenue as an unbiased contractor. Earlier than this transition, taxes have been easy for me. Taxes have been taken out of my paycheck each pay interval based mostly on my estimated tax charge (automated withholding), and I didn’t assume a lot of it. Nonetheless, as your revenue will increase, private data of taxes is essential to your monetary success. Listed below are 4 easy tax guidelines to make sure success:


#1 Save Sufficient to Pay the Taxes Owed to the IRS

As total revenue will increase that features revenue as an unbiased contractor, taxes owed considerably improve. It’s important to set sufficient of your revenue apart to pay the taxes that you just owe when the IRS comes calling. If not, you’ll be topic to penalties, curiosity, and naturally, the taxes. However how have you learnt how a lot cash to save lots of annually?

Whole taxes owed = Federal revenue tax + State revenue tax + FICA taxes (Social safety + Medicare)

Federal Revenue Tax

Marginal vs Efficient Federal Tax Charges

In the USA, we’ve got a progressive federal tax charge that means that the extra money you make, the extra your common tax will probably be. To know the tax code, you will need to perceive the distinction between marginal and efficient tax charges. Your marginal tax charge is the best bracket a few of your cash falls into. As an example, if in case you have $100K of taxable revenue in 2021 and also you file “Single”, the best tax bracket a few of your cash falls into is 24% based mostly on the present tax charge vary. Nonetheless, your common tax charge is far decrease. A few of your cash will get taxed at a 22%, 12%, and 10%. Your common tax charge is your efficient tax charge. On this instance, the marginal federal tax charge is 24%, and the efficient federal tax charge we’ll calculate beneath.

The right way to Calculate Your Efficient Federal Tax Price

Your Efficient Federal Tax Price= Whole Taxable Revenue/Whole Federal Taxes Paid

Calculate your estimated efficient tax charge through the use of the quantity of your projected gross revenue that falls into every tax bracket and multiply it by every respective tax charge, after which add all of it collectively. This may equal the full taxes owed and utilizing the above components you possibly can then calculate your efficient tax charge.

For instance, if in case you have a projected gross taxable revenue of $100,000, and plan to file single, the components would appear like this:

Whole taxes owed= (9,950 x 0.1)+((40,525-9,950) x 0.12)+((86,375-40,525) x 0.22)+((100,000-86,375) x 0.24)= $17,748.50.

Now calculate together with your taxable gross revenue = $17,748.50/$100,000 = 17.748%. That is the efficient federal tax charge for this particular person.

FICA Taxes: Medicare + Social Safety Tax

How a lot FICA tax owed will depend upon if you’re an worker and obtain a W-2, or a person contractor and obtain a 1099, or each.

  • Social safety tax is 6.2% for the employer and 6.2% for the worker. Social safety tax stops on any extra revenue above a specific amount “wage base” annually. In 2021, the wage base is $142,800.
  • Medicare tax is 1.45% for the employer and 1.45% for the worker.
  • Moreover, after $200,000 of taxable revenue there’s a further 0.9% tax that the employer pays.

In utility, if you’re an worker, you’ll owe 7.65% of your taxable revenue till you attain $142,800. Each taxable greenback above that quantity you’ll solely owe 1.45% of your revenue to Medicare taxes.
Nonetheless, if you’re an unbiased contractor, you might be answerable for paying each the worker and the employer parts. So you’ll owe 15.3% of your taxable revenue till $142,800 after which 2.9% for every taxable greenback from $142,801 till $200,000, after which 3.7% of your taxable revenue to FICA taxes for something above $200,000.

State Revenue Tax

State revenue tax varies extensively from state to state.

How A lot Ought to You Plan for Taxes When Moonlighting as a Resident?

The calculation will get extra difficult if you’re each an worker and produce revenue as an unbiased contractor. It is very important issue within the worker revenue first earlier than including within the self-employed revenue (because of this the employer pays for his or her portion of your FICA taxes first).

For illustration, here’s a graph of your efficient tax charge based mostly in your revenue. This contains FICA taxes, however doesn’t embrace state taxes. It additionally assumes $60,000 in revenue from an employer, and any curiosity obtained as an unbiased contractor (very corresponding to a resident’s monetary scenario).

Evaluate that to a graph for all revenue obtained as an unbiased contractor:

In abstract, calculating taxes owed is difficult, however the vital half is saving sufficient to pay taxes at a later date. In my situation, since there aren’t any state revenue taxes, I plan to place apart for taxes 25-30% of the additional revenue generated Moonlighting (along with the taxes owed on my worker wage as a resident).


Michael Brodeur, MD and Joshua White, DO

#2 Stay in Protected Harbor

To say in secure harbor, pay the IRS the taxes they require on the acceptable time and within the acceptable quantity.

What to Pay for Quarterly Funds

Whenever you get hold of revenue from being an unbiased contractor, the IRS requires that you just pay quarterly funds all year long. These needs to be equal funds based mostly in your earned revenue. The objective is to not pay all of the taxes that you just owe within the 4 funds, however to keep away from charges from the IRS with out grossly overpaying—as that offers the federal government an interest-free mortgage.

There are a number of guidelines to remain in secure harbor (to keep away from charges from the IRS), however the most secure and best one is the 100%/110% rule. In the event you pay 100% of what you owed final 12 months in 4 equal funds throughout the present tax 12 months and also you make below $150,000, you might be in secure harbor. In the event you make over $150,000, that proportion will increase to 110%.

When to Pay Quarterly Funds

For the tax 12 months 2021, estimated tax funds are due on the next dates as follows:

  • April 15, 2021 (for January 1-March 31)
  • June 15, 2021 (for April 1 to Could 31)
  • September 15, 2021 (June 1 to August 31)
  • January 15, 2022 (September-December 31)
  • Along with these estimated funds, the deadline to file your taxes is April fifteenth of the next 12 months.

These dates sometimes keep the identical from 12 months to 12 months. You’ll make 4 equal funds should you work the entire 12 months as an unbiased contractor. In case your work as an unbiased contractor begins on July 1st, the White Coat Investor suggests that you just pay your estimated taxes in 2 funds: one on September 15, and one on January fifteenth.

The right way to Pay Quarterly Funds

You possibly can pay electronically by means of this web site, by telephone, or by mail should you ship a examine with Kind 1040-ES. You may as well pay together with your cell gadget utilizing the IRS2Go app.

The place Do You Put Your Cash Earlier than the Tax Due Date

Put your cash someplace secure the place you possibly can simply withdraw it on the time of the tax due date. Don’t put it in a high-risk funding portfolio, as this cash must be assured. I’d advocate a excessive yield financial savings account.


#3 Maximize Tax Deductions and Credit

As an unbiased contractor, taxes owed are accounted with these varieties:

  • Every unbiased contractor is self-employed, and once they begin doing work for every shopper, they are going to fill out a W-9 (equal to an Employers’s W-4).
  • In return, every shopper the unbiased contractor labored for throughout the tax 12 months will ship them a 1099 kind (equal to an Employers’s W-2).
  • In case you are a sole proprietor (which is the default enterprise construction), then these 1099 varieties will stream on to Schedule C, after which on to a 1040 whenever you file your taxes.

Whenever you file your taxes, the objective is to say all of the credit and deductions which might be obtainable to you so that you owe much less taxes. The federal government provides you reductions on taxes by means of deductions and credit. A deduction will scale back your taxable revenue, so it reduces the sum of money you pay taxes on. A credit score instantly reduces the quantity of taxes you owe greenback for greenback.

Whenever you file your taxes, you should have the choice of selecting normal or itemized deductions. In 2021, the usual deduction is $12,550 for singles and $25,100 for married {couples}. Which means should you select the usual deduction and file single, you should have $12,550 much less revenue to pay taxes on. Solely select itemized deductions if in case you have extra deductions to deduct than the usual deduction. Itemized deductions = beneath the road deductions. Examples of itemized deductions embrace: charitable donations, medical bills, house mortgage curiosity, and others. Above the road deductions are deductions that may be taken along with the usual deduction. Which is fantastic! Listed below are some notable above the road deductions to make the most of:

Tax-Deferred Retirement Plans

As a result of you have got some revenue out of your self employment, you have got a few retirement plan choices obtainable to you that aren’t obtainable to those that are simply staff. You possibly can select both a SEP IRA or a Solo 401(ok) to contribute to. There are professionals and cons mentioned by the WCI however total he recommends the Solo 401(ok). This is not a pure deduction because it defers taxes till a later time (often retirement when your tax charges will probably be decrease), however it does scale back the revenue you’ll pay taxes on throughout that tax 12 months along with serving to you lower your expenses for retirement.

Limits: probably the most you possibly can contribute to a 401(ok) as an worker throughout all employers is $19,500/12 months. Nonetheless, if you’re an unbiased contractor, you may as well contribute because the employer as much as 20% of your web revenue with a restrict of $58,000 in 2021.

HSA Accounts

In 2021, you possibly can contribute as much as $3,600 if single and as much as $7,200 if married to an HSA plan. That is deducted out of your taxable revenue, however isn’t taxed whenever you withdraw from it to pay for well being associated bills. Nonetheless, with a purpose to qualify you must have a excessive deductible well being plan, and you’ll’t have entry to a bunch coverage protection.

Self-Employment Taxes

Bear in mind these self employment taxes which might be owed? Half of these self-employment taxes paid could be deducted out of your taxable revenue.

Scholar Loans

As much as $2500 in pupil mortgage curiosity could be deducted annually in case your revenue is beneath a sure restrict. In the event you file single this profit begins to part out at $70,000 and ends after $85,000 in adjusted gross revenue. For married {couples}, the part out runs from $140,000-170,000. One resident I do know wasn’t conscious of those limits and was aggressively paying off pupil mortgage curiosity with moonlighting revenue absolutely anticipating it to be deductible. It wasn’t!

Enterprise Bills

Any bills you pay for your enterprise you possibly can deduct out of your adjusted gross revenue. Maintain observe of what you spend on mileage, scrubs, gear, licensing charges, and so on., and it may well enable you on tax day.


#4 Enhance Your Private Tax Schooling

The ultimate software to extend tax success is to be told on tax legislation and the way it impacts you. I not too long ago learn the e book Taxes Made Easy by Mike Piper, which was beneficial by the White Coat Investor, and I extremely advocate it. It was simple to know, lined the fundamentals of taxes, and I believe it needs to be a must-read for everybody.

Have you ever moonlighted? What different steps have you ever taken to make sure you pay the taxes you owe with out leaving a tip? Remark beneath!

Positive Learn Supply

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