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Tax Deductions for the 1099 Physician

One of the big benefits to pursuing a side gig as a physician is the potential for tax advantaged income. Often, when tax season comes around and our members get their tax bills, the community sees lots of posts about ways to save on taxes. The response is often to get 1099 income, start a business, or invest in real estate, as the tax code was really written to benefit these parties. W2 physicians have a limited number of ways to save on taxes, but with 1099 income, you open the door to more tax advantages.


Don’t dismiss the power of these savings - remember that by having more money in your pocket today, compounding effects will expedite your pathway to financial independence.


As always, note that we are not accountants and you should consult appropriate expertise before taking action based on these ideas, which are not individualized to your personal situation. This page contains affiliate links from our advertisers, which support the group at no cost to you. To learn more, visit our disclaimers and disclosures.


Tax deductions for the 1099 physician include the following, as well as some unique other ones mentioned below.

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Introduction


Physicians can earn 1099 income in many ways - through a side gig, by moonlighting or taking call, or even just by doing medical surveys in your free time. You may not realize it, but if you earn 1099 income, you are not only self employed, but a business. This unlocks the potential for significant tax advantages, and you should do your best to become educated about these outlets if you’d like to reduce your bill come tax time.


Before we get into tax deductions, also remember that having 1099 income also subjects you to self-employed taxes and other aspects of self-employed finances.


Ultimately, the amount you pay in taxes on your 1099 income is going to be based on how much you earn minus the expenses you’re able to deduct, so knowing what you can deduct is key! Make sure you keep track of these expenses. Applications such as Quicken and Quickbooks Online can help track expenses throughout the year and compile reports to make taxes easier at year end.


Also, a reminder on the distinction between tax deductions and tax credits (discussed in more depth here on our taxes primer page).

  • Tax deductions lower your taxable income, and how much it actually saves you in taxes depends on your federal income tax bracket.

  • Tax credits, on the other hand, directly decrease the tax you owe dollar-for-dollar. So all things being equal, you’d prefer a tax credit over a tax deduction, but as high income professionals, physicians are phased out of many tax credits.


15 Common Tax Deductions for the 1099 Physician


There are lots of potential tax deductions that you’ll hear about, but not all of them will apply to you. Make sure that you speak with your accountant about what’s appropriate. If you get audited, the IRS will focus on what deductions were reasonable and which ones weren’t. For example, if you buy yourself a $15,000 coffee maker for your house and deduct it, for your solo member LLC that shows $15,000 a year in income through occasional consulting and medical surveys while you spend 60 hours a week in the hospital for your day job as a physician, you may raise some eyebrows. While opinions on what’s reasonable may depend on how aggressive your accountant is and how risk averse you are, we’d remind you that trying to save a few hundred dollars on taxes is probably not worth the hassle of an audit. Visit our page on choosing an accountant to help guide you through the process if you need to find an accountant.


Okay, that said, here are some common tax deductions physicians take based on their 1099 income.


Retirement Account Deductions

The ability to contribute to additional retirement accounts is one of the biggest tax advantages of 1099 income for physicians. Many of us are fortunate to have money left over after our retirement contributions in our W-2 employed positions and our day to day budgets. While we could invest these into a taxable account, the tax savings now plus the years of tax free growth in the retirement accounts are more powerful. In 2023, you can contribute up to $66,000 to a solo401k, for example.

  • Note: There are rules here; please read further on our self-employed finances page to learn about the employEE and employER sides and how much of your income is eligible, as only the employee portion is dollar for dollar applicable.

  • If you’re maxing out your retirement contribution at your W-2 job, you can’t contribute to the employee side, only the employer side

You could even increase the amount you put towards retirement accounts by considering a defined benefit or cash balance plan, where depending on your age, you may be able to contribute a 6 figure amount. There are lots of rules with all of this, so again, please consult a tax professional.


Learn more on our Primer on Retirement Accounts for Physicians.


Home Office Deduction

If you have space in your house you use exclusively for work purposes, you could qualify for home office deductions. There are different methods of doing this.


  • It can be based on the absolute numerical square footage of the area (simplified method that multiplies square footage x $5 up to a maximum amount of $1500 in 2023).

  • The ‘actual expenses’ method is the other way, where you take the percentage of your house that the square footage represents and multiply it times your rent, mortgage, and utility bills.

    • Note that this method is much more calculated and also has future consequences when you sell your house. Please read more in our article on the home office deduction and talk to an accountant.

  • You can also deduct things like renovations/maintenance/painting of this area, mortgage interest, and real estate taxes

IRS Form 8829 shows you what factors into this calculation. The fine print on the instructions for filling it out provide more context.

  • Note: You can NOT take this deduction as a W-2 employee who does work from home according to the current tax law. This must be an area that you use for your business and be exclusively used for that purpose and must be an area you use regularly (although it’s subjective what counts as regular use).

  • If you start your business mid-year, your deduction may need to be pro-rated.


Learn more about the home office deduction here.

Deductions for Cell Phone, Laptop, Office Supplies, Internet, and Other Business Supplies/Services

Remember that if these are used for both work and personal reasons, you'll need to factor in how much they are used for each, and only write off the percentage that was for business use.


Don’t forget things like your Zoom account, Canva subscription, or website fees.


Deduction for Professional Service Fees

The most common ones are legal and accounting, but depending on your field, there may be so many more, such as:

  • licensing services

  • consultants

  • executive coaches (but not life coaches, it must be professional)

If you have a defined benefit plan or a financial planner, these count too.


Travel Expenses and Meals Deductions


Airfare, ground transportation such as taxis and rideshare apps, parking, tolls, gas, and hotels can all be deducted. Meals are only deductible at 50%. More nuances here on the IRS site.


Vehicle Expenses Deduction

If you travel a lot for your side gig (for example, you’re a consultant, locums physician, or speaker, or maybe you’re a resident who’s doing a ride sharing app as a side gig), don’t forget about this deduction!


The IRS allows you to deduct parking and tolls, as well as choosing between taking a “standard mileage rate” per mile vs. a more exact method that could include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles. Stay current on this by checking the IRS site, as it can change quite a bit. If you truly only use your car for business, you may be able to deduct it up to a certain point.


Health Insurance Deduction

If you pay for your health insurance (medical, dental, and/or vision), you can deduct those premiums. You can also potentially write off other healthcare expenditures. See more details on the IRS website.


Self-Employment Taxes Deduction

One of the biggest things that hurts with self-employment taxes is that you pay as both the employer and the employee, so currently that means you pay ~15% in Social Security and Medicare taxes.


You are allowed to deduct half of this payment to reduce your income taxes (but make no mistake, you’re still paying the actual self-employment taxes).


Deductions for Business Insurance and Other Insurances

Different insurances to consider:

  • If you have an insurance which requires liability insurance, you can write that off.

  • As physicians, you can also write off malpractice premiums if you’re purchasing your own and a locums company isn’t supplying it.

  • Errors and Omissions insurance is another for those side gigs that require those.

Advertising Deduction

You name it for advertising and you can deduct it, including:

  • Social media ads

  • Business cards

  • Billboards

  • Newspaper ads

  • Website hosting fees

  • SEO services


Deduction for Employee Expenses

There are a few different expenses you can deduct in this category:

  • Hiring your spouse or children and funding their retirement accounts (make sure you can actually justify what they do for your business, but being able to put away income into a solo401k or a ROTH can be a huge tax benefit. For the kids, that’s decades of tax free growth!)

  • W-2 employees: can deduct wages, employee benefits, and employee retirement or pension plans, worker’s compensation insurance

  • Virtual assistants or independent contractors


Depending on the Side Gig, QBI Deduction


While professional services as a physician don’t qualify for the QBI deduction, many other side gigs do. This can allow you to deduct up to 20% of your business income, but there are lots of rules and calculations.


Learn more on our QBI tax deduction for physicians page.


Educational Expenses Deduction

Many of you will invest in learning more about your side gig. For example if you are a real estate business and take one of the real estate courses listed on our investing in real estate page, you may be eligible for a deduction.


Same goes for webinars or conferences and books and subscriptions related to your side gigs


Scrubs and Lab Coats

While you can’t deduct most clothes, if there are clothes that are only able to be worn as uniforms on your job, you can deduct these.


The IRS states they must not be suitable for taking the place of your regular clothing, so it doesn’t matter if you would never wear them anywhere else (for example if you would never wear a suit outside of work, you still can’t deduct it because you could wear it outside of work).


Bank Fees, Interest, and Other Fees

If you have transactional fees, you can deduct them, including:

  • wire transfer fees

  • late fees

  • interest payments on a business loan

  • credit card convenience fees


More Unique Tax Deductions for the 1099 Physician

(again, please check with your accountant that these pass the sniff test in your situation)


Depreciation or Repairs of Property

If you have hard assets for your business that lose value after a year, you may be eligible to claim depreciation on those assets. You may also be able to write off any repair costs.


Startup Costs

This is one a lot of physicians don’t know about. In the first year you start a business, you’re allowed to write off “startup costs” such as creating a website, hiring consultants or market research firms, related travel, staff training, and marketing. More details on the IRS website here.

Conditions apply - currently the IRS allows a deduction of $5,000 in business startup costs and $5,000 in organizational costs (LLC formation, etc), but only if your total startup costs are $50,000 or less.


Renting Your House to Your Business (The Augusta Rule)

If you host business related events in your house, vacation rental, or rental property, you can charge your business rent for up to 14 days per year. This basically makes your rental income tax free. A few things to keep in mind:

  • Talk to your accountant about what will fly for your business, but even renting out your house as production space for creators could count. Obviously, these should be legitimate and ideally documented with minutes and even an invoice to your business. Your accountant should walk you through this, but you’ll search comparable rents in the area when deciding how much to charge your business.

  • Note you cannot use this if you are not incorporated as a business and just filing as a sole-proprietor.

Collections Expenses or Bad Debt Write Offs

Additional outlets exist through charitable giving, employee fringe benefits, etc., but you really want to be talking to a tax strategist who can explain the pros and cons, risks, and complexities of utilizing these.


We recommend not doing any of these things unless you actually understand what you’re doing and are sure they apply to you, as some of them will put you at higher risk of audit or could make accessing funds for the purposes you want to use them later.



Summary: Common 1099 tax deductions for Physicians
Summary: Common 1099 tax deductions




FAQs


Should I be 1099 or W2 if I have a choice?

This will depend on whether or not you think the deductions above will outweigh the self-employed income taxes and additional hassles of self employed income, as well as any loss of benefits you may have in your W2 job, like health insurance.


Learn more in this article about choosing between 1099 and W-2 as a physician.



Should I be a 1099 physician or a W-2 employee if I have the choice?


Do I need an LLC to take advantage of these tax deductions?

In most cases for side income that isn’t a large amount, no (there are some exceptions noted above). The LLC is there for asset protection. It’s not actually a vehicle to save taxes unless you elect to file as an S corp or a C corp. A solo member LLC will ultimately flow through to your taxes in a way that’s similar to filing this income on your schedule C as a sole proprietor without an entity. You may still want to elect an LLC for liability reasons or to keep your finances clearly separated, but there is no need for you to create an LLC for a little bit of side income if you don’t see legal liabilities to your side gig.


We talk about this more on the self-employed finances page.


Conclusion


As you can see, there are many potential deductions that come along with business and 1099 income. Each of them must be appropriately assessed in terms of applicability to your specific situation. We highly recommend talking these things over with your accountant, who can guide you in accordance with your personal tax situation.



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