3 Planning Tips for independent contractor physicians
A higher income and greater flexibility are some of the attractive benefits of being a 1099 self-employed physician, but it also creates a series of challenges that your peers may not face. Here are some planning tips to make sure you’re financially prepared:
1. Tax planning - you’re in charge
Since 1099 earners do not have taxes withheld from their paychecks, you will need to make sure you have enough set aside for these payments, which can be significant. You will make estimated tax payments quarterly.
How are estimated tax payments calculated?
Most physicians are high earners and will pay estimated tax benefits based on 110% of the prior year or 90% of the current year’s tax liability. The due dates for estimated tax payments are April 15, June 15, September 15, and January 15.
2. Retirement planning – saving for retirement falls on your shoulders
As an independent contractor, your employer does not tempt you with retirement savings options, and there is definitely no match. However, there are alternatives for independent contractors:
SEP IRA: This allows you to make annual, tax-deductible contributions. The maximum amount permitted is currently $58,000 for 2021. You also have the flexibility to not need to contribute to a SEP each year. SEPs can be established and funded for the plan year as late as the due date of the federal income tax return, including extensions. You are also still able to contribute $6,500 to your traditional IRA.
Solo 401(k): With a standard 401(k) plan with an employer, you would contribute a certain amount, and typically your employer will match it up to a point. However, for a solo 401(k), you’re the only one contributing. The solo 401(k) plan is similar to a SEP IRA, with a maximum contribution of $58,000 per year (2021). Once you turn 50, you can add another $6,500 (2021) as well.
Defined Benefit Plan: This plan is ideal for 1099 contractors with a higher income. You can contribute up to $230,000 per year (2021), all of which is tax-deductible. This can be relatively complicated and costly to set up, so you may want to talk to a Financial Advisor.
3. Student loans - No PSLF
As a 1099 contractor, you do not qualify for Public Service Loan Forgiveness (PSLF). It’s more typical for independent contractors to refinance their loans and focus on paying them off. The schedule you use to payoff your student debt is personal to you and varies depending on your circumstances. Some physicians can payoff their loans in less than five years, especially if they are single and prepared to live “like a resident.” Some physicians take longer than ten years, especially if they have competing financial priorities such a paying for daycare or higher rent from living in a costly area. However, you could still use an Income-Driven Repayment plan and go for the traditional forgiveness after paying off your loans for 20-25 years. Remember to be prepared to pay taxes on the amount forgiven.
As you embark on the self-employment path, you control your cash flow and have the responsibility to take care of tax and retirement planning and find a team of qualified professionals to assist you.
Adviso Wealth is dedicated to working with people just like you. We want to give you the clarity and confidence you need to achieve your personal and financial goals.
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