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Side practices like consulting, teaching, telemedicine, or a small clinic are increasingly common among physicians who supplement their main practice. Although these side practices can increase earnings, they also introduce additional tax complexity. Proper planning can reduce liability, preserve cash flow, and keep you compliant with federal and state regulations. This is a practical guide to navigating tax planning for doctors with side practices.

Why Side Practices Are Important A side practice changes the tax character of your earnings. Earnings that would otherwise be taxed as salary shift to self‑employment income, subject to SE tax (Social Security and Medicare). A blend of W‑2 income from your primary job and 1099 income from a side practice produces a hybrid tax environment. Each type of income has different deduction rules, reporting requirements, and timing considerations.

Essential Tax Concepts for Physicians 1. Self‑Employment Tax (SEAT) – 15.3% on net self‑employment income. 2. QBI deduction – up to 20% of qualified business income per Section 199A, with limitations. 3. Corporate rates – incorporating may provide lower tax rates and distinct liability. 4. State taxes – numerous states tax medical earnings differently; some provide special exemptions or reduced rates for medical professionals.

Selecting the Appropriate Entity

Sole Proprietorship

Simplest to set up; earnings are reported on Form 1040 Schedule C. All expenses are deducted on the same form; no separate corporate filing required. Self‑employment tax applies to the net profit.

LLC

A single‑member LLC behaves like a disregarded entity, matching a sole proprietorship unless you opt for corporate tax. Multi‑member LLCs submit Form 1065; each member gets a K‑1. Provides liability protection without corporate formalities.

S Corporation

Pay yourself a reasonable salary (W‑2) and take the remaining profits as shareholder distributions. Salary is subject to payroll taxes, but distributions are not subject to SEAT. Requires payroll setup, quarterly payroll tax filings, and compliance with IRS reasonable‑compensation rules.

C Corporation

A separate legal entity; profits taxed at 21% federal and again on dividends. Ideal for larger side practices or when you plan to reinvest earnings. Needs detailed corporate governance and annual meetings.

Best Practice: Most physicians find an S‑Corp or LLC with an S‑Corp election strikes the right balance of simplicity, liability protection, and tax efficiency. However, the choice depends on your revenue, number of employees, and long‑term goals.

Deductible Expenses

Rent or Lease of Office Space

Utilities, internet, and telephone

Professional Liability Coverage

CME and Licensure Fees

Medical equipment and supplies like instruments and computers

Marketing and Advertising

Depreciation of Capital Assets

Health Insurance Premiums if self‑insured

Business‑related Travel and Meals (50% deduction for meals)

Home Office Deduction if you have a dedicated space for patient care or admin tasks.

Keep in mind: All expenses must be ordinary, necessary, and directly tied to the side practice. Document everything with detailed records, receipts, and a mileage log if you claim a home office or vehicle deduction.

Paying SE Tax on Time

• Quarterly estimated tax payments (Form 1040‑ES) are required if your side practice produces $1,000 or more in self‑employment tax.
  
• Employ the safe‑harbor rule: pay 90% of prior year’s tax or 100% of current year’s tax (110% if AGI exceeds $150,000).
  
• Setting up automatic payroll for an S‑Corp reduces the risk of underpayment penalties.
  
  

QBI Deduction

• QBI permits a 20% deduction on qualified business income from a pass‑through entity.
  
• High‑income doctors face limits: wage and capital restrictions, plus the 20% threshold.
  
• Reviewing your total income and side practice type is crucial to maximize the deduction.
  
  

Health Insurance and Retirement

• Premiums paid by self‑insured doctors are fully deductible from gross income.
  
• Establish a Solo 401(k), SEP IRA, or defined‑benefit plan to defer income and reduce taxable wages.
  
• IRS limits contributions to these plans; a financial advisor can guide you to stay within limits.
  
  

Recordkeeping & Documentation

• Maintain separate bank accounts for the main practice and side practice.
  
• Keep a detailed ledger of all income and expenses.
  
• Employ accounting software designed for medical practices to monitor reimbursable items, deductions, and tax docs.
  
• Store records for at least seven years to cover possible audits.
  
  

State & Local Considerations

• Certain states like Texas, Florida, and Nevada impose no state income tax, simplifying your setup.
  
• Others (e.g., California, New York) impose additional taxes on medical income.
  
• Check for local licensing fees, business taxes, or health department permits that may apply to side practices.
  
  

Timing Strategies

• Defer income: If your side practice allows, 確定申告 節税方法 問い合わせ push the receipt of large invoices to the next calendar year to reduce current year tax.
  
• Speed up deductions: Pay rent or acquire equipment before year‑end to raise deductions.
  
• Think about a cash‑basis entity to align income and expenses more closely.
  
  

Employment vs. Contractors

• Hiring employees triggers payroll taxes, benefits, and labor law compliance.
  
• Independent contractors (1099) cut payroll overhead but heighten audit risk.
  
• Engage a qualified tax professional to classify workers properly and avoid penalties.
  
  

Collaborating with a Tax Professional

• A CPA or tax lawyer experienced in medical practice taxes can guide you in entity selection, deduction optimization, and compliance.
  
• Collaborate with a professional to handle quarterly estimates, payroll setup, and audit defense.
  
• Regularly review your tax strategy.
  
  

Common Pitfalls to Avoid

• Merging personal and business expenses within a single bank account.
  
• Not maintaining detailed mileage logs for vehicle use.
  
• Underestimating SE tax and missing quarterly payments.
  
• Ignoring QBI limits and not structuring the side practice for qualification.
  
• Neglecting state‑specific tax rules applicable to medical professionals.
  
  

Conclusion

Running a side practice can raise your income substantially, but it also creates numerous tax responsibilities. By selecting the appropriate entity, maximizing deductible expenses, staying on top of self‑employment tax, and leveraging retirement and health‑insurance strategies, you can keep more of your earnings. Consistent work with a qualified tax professional and diligent recordkeeping form the foundation of sound tax planning for doctors with side practices. With the correct approach, you can dedicate yourself to quality care while reducing your tax load.