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Many physicians today supplement their primary practice with side practices—consulting, teaching, telemedicine, or a small clinic. Even though side practices may raise income, they add extra layers of tax complexity. Proper planning can reduce liability, preserve cash flow, and keep you compliant with federal and state regulations. Here is a practical guide to navigating tax planning for physicians who run side practices.

Why Side Practices Matter Side practices alter the tax classification of your income. Earnings that would otherwise be taxed as salary shift to self‑employment income, subject to SE tax (Social Security and Medicare). The mix of W‑2 income from your primary employer and 1099 income from a side practice creates a hybrid tax situation. Each type of income has different deduction rules, reporting requirements, and timing considerations.

Important Tax Ideas for Doctors 1. SEAT – 15.3% on net self‑employment income. 2. Qualified Business Income deduction – up to 20% of QBI under Section 199A, subject to limits. 3. Corporate rates – incorporating may provide lower tax rates and distinct liability. 4. State Taxes – many states tax medical income uniquely; some offer special exemptions or lower rates for doctors.

Deciding on the Correct Entity

Sole Proprietorship

Most straightforward to establish; income appears on Form 1040 Schedule C. All expenses are written off on the same schedule; no separate corporate filing needed. SE tax is due on the net profit.

Limited Liability Company (LLC)

Single‑member LLC treated as a disregarded entity; same as sole proprietorship for tax purposes unless you elect corporate taxation. Multi‑member LLCs file Form 1065; each member receives a K‑1. Provides liability protection without corporate formalities.

S‑Corp

Set a reasonable salary (W‑2) and 確定申告 節税方法 問い合わせ take the surplus as shareholder distributions. The salary is subject to payroll taxes, while distributions are exempt from SE tax. Requires payroll setup, quarterly payroll tax filings, and compliance with IRS reasonable‑compensation rules.

C‑Corp

A separate legal entity; profits taxed at 21% federal and again on dividends. Useful for larger side practices or when planning to reinvest profits. Requires detailed corporate governance and annual meetings.

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

Deductible Cost Items

Office Rent

Utilities, Internet, and Phone services

Liability Insurance for Professionals

Continuing Medical Education and Licensing Fees

Equipment and Supplies such as medical instruments, computers

Advertising and Marketing costs

Depreciation of Capital Assets

Health Insurance Premiums if self‑insured

Travel and Meals related to business (50% meals deduction)

Home Office Deduction – if you use a dedicated space for patient care or administrative tasks.

Note: All expenses must be ordinary, necessary, and directly connected to the side practice. Maintain detailed records, receipts, and a mileage log when claiming a home office or vehicle deduction.

Paying Self‑Employment Tax on Time

• If your side practice yields $1,000 or more in SE tax, quarterly estimated payments (Form 1040‑ES) are required.
  
• 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.
  
  

Qualified Business Income (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.
  
• Analyzing total income and side practice type is vital to maximize the deduction.
  
  

Health Insurance & Retirement

• If you are self‑insured and pay your own premiums, you can deduct 100% of those premiums from your 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

• Separate bank accounts for primary practice and side practice.
  
• Record all income and expenses in a detailed ledger.
  
• 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 and Local Issues

• Some states (e.g., Texas, Florida, Nevada) have no state income tax, which simplifies your situation.
  
• Other states like California and New York levy extra taxes on medical income.
  
• Verify local licensing fees, business taxes, or health department permits that might affect side practices.
  
  

Timing Tactics

• Defer income: If your side practice allows, 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.
  
  

Hiring Workers or Contractors

• Employees need payroll taxes, benefits, and adherence to labor regulations.
  
• Using independent contractors (1099) lowers payroll load but raises audit risk.
  
• Use a qualified tax professional to classify workers correctly to avoid penalties.
  
  

Working with a Tax Professional

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

Common Mistakes to Avoid

• Merging personal and business expenses within a single bank account.
  
• Not maintaining detailed mileage logs for vehicle use.
  
• Underestimating self‑employment tax and missing quarterly payments.
  
• Overlooking QBI limitations and failing to structure the side practice to qualify.
  
• Disregarding state‑specific tax rules for medical professionals.
  
  

Conclusion

Running a side practice can raise your income substantially, but it also creates numerous tax responsibilities. Picking the proper entity, maximizing deductible expenses, monitoring SE tax, and employing retirement and health‑insurance tactics helps you preserve more 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 right approach, you can focus on delivering quality care while minimizing your tax burden.