How the New Tax Law Affects Locum Tenens

Tax day is quickly approaching, and the new tax law has sparked a lot of questions surrounding locum tenens taxes and how independent contractors who receive 1099 income may be affected. Taxation for doctors is unique in the locum staffing industry, and we’ve set out to clarify some of the nuances of the new law.

So, let’s start by getting a few facts straight about the new tax reform legislation.

Formally known as The Tax Cuts and Jobs Act, the new law was signed by Pres. Trump on December 22, 2017, and most of the changes went into effect starting in January 2018. The Act introduces extensive changes to the U.S tax law.

Generally, these changes will not be reflected in 2017 tax returns due this April, but will impact income earned this year. And taxation of locum doctors and advanced practitioners are just some of the professions impacted by the new legislation.

For the inside scoop on how locums are affected, Staff Care talked to tax expert Joseph Smith, BA, MS in Taxation, owner of Travel Tax, and a former traveling respiratory therapist. His practice focuses on taxation of locum doctors, advanced practitioners and other traveling health care professionals. He also serves on the tax compliance committee for the National Association of Travel Healthcare Organizations (NATHO) and teaches college courses in taxation.

Smith points out that there are two fundamental differences in how taxes are filed; you can either file based on W-2 income, 1099 income or a combination of both. While most locum tenens tax returns are filed based on 1099 income (independent contractors), Smith explained both scenarios relating to taxation for doctors and other taxpayers.

Changes for W2 employees

There are three substantial changes that come into play with the new tax law for employees:

1. Employee business expenses are no longer deductible. This means that deductions for mileage, meals, licenses, etc. are history.
2. The standard deduction is almost twice what it has been, BUT the personal exemption has been removed. This will make it harder for some taxpayers to itemize deductions.
3. At the same time, the tax rates are lower which makes up for some of the lost deductions.

Due to the lower tax rates, employees may see changes in their withholding in their February 2018 paychecks

Most locum tenens practitioners will see improvement in the coming year, however.

Changes for 1099 contractors (usual filing status for locum tenens)

There are two major changes for 1099 filers:

1. As noted for W2 employees, the standard deduction for taxpayers has increased, but the personal exemption has been removed;
2. “Pass through income” is only 80 percent taxable. This applies to self-employed sole proprietorships, S corps, and partnerships that have qualified business income (QBI). QBI is basically the net income of an activity.

How the 20% tax break works

Everyone from Uber drivers to locum tenens physicians are eligible for the savings on pass through income. When one compiles their return in 2019 for the 2018 tax year, he or she will generally deduct 20 percent of their QBI, leaving 80 percent of income to be taxed.

The big takeaway, according to Smith, is that locum tenens and other traveling health care professionals will be able to deduct 20 percent of their QBI from the tax return, subject to limitations. Some of the limitations include per diems, which are generally excluded from 1099 reporting.

“The new law does not affect that. Nor does it affect the ability to deduct expenses more than per diems, unlike it does for W2 employees,” Smith explained.

Smith added that some locum tenens may want to consider S corporation status or some restructuring to help qualify for the new deduction.

Limitations for high earners

Taxation of locum tenens doctors and other 1099 filers also depends on the amount earned throughout the year. There are several limitations to the law that Smith explained in greater detail.

“Because healthcare is a service industry and all the income is generally generated by the owners, the new law applies some income limitations to the new QBI tax break,” he said.

“If you earn less than $157,000 as a single filer or $315,000 as married, no limitations apply. You can deduct the full 20 percent of earnings,” Smith explained. “However, if you earn more than this, the deduction phases out until the QBI reaches $207,500 for singles and $415,000 for married. After this, the 20 percent deduction is gone.”

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“During the phase-out period, the limitation is increased by 50 percent of any W2 wages you pay to others including yourself, which is why some may want to consider S corporation status since owners are required to treat themselves as employees.”

It’s important for the purposes of locum tenens taxes to note that the 20 percent deduction of QBI calculates income tax, but not self-employment tax.

“The total net is subject to the self-employment tax,” Smith concluded.

“There are many more provisions [in the new tax law] that could be addressed, but one new addition is the ability to use 529 plans for private school tuition.”

CONTACT Staff Care, the locum tenens staffing experts, to advance your career with short-term and long-term assignments in your medical specialty.

Note: This article is not intended to serve as legal or tax advice. Locum tenens physicians and practitioners are encouraged to contact a tax preparer with expertise in their tax situations.

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