As a veterinary locum tenens provider, understanding how to manage your taxes is crucial. This tax guide for locum tenens veterinarians will help you navigate your tax obligations, choose the right business entity, and track deductible expenses. Whether you’re working in multiple states, relocating or managing quarterly tax payments, this guide covers the essential tax strategies you need.
This guide is presented by Massey and Company, an Atlanta CPA firm. We work with Massey & Co to manage our multi-state tax issues. Holiday Vet is not a qualified tax preparer and cannot give tax advice.
Key Takeaways
- Locum tenens providers, classified as independent contractors, must manage their own taxes and make estimated quarterly tax payments while tracking income and allowable deductions.
- Choosing the right business entity, like an LLC, is important for tax implications, legal protection, and maintaining separate personal and business finances.
- Deductions for business expenses, including travel, home office, and professional fees, can significantly lower taxable income, making diligent record-keeping essential for optimizing tax situations.
Understanding Locum Tenens Tax Obligations
As a locum tenens provider, being classified as an independent contractor means you must manage your own taxes. Unlike traditional employees, locum tenens veterinarians don’t have taxes automatically withheld from their paychecks. You need to set aside a portion of your income to cover federal, state, and self-employment taxes.
Tax responsibilities can vary significantly depending on the state you work in and your residency status. Each state has its own tax laws and regulations, so staying informed about the specific requirements in each practice location is vital. This can be especially challenging if you frequently move between states for assignments.
Establishing a system for tracking your income and expenses, including all allowable tax deductions, is key to effective tax management. Consulting a CPA or other tax professional who understands the unique tax laws applicable to locum veterinarians can help you to understand these complexities and ensure you’re meeting all your tax obligations.
Selecting a Business Entity
Choosing the right business entity is a crucial decision for locum tenens providers, as it impacts tax liabilities, legal protection, and financial management. Understanding the differences between various entities can help optimize tax benefits and protect personal assets.
In most cases, you will need to obtain a federal Employer Identification Number (EIN) from the IRS to conduct business under your desired entity type. You will also need this to open a business bank account.
Limited Liability Company (LLC)
An LLC is a popular choice among locum tenens providers due to its flexibility and liability protection. It allows for pass-through taxation, meaning business income is reported on the owner’s personal tax return, potentially reducing the overall tax burden.
However, it is important to note that while an LLC offers protection for personal assets against business liabilities, it does not always shield against professional liability. Locum tenens providers should consider obtaining professional liability insurance to cover any claims related to their medical practice. An LLC, combined with such insurance, offers a balanced approach to managing both financial and professional risks.
S Corporation
An S Corporation is another entity that provides liability protection and pass-through taxation. It allows providers to pay themselves a reasonable salary while distributing remaining profits as dividends, potentially reducing self-employment taxes. However, S Corporations have more stringent requirements, including the need to file specific tax forms and maintain detailed accounting records.
In our CPA firm, a popular solution for entity choice is an LLC with an election to be taxed as an S corporation.
Sole Proprietorship
A sole proprietorship is the simplest form of business entity, where the provider operates without a formal business structure. While this option offers ease of setup and minimal administrative requirements, it does not provide liability protection. The provider is personally responsible for all business debts and obligations, which can pose significant risks.
Professional Corporation (PC)
A Professional Corporation is designed for licensed professionals, offering liability protection for business debts and obligations. While PCs provide some tax advantages, they are subject to corporate tax rates, which may not be as favorable as pass-through entities. This structure is often chosen by providers who plan to expand their practice and hire employees.
Professional Limited Liability Company (PLLC)
A PLLC combines the benefits of an LLC with the requirements for licensed professionals. It offers liability protection and pass-through taxation, similar to an LLC, while adhering to professional licensing regulations. This entity is ideal for locum tenens providers seeking a balance between legal protection and tax efficiency.
Working with an Attorney
Consulting with an attorney is a vital step when selecting a business entity for your locum tenens practice. An attorney can provide legal insights into the implications of each business structure, ensuring that your choice aligns with your professional and personal goals. They can help you understand the legal obligations associated with each entity type, such as compliance with state-specific licensing requirements and liability protection.
An attorney can also assist in drafting and reviewing legal documents necessary for setting up your business entity, such as operating agreements for LLCs or bylaws for corporations. This legal guidance can prevent potential pitfalls and ensure that your business is structured correctly from the start.
Additionally, an attorney can offer advice on mitigating risks associated with your practice, such as professional liability and contract negotiations with locum tenens agencies. By consulting with an attorney, you can gain a comprehensive understanding of the legal landscape, enabling you to make informed decisions that protect your interests and support the growth of your locum tenens practice.
Be Careful Not to Pierce the Corporate Veil
When operating as a locum tenens provider under a business entity like an LLC or corporation, it is important to maintain a clear distinction between your personal and business finances. This separation is key to preserving the “corporate veil,” which protects your personal assets from business liabilities. Piercing the corporate veil occurs when this separation is compromised, potentially exposing your personal assets to business creditors.
To avoid piercing the corporate veil, ensure that you consistently follow formal business procedures. This includes maintaining separate bank accounts and credit cards for business transactions, keeping meticulous records, and documenting all business decisions through meeting minutes or resolutions. Additionally, always sign contracts and agreements in the name of the business entity, not your personal name.
It’s also important to adequately capitalize your business, meaning it should have sufficient funds to cover its operations and liabilities. Under-capitalization can be a factor in piercing the corporate veil if a court deems the business was not formed with the intent to operate independently.
Moreover, avoid commingling funds by ensuring that personal expenses are never paid from business accounts and vice versa. This clear financial boundary is essential for maintaining the integrity of your business entity and protecting your personal assets.
In our CPA practice we recommend that all businesses (including locum providers) open a dedicated bank account and credit card for business finances. This helps to avoid the comingling of personal and business transactions, as well as to simplify record-keeping and ensure accurate tax reporting.
Accounting and Bookkeeping for Locum Veterinarians
Accurate accounting and bookkeeping practices are crucial for locum tenens providers to manage their financial health and ensure compliance with tax obligations. As independent contractors, locum tenens veterinarians must maintain accurate financial records to track income, expenses, and potential tax deductions and credits. This includes organizing receipts, invoices, and other financial documents, which serve as evidence for deductible expenses and income reporting in the event of an IRS audit.
.Utilizing accounting software can greatly simplify the bookkeeping process by automating tasks such as expense tracking, invoice generation, and financial reporting. Many software options also offer integration with bank accounts and credit cards, allowing for seamless transaction recording and categorization. This helps locum tenens providers maintain up-to-date financial records and prepare for tax season with ease. QuickBooks Online is a popular software choice for small businesses of all kinds.
Regularly reconciling accounts is another essential practice, ensuring that recorded transactions align with bank statements. This helps identify discrepancies early and prevents potential issues during tax filing. Locum tenens providers should also set aside time each month to review their financial statements, which can offer insights into spending patterns, cash flow, and overall financial performance.
Some business owners prefer to do their own bookkeeping and accounting. Others prefer to engage a qualified tax professional, accountant or bookkeeper to do it for them. Either way, be sure to implement solid accounting and bookkeeping practices. This way, locum tenens providers will be able to stay out of tax trouble, optimize their financial management and focus on their professional responsibilities with confidence.
Independent Contractor or Employee?
Most locum tenens providers are independent contractors. As such, they do not receive job-related benefits or automatic tax deductions from their employers. Instead of receiving a W-2 form, independent contractors receive a 1099-MISC form from each client, which reports their earnings without withholding taxes. This requires you to manage your own tax payments, including making quarterly estimated tax payments based on your income.
Failing to track expenses is a common challenge for independent contractors, leading to missed deductions. Locum tenens providers can deduct a wide range of business expenses directly related to their work, which can lower their taxable income. Properly tracking these expenses is crucial to optimizing your tax situation.
What if You Have the Choice of Being an Employee?
You may be given the opportunity to choose between being an employee or an independent contractor. This choice can significantly impact your financial and professional situation.
As an employee, you may receive benefits such as health insurance, retirement plans, and paid time off, which can offer greater financial security and stability. Additionally, taxes are automatically withheld from your paycheck, simplifying your tax responsibilities and reducing the need to make quarterly estimated tax payments.
On the other hand, working as an independent contractor provides greater flexibility and control over your work schedule and assignments. While you are responsible for managing your own taxes, you can benefit from a range of tax deductions for business expenses, which can lower your taxable income. This includes deductions for travel, home office, professional fees, and continuing medical education, which can provide significant tax advantages.
Ultimately, the decision should be based on your personal and professional goals, weighing the benefits of employment security and benefits against the freedom and potential tax savings of being an independent contractor. We suggest that you consult with a CPA firm that is familiar with locum arrangements to help you understand the financial implications of each option. You will want to make an informed decision that aligns with your career objectives and financial situation.
Working in Multiple States
Taking assignments in multiple states means dealing with different tax regulations. Establishing a primary ‘tax home’ or domicile state for tax purposes is the first step.
Each state may have different requirements for self-employed individuals, including filing tax returns and quarterly estimated tax obligations. When working in different states, you generally must file taxes in each state where you earn income.
Home states can tax income from locum tenens work but often provide credits for taxes paid to other states to avoid double taxation. Maintaining detailed records of business expenses ensures compliance and optimizes deductions.
Keep in mind that states like Alaska, Florida, Nevada and Texas do not impose income taxes, which can influence your overall tax situation.
More on Working as a Locum Vet in Tax-Free States
We recommend that you work with a CPA firm that is familiar with multi-state taxation in order to keep track of the taxes owed to each state.
Estimated Quarterly Tax Payments
Locum tenens providers must make estimated quarterly to the IRS and the state. These payments are due on four specific dates throughout the year: April 15, June 15, September 15, and January 15. Failing to make these payments can result in penalties.
Your CPA firm can help accurately determine your tax obligations and ensure compliance. Report all income accurately, even if you do not receive a 1099 form from every client. Keeping detailed records of your earnings and expenses will help you manage your tax responsibilities and avoid penalties.
Self-Employment Taxes
You will likely be required to pay self-employment taxes. The self-employment tax rate is 15.3%, comprising a 12.4% Social Security tax and a 2.9% Medicare tax. To calculate self-employment tax, 92.35% of your net earnings from self-employment is considered. For 2024, only the first $168,600 of self-employment earnings is subject to the Social Security portion.
If your net earnings exceed $200,000 for single filers, an additional Medicare tax of 0.9% applies. Understanding these tax rates and limits is crucial for accurate tax planning and ensuring you set aside enough funds to cover your self-employment taxes.
Managing self-employment taxes proactively can help avoid surprises and ensure all obligations are met. A qualified tax professional can provide valuable insights and strategies to optimize your tax situation.
Deductible Business Expenses
Locum providers can claim deductions for necessary expenses incurred while performing their duties. This includes travel costs for temporary assignments away from home, such as airfare and hotel accommodations. To qualify for deductions, rental costs for housing while on assignment must be ordinary and necessary according to IRS guidelines.
Continuing education expenses, such as registration fees for workshops and seminars, can also be claimed as tax deductions for locum tenens providers.
Home Office Deductions
You are entitled to a home office deduction if you have a designated room or area in your home for doing administrative work relating to your business as a locum provider. The deduction is based on the square feet of the home that is used for the home office. Home office deductions include a portion of mortgage interest, rent expense, insurance, real estate taxes, utilities, HOA fees, cleaning and repairs.
Keep in mind that a home office expense is non-deductible if the room used for business also serves a dual purpose, such as a media room or bedroom. Clear boundaries between personal and business spaces are essential for qualifying for these deductions.
Vehicle Expense Deductions
Independent contractors and business owners can deduct a portion of the automobile expense. The deduction is based on either the standard IRS mileage rate or actual expenses for vehicle use. This includes deducting costs associated with your vehicle, such as depreciation, lease payments, fuel and insurance. There are special tax advantages when purchasing automobiles that weigh over 6,000 pounds.
Keep in mind that parking, toll fees, and gas expenses while commuting are considered non-deductible.
To qualify for vehicle deductions, be sure to maintain detailed records of mileage and other travel expenses. We recommend using a mileage app for this purpose. Proper documentation ensures maximum allowable deductions.
Professional Fees and Licensing Costs
Professional fees paid to CPAs, legal advisors and bookkeepers are tax-deductible. These fees include various services that support your professional practice as a locum tenens provider. Licensing fees for locum tenens practitioners are also tax-deductible.
Retirement Account Options
Locum providers have multiple options for retirement accounts, including SEP IRAs and Solo 401(k)s. Both allow for significant tax-deferred contributions, with SEP IRAs enabling up to 25% of income or a maximum of $69,000 for 2024. For high-income earners, the Roth option for both Solo 401(k) and SEP IRA plans can enhance tax-free growth opportunities.
A Solo 401(k) is ideal for self-employed individuals without employees, while a SEP IRA may be preferable for those with employees due to lower administrative burdens.
In our CPA firm, we work closely with financial planners to maximize retirement plan contributions and minimize taxes.
Summary
Understanding the intricate tax landscape as a locum tenens provider requires diligence, organization, and proactive planning. By understanding your unique tax obligations, choosing the right business entity, and keeping meticulous records, you can effectively manage your taxes and maximize your financial outcomes. From making estimated quarterly tax payments to leveraging deductible business expenses and planning for retirement, each aspect of tax management plays a crucial role in your overall financial health.
Remember, consulting a qualified tax professional can provide invaluable guidance tailored to your specific situation. By staying informed and proactive, you can reduce stress during tax season and ensure you’re meeting all your tax responsibilities. Keep these strategies in mind as you continue your locum tenens journey, and you’ll be well-equipped to handle your taxes with confidence and ease.
Frequently Asked Questions
Locum tenens providers need to handle their own taxes since they’re considered independent contractors. Make sure to save for your federal, state, and self-employment taxes while keeping track of any allowable deductions.
Choosing an LLC for your locum tenens practice is a smart move for protecting your personal assets while enjoying pass-through taxation benefits. Just remember to keep your business and personal finances separate and secure an EIN from the IRS!
Make sure to mark your calendar for April 15, June 15, September 15, and January 15 for your estimated quarterly tax payments to avoid any IRS penalties. It’s critical to stay on top of these dates!
To maximize your deductible business expenses, keep detailed records of your necessary costs like travel, home office, and education, and don’t hesitate to consult a tax professional for tailored advice. This will ensure you’re making the most of your deductions!
Hiring a qualified tax professional is essential because they can navigate complex tax situations and ensure compliance with tax laws, ultimately optimizing your financial outcome. Trusting an expert can save you time and potentially increase your savings.