Money Talk with Malik | Financial Planning for Builders

Key Takeaways

Locum tenens physicians are typically paid as independent contractors (1099), meaning no taxes withheld and self-employment tax on top of income tax
Self-employment tax is 15.3 percent on the first $168,600 of net income (2024), then 2.9 percent above that
A solo 401(k) or SEP-IRA lets you shelter a large portion of locum income from taxes, sometimes tens of thousands of dollars per year
Business expenses for locum work are deductible: travel, housing, licensing, malpractice, equipment
Quarterly estimated tax payments are required or you'll face underpayment penalties

I hear from physicians all the time who picked up locum work during residency or as an attending and then got hit with a tax bill they weren't expecting. Thousands more than they thought they owed, sometimes right around the same time they were trying to pay down student loans or build an emergency fund.

I get it. Your main job taxes get handled by your employer. Locum income is a different animal. Here's how to handle it right.

Why Locum Income Is Taxed Differently

When you work at a hospital or medical group as a W-2 employee, they withhold federal and state income taxes. They also split the Social Security and Medicare taxes with you, which are 7.65 percent each.

When you do locum work through a staffing agency, you're almost always classified as an independent contractor. You get a 1099 at the end of the year. Nobody withheld anything.

Now you owe federal income tax at your marginal rate, state income tax, and the full self-employment tax (which is 15.3 percent because you're paying both the employee and employer share of Social Security and Medicare). On $50,000 of locum income, that self-employment tax alone is around $7,650. That's before income tax.

The surprise is real. The fix is knowing about it before you earn the money, not after.

Quarterly Estimated Taxes: The First Thing to Get Right

Because no one is withholding from your locum checks, you're responsible for paying taxes as you go. The IRS requires quarterly estimated payments on income not subject to withholding. The deadlines are roughly April 15, June 15, September 15, and January 15.

If you don't pay enough throughout the year, you'll owe an underpayment penalty on top of the taxes themselves. The penalty isn't enormous, but it's annoying and completely avoidable.

A simple approach: every time you receive a locum payment, set aside 35 to 40 percent in a separate savings account. That covers federal and most state tax obligations for most physicians. Make the quarterly payments from that account. Whatever's left after taxes is yours.

Realistically, this gets easier once you've done it for a year and know your actual effective rates. The first year, err on the side of over-estimating.

The Solo 401(k): Your Biggest Tax Lever

Here's the piece most locum physicians miss. If you're receiving 1099 income, you can open a solo 401(k), also called an individual 401(k) or self-employed 401(k), and contribute up to $69,000 in 2024.

That breaks down into two parts. As the employee, you can contribute up to $23,000 (or $30,500 if you're 50 or older). As the employer (because you're self-employed, you're both), you can contribute up to 25 percent of your net self-employment income on top of that.

So if you earn $100,000 in locum income, you could theoretically shelter $23,000 as employee contributions plus another $18,587 as employer contributions (25 percent of net SE income after the deduction for SE tax). That's over $41,000 shielded from federal and state income tax.

If your locum income pushes you into the 32 or 37 percent federal bracket, those contributions are worth real money.

The catch: you need to open the solo 401(k) by December 31 of the tax year you want to contribute. Some plans require you to sign paperwork before year-end even if you fund it by the tax filing deadline. Don't wait until April.

The SEP-IRA: A Simpler Option

If the solo 401(k) feels like too much to manage, a SEP-IRA is simpler. You can contribute up to 25 percent of your net self-employment income, capped at $69,000 for 2024.

The SEP-IRA doesn't have an employee contribution portion, so the max is lower than the solo 401(k) at most income levels. But it's easier to set up and there's no year-end deadline to open it. You have until the tax filing deadline (including extensions) to both open and fund it.

For a physician doing occasional locum shifts rather than full-time locum work, the SEP-IRA is often the more practical choice.

Deductible Business Expenses for Locum Work

This is another area where physicians leave money on the table. When you're self-employed, legitimate business expenses reduce your taxable income, which also reduces your self-employment tax. The savings double up.

Common deductible expenses for locum physicians:

Travel. Flights, hotels, and mileage driving to locum assignments are deductible if the travel is for business. Keep records.

Licensing and credentialing fees. State medical licenses you need for locum assignments, DEA registration fees, and credentialing costs are all deductible.

Malpractice insurance. If you're paying for your own tail coverage or claims-made policy for locum work, that's deductible.

Professional memberships. Board certifications, specialty society dues, continuing medical education costs.

Home office. If you have a dedicated space at home used exclusively for your locum business (scheduling, billing, documentation), a portion of your home expenses may be deductible. This one requires careful documentation.

Equipment and supplies. A stethoscope, medical bag, or other equipment you use for locum work.

Keep receipts and a simple log. You don't need elaborate accounting software. A spreadsheet works fine.

Structuring Your Locum Work: LLC or Not?

Some physicians ask whether they should set up an LLC for their locum work. The honest answer: it depends.

A single-member LLC doesn't change your tax treatment by default. You're still a sole proprietor for tax purposes. The benefit of an LLC is liability protection, which may or may not be meaningful depending on whether you have malpractice coverage and your state's laws.

An S-corp election on an LLC can reduce self-employment taxes if your locum income is high enough, typically above $80,000 to $100,000 per year. The savings come from splitting your compensation between salary (subject to SE tax) and distributions (not subject to SE tax). But an S-corp adds payroll, bookkeeping, and filing complexity.

Worth discussing with a CPA who works with physicians if your locum income is substantial and ongoing. For occasional shifts, the cost and complexity usually isn't worth it.

The Thing Nobody Tells Residents About Locum Work

Moonlighting during residency is increasingly common, right? Programs allow it, and the money can make a real difference when you're earning $60,000 to $70,000 in residency.

What nobody explains is that the first moonlighting paycheck often feels like a windfall, and then tax season arrives. I've talked to residents who owed $8,000 to $12,000 in taxes they weren't expecting from a relatively modest amount of locum work.

The fix is not complicated. Set aside a big chunk of every locum payment. Open a SEP-IRA if you're earning meaningful amounts. Make quarterly estimated payments. The boring stuff done early prevents the April surprise.

Summary

Locum tenens income is a real opportunity to accelerate your financial progress. But the tax rules are different from your W-2 job, and ignoring them leads to painful surprises.

Set aside taxes from every payment. Make quarterly estimated payments. Open a solo 401(k) or SEP-IRA and max it out. Deduct your legitimate business expenses. And if your locum income is growing, talk to a CPA about whether an S-corp structure makes sense.

The money is good. Keep as much of it as you can.

Malik Amine is a financial advisor working with tech founders and physicians. This is general education, not personalized financial or tax advice. Talk to a CPA about your specific locum tax situation.