You have no doubt by now been made aware of the concept of doctors paying less tax on high W-2 wages.
The idea is that if you get the right kind of real estate (or other) investment that you can claim major losses on, you reduce your overall gross income.
Reduce your income, get more of your withholdings back.
Or, more properly, reduce your withholdings during the year and keep more of your wage’s spending or saving power for yourself.
This is interesting information on a trivial level for the typical private physician, but not terribly useful at the operational level.
This is partly because you are not receiving wages on much of your total business income if you’re doing taxes right.
Furthermore, without the proper tax elections in place you could be paying what amounts to double taxation on every dollar you make.
This is not ideal. It is also not mandatory.
As an author I respect says in another context, “Pain is inevitable. Suffering is optional.”
Zero and negative dollar reporting strategies are integral, but they are just one piece of a big juicy delicious pie.
So exactly does a private practice doctor do taxes right, anyway?
Allow me, if you will, to elaborate.
Forget Self-Employment
If you have the idea that you have to pay the piper as a self-employed private practitioner as one of the high costs of professional medicine, then this is going to come as a relief.
Even as a solo practitioner with a very small office, you can elect to be taxed as a corporation with a healthy tax advantage, and still file your household return much as a typical wage earner.
The S Corporation election is available to those who are American citizens or are legally qualified to work here, as long as you have 100 or less shareholders and are okay with only one class of stock.
Additionally, you must be either a limited liability entity or incorporated. In my opinion, incorporation even in your first year is a smart move, provided that you’re confident in the growth and future success of your practice.
More on that in the next section, by the way.
The tax advantage? Simply put, without the S Corp election you are going to pay two taxes on ALL of your income up to $168,600.
Ordinary income tax, and self-employment or SE tax.
SE tax is essentially you paying both the employer and employee portions of SS and Medicare tax on all of your business earnings.
Whether your married or single that can add up to over a quarter of your income, and that’s a lot of damned tax!
With the S Corporation election, however, you take a reasonable wage from your business, after which the remaining income is taxed only once.
The members are taxed on this income, which flows through to their Form 1040 returns in the percentage proportion of ownership.
This is a highly viable strategy for the private practice that is scaling from the ground up, but you may be wondering what is considered a reasonable compensation?
Shouldn’t doctors be making six-figure salaries anyway?
We certainly think so, but in the formation years of your practice it is considerable in our opinion to take a salary closer to half of all the net profit from this business, and that gives you something to work with.
Let’s say after all expenses in your first year you project you will clear $100,000. You clearly can’t pay yourself more than that, because the money isn’t there.
It is my opinion that a projected wage of about $48,000, or close to half of that figure is reasonable, and that still leaves you $52,000 that is only taxed once.
This saves you about $7,700 in the year in question, by the way.
True Incorporation
As your practice levels up, and with that your income your next step if you have not already done so is to consider converting from S Corporation to a general or C Corporation.
Our firm can create the necessary notifications required for the IRS, and in my opinion, this bears serious consideration as your fortunes rise.
One thing to keep in mind is a true corporation is a separate entity that pays its own tax. The income does not flow through via Schedule K-1 to the shareholders (which are now unlimited, by the way) as it does with an S Corp.
This means that the tax is paid by the corporation, not by the owners.
The corporate tax rate has been 21% since 2018, and as your own bracket rises to 24% and beyond as your business scales this has to be considered seriously.
You must take your compensation from the corporation, naturally, and quite naturally this is an ordinary and necessary expense of the corporation that reduces its tax.
Your board may vote for periodic dividends to the shareholders, providing you with maximum control of your tax picture for both the company as well as the individual owners when done properly.
Getting Back to Negative K-1’s
This is a goal of many real estate investment brokers, and it’s actually a better deal than it sounds.
This is due to the intangible property depreciation you are able to write off without an actual annual outlay of cash.
Let’s say you have an interest in a rental real property. Your gross revenue is simply incoming rents for the most part, but there are many potential expenses reducing that revenue to near or even below zero.
Depreciation is a biggie, but you have property tax, mortgage interest, management fees, HOA, maintenance, pest control, etc., etc.
But wait, there’s more! For new acquisitions you have a very real opportunity to take some portion of the short-term improvements as bonus depreciation in your first year.
In 2024 that can be up to 60% of 5 year and 15-year improvements. Do keep in mind that the percentage is going down to 40% in 2025, in case you’re on the fence about it.
Other Common Tax Strategies
Since we’re already talking about depreciation, let’s touch on what that means for your practice.
If you have any diagnostic or treatment equipment that costs in excess of $2,500 the way that you treat this expense in the first year, and possibly the next few years can affect your taxable income.
Naturally, you want to ensure that all ordinary and necessary expenses of your business are taken with business forms of payment, be that checking, debit cards, or credit cards, and that they make it into your books as reductions to net income.
Equipment under $2,500 can be written off in the year of purchase under a special tax allowance we can help you with.
Consumables such as gloves, sharps, all things cleaning and sterilization.
Utilities, rent or lease if you have it, and if you’re purchasing your property the interest on your mortgage payments as well.
Look for potential tax credits. Energy-efficient purchases, R&D credits, or certain employee hiring incentives are worth your attention.
And don’t forget about all of your Software as a Service (SaaS) as well as your medical records and billing software.
Conclusion
One of the key paths you can take toward the future success of your private medical practice is to ensure you are paying the least amount of tax legitimately possible.
Tax evasion may be a felony, but legal tax avoidance is not only desirable but critical to the year-to-year growth of your business.
Most of all, remember that you didn’t go to medical school to get a business degree, and there is no shame in reaching out for the expert advice and guidance necessary to ensure a prosperous future for your practice.
Would you like to have a conversation about how having a non-equity financial partner guiding your practice’s business future can increase your wealth, reduce your taxes, and provide the peace of mind that will allow you to put 110% of yourself into your patient care goals?
We would like to talk to you as well.
We are still accepting two new business advisory clients in April.
Use the link I’m providing below now to choose the time to talk most convenient for you.
Imagine having a financial coach and compliance expert by your side, so that you can focus your professional clinical time where it belongs: on patient care.
Does that sound good?
Then reach out to me, and let’s talk: Free Profit & Cash Flow Analysis