Side practices like consulting, teaching, telemedicine, or a small clinic are increasingly common among physicians who supplement their main practice. While these activities can boost income, they also add layers of tax complexity. Proper planning can reduce liability, preserve cash flow, and keep you compliant with federal and state regulations. This is a practical guide to navigating tax planning for doctors with side practices.

The Importance of Side Practices A side practice changes the tax character of your earnings. What would normally be taxed as salary is now treated as self‑employment income, subject to Social Security and Medicare taxes. Combining W‑2 income from your main employer with 1099 income from a side practice results in a hybrid tax scenario. Each income type comes with distinct deduction rules, reporting needs, and timing factors.

Important Tax Ideas for Doctors 1. Self‑Employment Tax (SEAT) – 15.3% on net self‑employment income. 2. QBI deduction – up to 20% of qualified business income per Section 199A, with limitations. 3. Corporate rates – incorporating may provide lower tax rates and distinct liability. 4. State Taxes – many states tax medical income differently; some offer special exemptions or lower rates for medical professionals.

Choosing the Right Entity

Schedule C Sole Proprietorship

Easiest to set up; income reported on Form 1040 Schedule C. All expenses are written off on the same schedule; no separate corporate filing needed. Self‑employment tax applies to the net profit.

LLC

A single‑member LLC behaves like a disregarded entity, matching a sole proprietorship unless you opt for corporate tax. Multi‑member LLCs file Form 1065; each member receives a K‑1. Provides liability protection without corporate formalities.

S‑Corporation

Pay yourself a reasonable salary (W‑2) and take the remaining profits as shareholder distributions. The salary is subject to payroll taxes, while distributions are exempt from SE tax. Needs payroll setup, quarterly payroll tax filings, and adherence to IRS reasonable‑compensation rules.

C‑Corporation

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

Best Practice: Many doctors choose an S‑Corp or LLC with an S‑Corp election for simplicity, liability protection, and tax efficiency. Nonetheless, the choice relies on revenue, number of staff, and future goals.

Tax‑Deductible Expenses

Office Rent

Utilities, Internet, and Phone services

Liability Insurance for Professionals

CME and Licensure Fees

Equipment and Supplies such as medical instruments, computers

Marketing and Advertising

Depreciation of Capital Assets

Premiums for Health Insurance when self‑insured

Business‑related Travel and Meals (50% deduction for meals)

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 確定申告 節税方法 問い合わせ vehicle deduction.

Paying Self‑Employment Tax on Time

• Quarterly estimated tax payments (Form 1040‑ES) must be made if your side practice generates $1,000+ in SE tax.
  
• Use the "safe harbor" rule: pay 90% of last year’s tax or 100% of this year’s tax (110% if your adjusted gross income exceeds $150,000).
  
• Automating payroll for an S‑Corp lowers the chance of underpayment penalties.
  
  

Qualified Business Income (QBI) Deduction

• QBI permits a 20% deduction on qualified business income from a pass‑through entity.
  
• Limitations apply for high‑income doctors: wage and capital limitations, and the 20% threshold.
  
• Reviewing your total income and side practice type is crucial to maximize the deduction.
  
  

Health Insurance & Retirement

• Self‑insured doctors can deduct 100% of their premiums from gross income.
  
• Create a Solo 401(k), SEP IRA, or defined‑benefit plan to defer earnings and lower taxable wages.
  
• Contributions to these plans are limited by IRS rules; a financial advisor can help you stay within those limits.
  
  

Documentation and Recordkeeping

• Maintain separate bank accounts for the main practice and side practice.
  
• Record all income and expenses in a detailed ledger.
  
• Use accounting software tailored for medical practices to track reimbursable items, write-offs, and tax documents.
  
• Store records for at least seven years to cover possible audits.
  
  

State and Local Issues

• Certain states like Texas, Florida, and Nevada impose no state income tax, simplifying your setup.
  
• Others (e.g., California, New York) impose additional taxes on medical income.
  
• Look into local licensing fees, business taxes, and health department permits that could apply.
  
  

Timing Approaches

• 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.
  
• Consider using a "cash‑basis" entity to match income and expenses more closely.
  
  

Hiring Employees or Contractors

• Hiring employees triggers payroll taxes, benefits, and labor law compliance.
  
• Independent contractors (1099) cut payroll overhead but heighten audit risk.
  
• Hire a qualified tax professional to classify workers correctly and dodge 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.
  
• Collaborate with a professional to handle quarterly estimates, payroll setup, and audit defense.
  
• Consistently evaluate your tax strategy.
  
  

Common Mistakes to Avoid

• Mixing personal and business expenses in the same bank account.
  
• Failing to keep detailed mileage logs for vehicle use.
  
• Underestimating SE 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.
  
  

Wrap‑Up

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. Regular collaboration with a qualified tax professional and meticulous recordkeeping are the cornerstones of effective tax planning for doctors with side practices. With the correct approach, you can dedicate yourself to quality care while reducing your tax load.