Side practices like consulting, teaching, telemedicine, or a small clinic are increasingly common among physicians who supplement their main practice. Although these side practices can increase earnings, they also introduce additional tax complexity. Good planning can minimize tax liability, safeguard cash flow, and ensure compliance with federal and state laws. This is a practical guide to navigating tax planning for doctors with side practices.

The Importance of Side Practices Side practices alter the tax classification of your income. Earnings that would otherwise be taxed as salary shift to self‑employment income, subject to SE tax (Social Security and Medicare). A blend of W‑2 income from your primary job and 1099 income from a side practice produces a hybrid tax environment. Different income sources have separate deduction rules, reporting obligations, and timing aspects.

Essential Tax Concepts for Physicians 1. Self‑Employment Tax (SEAT) – 15.3% on net self‑employment income. 2. Qualified Business Income deduction – up to 20% of QBI under Section 199A, subject to limits. 3. Corporate Tax Rates – incorporation can offer lower rates and separate liability. 4. State Taxes – many states tax medical income differently; some offer special exemptions or lower rates for medical professionals.

Selecting the Appropriate Entity

Schedule C Sole Proprietorship

Most straightforward to establish; income appears on Form 1040 Schedule C. All expenses are deducted on the same form; no separate corporate filing required. SE tax is due on the net profit.

Limited Liability Company

Single‑member LLC treated as a disregarded entity; same as sole proprietorship for tax purposes unless you elect corporate taxation. Multi‑member LLCs submit Form 1065; each member gets a K‑1. Delivers liability protection without corporate formalities.

S Corporation

Set a reasonable salary (W‑2) and take the surplus as shareholder distributions. The salary is subject to payroll taxes, while distributions are exempt from SE tax. Involves payroll setup, quarterly payroll tax filings, and compliance with IRS reasonable‑compensation rules.

C‑Corporation

Separate legal entity; profits taxed at the corporate level (21% federal) and again when distributed as dividends. Useful for larger side practices or when planning to reinvest profits. Needs detailed corporate governance and annual meetings.

Best Practice: Most physicians find an S‑Corp or LLC with an S‑Corp election strikes the right balance of simplicity, liability protection, and tax efficiency. However, the choice depends on your revenue, number of employees, and long‑term goals.

Deductible Expenses

Office Rent or Lease

Utilities, Internet, and Phone

Professional Liability Insurance

CME and Licensure Fees

Equipment and Supplies such as medical instruments, computers

Advertising and Marketing costs

Capital Asset Depreciation

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.

Remember: All expenses must be ordinary, necessary, and directly related to the side practice. Maintain detailed records, receipts, and a mileage log when claiming a home office or vehicle deduction.

Timely Self‑Employment Tax Payments

• Quarterly estimated tax payments (Form 1040‑ES) must be made if your side practice generates $1,000+ in SE tax.
  
• Employ the safe‑harbor rule: pay 90% of prior year’s tax or 100% of current year’s tax (110% if AGI exceeds $150,000).
  
• An automatic payroll setup for an S‑Corp decreases the risk of underpayment penalties.
  
  

QBI Deduction

• A QBI deduction offers a 20% cut on qualified business income from a pass‑through entity.
  
• High‑income doctors face limits: wage and capital restrictions, plus the 20% threshold.
  
• A careful review of your total income and the type of side practice is essential to maximize the deduction.
  
  

Health Insurance & Retirement

• If you are self‑insured and pay your own premiums, you can deduct 100% of those premiums from your gross income.
  
• Create a Solo 401(k), SEP IRA, or defined‑benefit plan to defer earnings and lower taxable wages.
  
• Contribution limits are set by IRS rules; a financial advisor can help you stay compliant.
  
  

Recordkeeping & Documentation

• Separate bank accounts for primary practice and side practice.
  
• Keep a detailed ledger of all income and expenses.
  
• Use medical‑practice‑specific accounting software to track reimbursables, deductions, and tax documents.
  
• Store records for at least seven years to cover possible audits.
  
  

State & Local Considerations

• States such as Texas, Florida, and Nevada lack state income tax, easing your compliance.
  
• Other states like California and New York levy extra taxes on medical income.
  
• Look into local licensing fees, business taxes, and health department permits that could apply.
  
  

Timing Approaches

• Delay income: Transfer receipt of sizable invoices to the next year to lessen 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

• Employees require payroll taxes, benefits, and compliance with labor laws.
  
• Independent contractors (1099) can reduce payroll burden but increase audit risk.
  
• Engage a qualified tax professional to classify workers properly and avoid penalties.
  
  

Partnering 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, 確定申告 節税方法 問い合わせ payroll setup, and audit defense.
  
• Regularly review your tax strategy.
  
  

Common Mistakes to Avoid

• Merging personal and business expenses within a single bank account.
  
• Not maintaining detailed mileage logs for vehicle use.
  
• Underestimating self‑employment tax and missing quarterly payments.
  
• Overlooking QBI limitations and failing to structure the side practice to qualify.
  
• Neglecting state‑specific tax rules applicable to medical professionals.
  
  

Final Thoughts

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. Ongoing partnership with a qualified tax professional and thorough recordkeeping underpin solid tax planning for doctors running side practices. With the correct approach, you can dedicate yourself to quality care while reducing your tax load.