Side practices like consulting, teaching, telemedicine, or a small clinic are increasingly common among physicians who supplement their main practice. Even though side practices may raise income, they add extra layers of tax complexity. Proper planning can reduce liability, preserve cash flow, and keep you compliant with federal and state regulations. Here is a practical guide to navigating tax planning for physicians who run side practices.

The Importance of Side Practices Side practices alter the tax classification of your income. Income that would otherwise be taxed as salary becomes self‑employment income subject to the self‑employment tax (Social Security and Medicare). The mix of W‑2 income from your primary employer and 1099 income from a side practice creates a hybrid tax situation. Each type of income has different deduction rules, reporting requirements, and timing considerations.

Essential Tax Concepts for Physicians 1. SEAT – 15.3% on net self‑employment income. 2. Qualified Business Income (QBI) deduction – up to 20% of qualified business income under Section 199A, subject to limitations. 3. Corporate Tax Rates – if you incorporate, you may benefit from lower corporate rates and distinct liability. 4. State taxes – numerous states tax medical earnings differently; some provide special exemptions or reduced rates for medical professionals.

Deciding on the Correct Entity

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 is treated as a disregarded entity, identical to a sole proprietorship unless corporate taxation is elected. A multi‑member LLC files Form 1065, with each member receiving a K‑1. Delivers liability protection without corporate formalities.

S‑Corp

Set a reasonable salary (W‑2) and take the surplus as shareholder distributions. Salary incurs payroll taxes, but distributions avoid SE tax. Needs payroll setup, quarterly payroll tax filings, and adherence to IRS reasonable‑compensation rules.

C Corporation

A distinct legal entity; profits taxed at the corporate level (21% federal) and again upon dividend distribution. Best for larger side practices or when you intend to reinvest profits. Demands detailed corporate governance and annual meetings.

Best Practice: Most physicians opt for an S‑Corp or LLC with an S‑Corp election to balance 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 telephone

Professional Liability Coverage

Continuing Medical Education (CME) and Licensure Fees

Equipment and Supplies (e.g., medical instruments, computers)

Advertising and Marketing costs

Capital Asset Depreciation

Health Insurance Premiums (if self‑insured)

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

Home Office Deduction if you have a dedicated space for patient care or admin tasks.

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

Paying Self‑Employment Tax on Time

• If your side practice yields $1,000 or more in SE tax, quarterly estimated payments (Form 1040‑ES) are required.
  
• 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).
  
• Setting up automatic payroll for an S‑Corp reduces the risk of underpayment penalties.
  
  

Qualified Business Income 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.
  
• A careful review of your total income and the type of side practice is essential to maximize the deduction.
  
  

Health Insurance & Retirement Planning

• Premiums paid by self‑insured doctors are fully deductible from gross income.
  
• Establish a Solo 401(k), SEP IRA, or defined‑benefit plan to defer income and reduce taxable wages.
  
• Contribution limits are set by IRS rules; a financial advisor can help you stay compliant.
  
  

Documentation and Recordkeeping

• Use distinct bank accounts for primary and side practices.
  
• Maintain a detailed ledger for all income and expenses.
  
• Use medical‑practice‑specific accounting software to track reimbursables, deductions, and tax documents.
  
• Keep records for a minimum of seven years in case of audit.
  
  

State and Local Issues

• Some states (e.g., Texas, Florida, Nevada) have no state income tax, which simplifies your situation.
  
• Other states like California and New York levy extra taxes on medical income.
  
• Verify local licensing fees, business taxes, or health department permits that might affect side practices.
  
  

Timing Approaches

• Defer income: Move large invoice receipts to the following year if permitted, lowering 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.
  
  

Employment vs. Contractors

• Employees require payroll taxes, benefits, and 法人 税金対策 問い合わせ compliance with labor laws.
  
• Independent contractors (1099) cut payroll overhead but heighten audit risk.
  
• Use a qualified tax professional to classify workers correctly to avoid penalties.
  
  

Collaborating with a Tax Professional

• A CPA or tax attorney with experience in medical practice tax matters can help you choose the right entity, optimize deductions, and ensure compliance.
  
• Work with a professional for 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.
  
• Failing to estimate SE tax accurately, leading to missed quarterly payments.
  
• Overlooking QBI restrictions and not setting up the side practice to qualify.
  
• Ignoring state‑specific tax rules for medical professionals.
  
  

Final Thoughts

Operating a side practice can boost your income considerably, yet it brings a variety of tax obligations. 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.