Many physicians today supplement their primary practice with side practices—consulting, teaching, telemedicine, or a small clinic. Even though side practices may raise income, they add extra layers of 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 A side practice transforms the tax nature of your earnings. Earnings that would otherwise be taxed as salary shift to self‑employment income, subject to SE tax (Social Security and Medicare). Combining W‑2 income from your main employer with 1099 income from a side practice results in a hybrid tax scenario. Different income sources have separate deduction rules, reporting obligations, and timing aspects.

Important Tax Ideas for Doctors 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 – many states tax medical income uniquely; some offer special exemptions or lower rates for doctors.

Selecting the Appropriate Entity

Sole Proprietorship (Schedule C)

Most straightforward to establish; income appears on Form 1040 Schedule C. All expenses are written off on the same schedule; no separate corporate filing needed. The net profit is subject to self‑employment tax.

Limited Liability Company (LLC)

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

S Corporation

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

C Corporation

A separate legal entity; profits taxed at 21% federal and again on dividends. Best for larger side practices or when you intend to reinvest profits. Needs 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 decision hinges on revenue, employee count, and long‑term objectives.

Tax‑Deductible Expenses

Lease

Utilities, internet, and telephone

Liability Insurance for Professionals

Continuing Medical Education and 確定申告 節税方法 問い合わせ Licensing Fees

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

Marketing and Advertising expenses

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.

Remember: All expenses must be ordinary, necessary, and directly related to the side practice. Keep detailed records, receipts, and a mileage log if you’re 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.
  
• Apply the safe‑harbor rule: pay 90% of last year’s tax or 100% of this year’s tax, increasing to 110% if AGI > $150,000.
  
• Automating payroll for an S‑Corp lowers the chance of underpayment penalties.
  
  

Qualified Business Income Deduction

• The QBI deduction allows a 20% deduction on qualified business income from a pass‑through entity.
  
• Doctors with higher incomes encounter limits: wage and capital caps, and the 20% ceiling.
  
• Analyzing total income and side practice type is vital 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.
  
• Establish a Solo 401(k), SEP IRA, or defined‑benefit plan to defer income and reduce taxable wages.
  
• IRS limits contributions to these plans; a financial advisor can guide you to stay within limits.
  
  

Recordkeeping and 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 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.
  
• Check for local licensing fees, business taxes, or health department permits that may apply to side practices.
  
  

Timing Tactics

• Defer income: Move large invoice receipts to the following year if permitted, lowering current year tax.
  
• Accelerate deductions: Pay rent or purchase equipment before year‑end to increase deductions.
  
• Use a cash‑basis entity to better match income with expenses.
  
  

Hiring Workers or Contractors

• Employees need payroll taxes, benefits, and adherence to labor regulations.
  
• Independent contractors (1099) cut payroll overhead but heighten 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, payroll setup, and audit defense.
  
• Frequently review your tax strategy.
  
  

Pitfalls to Avoid

• Merging personal and business expenses within a single bank account.
  
• Not maintaining detailed mileage logs for vehicle use.
  
• Failing to estimate SE tax accurately, leading to missed 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

Operating a side practice can boost your income considerably, yet it brings a variety of tax obligations. By selecting the appropriate entity, maximizing deductible expenses, staying on top of self‑employment tax, and leveraging retirement and health‑insurance strategies, you can keep more of your 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 right approach, you can focus on delivering quality care while minimizing your tax burden.