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Join Tod Stillson, a family physician and entrepreneur, as he navigates the intricacies of tax planning and financial well-being for employed doctors. Tod provides valuable insights on transitioning from a traditional W-2 employee role to becoming a micro-business owner, offering key tips on tax-saving strategies, downsizing full-time positions, and maximizing deductions. As the health care industry continues to evolve, employed doctors must stay ahead of the curve when it comes to their finances. Tod discusses how to effectively navigate the ever-changing landscape of taxation to optimize financial health and secure a stable future. Whether you are a seasoned practitioner looking to make a strategic career transition or a new doctor seeking to boost your financial literacy, Tod offers practical advice and expert guidance to help you achieve your financial goals.

Tod Stillson is a family physician, entrepreneur, and Amazon best-selling author of Doctor Incorporated: Stop the Insanity of Traditional Employment and Preserve Your Professional Autonomy. He can be reached at SimpliMD.  Follow him on Facebook, Instagram, and X @DrInc9, or join his Facebook community for doctors, Every Doctor Is A Business.

He discusses the KevinMD article, “Tax tips for employed doctors: the allure and hazards of safe harbors.”

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast, and get CME for this episode by clicking on the CME link in the show notes. Today we welcome back Tod Stillson. He’s a family physician, entrepreneur, and author of the book “Doctor Incorporated: Stop the Insanity of Traditional Employment and Preserve Your Professional Autonomy.” Today’s KevinMD article is “Tax tips for employed doctors: the allure and hazards of safe harbors.” Tod, welcome to the show.

Tod Stillson: Kevin, it’s great to be back on your show and to meet with you today.

Kevin Pho: So Tod’s been on several times. Go to KevinMD.com/podcast to search for his name and hear his story. But today let’s jump right into this article. It is very timely, it is tax season. It’s titled “Tax tips for employed doctors: the allure and hazards of safe harbors.” Now, for those who didn’t get a chance to read this article, tell us what it’s about.

Tod Stillson: Yeah, the article in general is that most physicians, or at least the majority of physicians, are W2 employees nowadays because they’ve chosen to enter safe harbors. And this time of the year, when you start doing your taxes as a W2 employee, you realize that you pay a lot of taxes, Kevin. And so this article kind of breaks that down a bit into what options you have to reduce your taxes as a W2 employee.

Kevin Pho: All right, so as a W2 employee, you mean the majority of physicians who are employed by, of course, hospital systems and academic medical institutions and large hospitals. That encapsulates the majority of physicians today, would you say?

Tod Stillson: It certainly does, because the number of private practice physicians is declining as those practices are bought up. There’s still a few out there, and there’s a good number of physicians who are listening to this podcast who will fit into that category still, but the majority are moving towards traditional W2 employment through a large corporation.

Kevin Pho: So when you say that these physicians are paying a lot of taxes, give us some context in terms of what exactly that means.

Tod Stillson: Yeah, so physicians with their high income end up paying, on average, according to a recent Medscape survey, about $85,000 a year in taxes. And of course that’s with an average salary, a median salary, around $400,000. If you’re above that, you know who you are, and you’re paying a whole lot more.

I speak to physicians all over the country through SimpliMD, and it’s not unusual for me to talk to physicians who are paying $100,000, $130,000 a year in taxes.

Kevin Pho: And from a physician’s individual financial picture, give us some stories about how these high taxes are affecting these physicians. Even though they may be taking home a high salary, these taxes are affecting their individual financial health. Is that correct?

Tod Stillson: Yeah, they really do. I would use an example, especially for those of the listeners who live in California, a great example, but some on the East Coast as well.

But I speak to physicians in California, as an example, who, due to their high income and their state taxes being so high, they pay as much as 50 percent of their income in taxes. And then on top of that, the cost of living in California is so high that although a physician may be earning 500, 600, 700,000 a year, when you take out 50 percent for taxes, take into account the cost of living, take into account the high cost of real estate in that part of the world to live in, frankly they’re living almost like lower middle class citizens. Because really all their income is going to pay for both of those huge categories, between housing, taxes, and then just cost of living, they’re not able to save much. So it really becomes almost like paycheck to paycheck living, which seems absurd for somebody making 700, $800,000 a year, but the reality is that’s what it looks like.

Kevin Pho: So for these physicians that you’re talking about, when they’re considering what options they have, what typically are they confronted with in terms of choices?

Tod Stillson: Well, what they’ll discover quickly, whether themselves, and about 50 percent of physicians do their own taxes, 50 percent have CPAs do them, either way physicians discover that at their high income bracket the federal government and many of the state governments have reduced the options that you have for reducing your adjusted gross income. Because quite honestly, they’re targeting you and your income as an individual taxpayer to pay for the work that the government does for us.

So the number of options that you have are just getting shrunken down more and more, and then even those options that are available are increasingly getting pro-rated based upon your income number. So that you’re really not left with a lot of options, especially when you are just simply a W2 taxpayer who doesn’t have other tax channels to use.

Kevin Pho: So in terms of those options, you’re talking about the limited accessibility of deductions in this situation, correct?

Tod Stillson: Absolutely, yes, that is correct. So they really are becoming less and less. As an example, a W2 employee physician is not going to be able to deduct business expenses. And so that’s the most common differentiation between a self-employed doctor and a traditionally employed W2 doctor, is that business deductions are really minimal to none and not possible, even though there are expenses associated with being a physician. Those are just really covered by your own household expenses, which again erodes a little bit of that income that you are earning, and there’s no way to gain that back.

Kevin Pho: So you’re here today because there’s another potential path forward. So tell us about that option.

Tod Stillson: Yeah, so in the past physicians really kind of looked at this as a door that led to one of two paths. You either chose to be traditionally employed, like most doctors are doing now, or you chose to be self-employed through either a private practice, or to work locums, or maybe even to do a direct primary care practice or direct care practice.

And so you kind of have those two pathways that physicians choose. Right now it looks like about 90 percent of young physicians choose the traditional employment path, and about 10 percent or so kind of go the alternative route. And once you get put into one of those two categories, a lot of doctors think, well, I’m stuck there, that’s the path I’ve chosen, that’s the only place I’m going to operate from. And to kind of set in motion that process that makes them think that’s their only option.

And what’s developing now is this concept that I would call job stacking. And that’s where physicians are now beginning to see it’s possible to do a combination or a blend of those two options, where you might work part of your time as a self-employed doctor and part of the time as a traditionally employed doctor.

And so the door that I see really beginning to get opened up more and more for physicians who have chosen to go the traditional employment route as the W2 employee is, they’re now reducing their full-time equivalent hours from 1.0 to something less than that, Kevin, to something like say 0.7 or 0.8 full-time equivalent. And when a doctor does that, they still maintain all the strengths and good about being an employee, but now they create a margin in their own professional services space, as well as their own personal income space, to begin to do self-employment work that can fill that 0.2 or 0.3 gap.

So their total income into their home doesn’t change, because they filled it all up to be the same. However, now when you do that job stacking, or kind of combined W2 self-employment and traditional employment combination, now you’ve pulled in a whole bunch of tax strategies and tax options that are due to your self-employment world.

Kevin Pho: So by keeping part of that W2 employment you still maintain the advantages, such as benefits and health insurance and things like that, but it gives you the flexibility of, say like a 1099 source of income, where you could incorporate things like business expenses and other tax advantages, right?

Tod Stillson: Yeah, that is exactly right. So you kind of get the best of both worlds in some regards. Because, and it depends on the contract you have with your employer, but most of them in traditional employment, even if you’re 0.7 or so, you’re still going to get all of their benefit packages, including malpractice and health insurance, which is a big cost or expense, among a whole bunch of other benefits including access to retirement plans through that traditional employer.

But when you then open up your own self-employment process, now you can begin to deduct business expenses that you weren’t able to deduct. And you can also expose yourself to more robust retirement plans that were not accessible to you before as a traditional employee. Because of some federal laws called ERISA, you have caps on the amount of money that you can put into a traditional employment retirement plan. But when you’re self-employed, many of those caps are reduced because of how self-employment processes work.

And especially in the context I’m talking about, when talking about a micro corporation for a physician, that means that they’re really not opening up a private practice, they’re really opening up an individual corporation that really they’re the only stakeholder, they’re the only shareholder, they’re the only employee. And so really all the benefits just get passed through to them. You’re not sharing them with all the employees in the clinic or the office.

Kevin Pho: So go a little bit more granular in terms of the tax advantages of having your own micro corporation. You mentioned that you have access to perhaps allocating more funds to retirement savings. What are some other specific tax advantages that one can expect by going this route?

Tod Stillson: Well, the big one really is the deductible business expenses, Kevin, that you’re able to kind of pull into your space that really wasn’t available to individuals who work as a traditional employee. And so those can range from travel expenses to home office expenses to CME, to really a whole host of expenses that really aren’t available to those who are just working as an employee.

Kevin Pho: So what are some examples of things that physicians are doing during that gap, that 0.2 or 0.3? What are some things that you’re seeing physicians are doing?

Tod Stillson: Yeah. Well, because about 50 percent of physicians are doing side jobs now, the recent data from Medscape shows that 40 to 50 percent are doing them, there’s really a host of side work that physicians have access to. And in today’s world that’s becoming even more and more pronounced because of location independent work is an option for a lot of physicians.

And so, Kevin, what I see people doing, like in my world as a primary care doctor, a family doctor, I’m the assistant director of a local nursing home. That’s a great example of a side job that I do that provides additional income to me. But because of the advent of telehealth, doctors can add in telehealth, doctors can add in directorships, doctors can work in a really host of medical legal environments to do chart reviews, to do legal cases. Really, I see it all over the board, there’s just a wide spectrum of options available.

Another example, at least in my world in primary care, but we see this growing because of the physician shortage, is getting paid to oversee nurse practitioners or allied health professionals that work with you. That side income and additional income that can be brought in. So there’s really a large number of options out there that physicians can do.

Kevin Pho: And where can physicians start looking for some of these options? You mentioned things like being a medical director at a nursing home. Are these readily advertised, are these opportunities that physicians themselves should seek out?

Tod Stillson: Yeah, you see both elements. One is on job boards, like just on national job boards that you can see through a host of recruiting services that would do it. But a lot of times, for the part-time positions available in particular, you often hear about them or see them just from the local network that you’re involved in, and through the resources that you’re already communicating with, whether that be you’re interacting with a hospice service, you’re working with a home health agency or an extended care facility, working with a local pharmacy. There’s really all kinds of local geographic areas that you can explore and look into.

But then when it comes to national services, that really comes to more doing a search that matches up with what your preferences are. I like, as an example, there’s companies out there that do what I just would call Uber doctoring, right? Which is basically just like Uber, people who drive for Uber, they do it on the side. Some of them do it full-time, but some do it on the side. And then basically it’s just a matter of, you turn it on when you want to turn it on, you turn it off when you don’t want to turn it on, and you make yourself accessible.

There are those sort of things available for doctors, so that if you’re like, yeah, I’d like to do a little bit of remote medical care on Friday evenings from 6:00 to 10:00, because, well, I can make a little income and I’m available, that’s like Uber doctoring, right? It’s that sort of providing yourself the opportunity to make some money on the side. There are a host of businesses and companies out there doing those sort of things, and it’s all accessible nowadays.

Kevin Pho: So I hear rumors that if you work for some W2 jobs, for instance an academic medical center, you’re only limited to work for them. They have specific language in your contract that prevents you from working for other employers. Is that what you’re hearing?

Tod Stillson: I see across the board some of that. I don’t see it all the time. And so that comes back to really understanding what contract you’re signing when you’re signing a W2 contract. And it’s important, I’m a big fan of having an agency or a lawyer review your contract. Doctors often make that mistake, Kevin, of not doing it, but I encourage physicians to have somebody review that for them and look for that sort of language that could be embedded in the contract.

In urban areas in particular, where there’s a lot more competition for services and the particular employers want you to be only aligned with them, I see that a little bit more and more. Rural spaces, or less urbanized areas, I don’t see that in the contract language as much as being an issue. But it certainly is something that every physician kind of needs to look into, the granular portion of their contract, to see if that is an issue.

And frankly, if it’s there, many times if you were to approach the employer and say, hey look, I want to do some remote medicine that involves doing work across the country and nothing in our backyard, they are going to give you the green light to do it. Because at the end of the day, they’re more interested in you not doing things that compete with their services and their work and their channels.

Kevin Pho: We’re talking to Tod Stillson. He’s a family medicine physician, entrepreneur, and author of “Doctor Incorporated: Stop the Insanity of Traditional Employment and Preserve Your Professional Autonomy.” Today’s KevinMD article is “Tax tips for employed doctors: the allure and hazards of safe harbors.” Tod, as always, we’ll end with your take-home messages to the KevinMD audience.

Tod Stillson: And my take-home message would be this, and that is, as a W2 employee you don’t have a lot of options. And so the two primary options that you have to reduce your taxes as a W2 employee is to consider forming a business or going into real estate. Those are the two primary channels that allow you to reduce your tax burden.

The simplest approach is to form a micro corporation around yourself, because it’s not much of a business that you have to create as something new, you’re usually already doing it. So the best tax move that any doctor can do is to create a micro corporation around themselves, and then find space in their lives to use that micro corporation, and then take advantage of all the tax benefits associated with it.

Kevin Pho: Tod, thanks again for sharing your perspective and insight, and thanks for coming back on the show.

Tod Stillson: Thank you, Kevin. It’s great to be with you.