When physicians accept a job offer from a hospital, they are often enticed with a signing bonus in the form of a forgivable loan.

Given the complexities of looking for a job and negotiating an employment contract, it’s easy to see the words “signing bonus” and overlook the term “forgivable loan.”

However, while this may seem like an attractive deal, it carries significant tax implications that physicians should be aware of.

Understanding forgivable loans for physicians

According to a report by Merritt Hawkins, a physician recruiting firm, signing bonuses are relatively common in the physician job market. More than 90 percent of physician job searches provided by the firm included a signing bonus.

According to the 2023 AMN Health Care survey, 2023 Review of Physician and Advanced Practitioner Recruiting Incentives, the average physician’s signing bonus was $37,473, representing a 21 percent increase from the prior year.

A forgivable loan is a common recruitment tool used by hospitals to attract top physician talent. The hospital provides the physician with a lump sum of money upfront, typically ranging from $10,000 to $50,000 or more.

The loan is “forgivable,” meaning that if the physician remains employed by the hospital for a specified period, typically two to four years, the loan does not have to be repaid.

Continue reading or watch the video below to learn more about the “hidden” tax surprise associated with physician signing bonuses, which are often considered forgivable loans.

Are sign-on bonuses taxed for physicians?

Yes. The tax “surprise” comes from the fact that the signing bonus loan is not considered taxable income by the Internal Revenue Service (IRS) until the year it’s forgiven.

For example, if a physician receives a $30,000 forgivable loan, they may owe no tax at all in the year it’s received. However, once they meet the employment requirement after three years, the entire $30,000 will be taxable as if it were regular income.

This gap between a signing bonus and taxes can result in a significant tax liability that many physicians fail to anticipate. Depending on their tax bracket, they could owe thousands of dollars in taxes on the forgiven loan amount.

The average signing bonus for family physicians is currently $22,050, which could translate to a substantial tax bill.

Avoiding the sign-on bonus tax surprise

To avoid being caught off guard by the tax implications of a forgivable loan, physicians should take the following steps:

Understand the terms: Carefully review the forgivable loan agreement, including the forgiveness schedule and tax implications.

Consult a tax professional: Seek advice from a tax professional to understand the specific tax implications and plan for the potential liability.

Set aside funds: If possible, set aside a portion of the forgivable loan amount to cover the anticipated tax liability.

Explore alternatives: Consider alternative signing bonus options with the hospital, such as a traditional cash bonus or a higher base salary, if the tax implications of a forgivable loan are too burdensome.

The bottom line

By being proactive and seeking professional guidance, physicians can make informed decisions and avoid the hidden tax surprise associated with forgivable loans.

Shane Tenny is managing partner, Spaugh Dameron Tenny, LLC, and host of The Prosperous Doc podcast. 

Securities, investment advisory and financial planning services offered through qualified Registered Representatives of MML Investors Services, LLC. Member SIPC. Supervisory office: 4350 Congress Street, Suite 300, Charlotte, NC 28209, (704) 557-9600. Spaugh Dameron Tenny is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. CRN202510-3194816