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High income physician clients

HOPE2
Level 9

Hi, I have a new client, high income physician with W-2 full-time job, and he is a researcher and MD.

What is the best recommendation to him to save tax, he has 401-K also, can he form S-Corp? I think Full-time job can not get 1099-NEC form employer like a hospital.

Any help and advice greatly appreciated it!

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31 Comments 31
qbteachmt
Level 15

"I think Full-time job can not get 1099-NEC form employer like a hospital."

Full time and Job don't really go together in creating a limitation or restriction as you stated it. Amount of work (full time or not) doesn't have anything to do with Payroll (W2) or not (1099-NEC). 1099-NEC is not a synonym to W2. It identifies a different relationship.

A Job as Employee of an employer, means payroll and W2. A Job as Employee of an S Corp, means payroll and W2, even if you own 100% of the shares. W2 is the form issued to employees (who submitted W4 and I9 for employment), who are paid through payroll. They work for a company that provides for their tools, assignments, schedules, and supervision. A Shareholder-Employee is wearing two hats, in other words (they might be their own boss). The Supreme Court ruled that Corporations are people, too. That's why the shareholder working for the S corp also is an employee, because some human must "do the work" of that business on behalf of the corporation.

1099-NEC is issued to people who are not the employee of the party to whom they are providing their services, which is why you use the term Independent Contractor (and they submit W9 for tax identification purposes) when the labor or service is between two companies. They are contracted by one party to provide their business expertise as a separate entity to the customer contracting with them. An independent contractor carries all the risk of their work, has to keep up with their profession (licensing, instructions, E&O and liability and other insurance), uses their own tools, works without supervision, sets their own schedule.

Since 1099 is an informational form, there is no requirement to issue a 1099-NEC to an S Corp, and it makes sense if you keep in mind S Corps are supposed to be running everything through payroll via reasonable compensation, so that means all of this is revealed anyway, through 941/944, 940, W4, W2, and other filings. But, there are some requirements to issue 1099-NEC and 1099-Misc, even to corporations, such as for medical services, rent, and other reasons.

"can he form S-Corp?"

Sure, But you have to know why, and this is not a tax saving strategy. It's an operational concept. It doesn't replace the employer for work being done, if the worker classification is already correct. In fact, it is sometimes asked that an employee should form an LLC or S Corp so the employer can drop them as an employee, for fraudulent reasons. That's worker misclassification.

For instance, locally, our ambulances outside the hospital emergency entries are a contract service. It's outsourced, in other words. The hospital does not provide any equipment, but the ambulance service is on site. The lease of the space is included in their contract.

If he works for the one hospital as an employee, but also has his own clinical practice or has his own research contracts/grants, then the nonemployee activities might be contracted, and he would contract under his S Corp (not replacing his W2 position, but supplementing with these other services and sources of income). And if he does that not through an S Corp, but perhaps an LLC or PLLC, he gets a 1099-NEC. If he does that through the S Corp, he is acting as President of the S Corp, signing a contract for services with a customer (or grantor), then he hires his employee (himself) to do that work, and that means the research facility activity or clinic pays the S Corp, the S Corp has him on payroll, and he still gets a W2, but for the work not from the hospital. So, he gets two W2.

There can be strategies to help reduce tax burden from a personal financial perspective, but when you make a lot of money, you end up paying a lot in taxes (for the most part) and that's the point. Incorporation isn't a tax strategy. It shifts the burden, and sometimes makes things worse.

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"Level Up" is a gaming function, not a real life function.
IRonMaN
Level 15

"I think Full-time job can not get 1099-NEC form employer like a hospital."

If he is a full time employee, what good is forming an 1120S?  He can't run expenses through an entity that has no income.


Slava Ukraini!
HOPE2
Level 9

Thanks, he has 401-K, if it is possible let me know please if there can be other strategies to help reduce tax burden from a personal financial perspective. 

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qbteachmt
Level 15

"if there can be other strategies to help reduce tax burden from a personal financial perspective"

It isn't clear what you are looking for here for this person. Property, annuities, trusts, mega backdoor Roth, deferred comp, defined benefit plan, 529 plans? This is like trying to diagnose a disease using only text. There are options that could be considered after a thorough consultation and document review, including what else the existing employer might be willing or able to offer to enhance the present batch of benefits and retirement plans. For individuals, they can pursue anything on the market that meets their needs, which includes this entire family/household.

*******************************
"Level Up" is a gaming function, not a real life function.
PATAX
Level 15

A lot of people get W-2s and are high income earners and pay a lot in tax. That's life. The doctor is not any different than an engineer or manager or anyone else that is an employee.

HOPE2
Level 9

I know and understood a lot of people pay tax, I can say anybody should pay tax if eligible. This is not my subject, my question was about tax saving what nowadays all of us know that intuit everyday send us TAX saving..... email, as a tax practitioner, I was asked , and I want to have other ideas for this like clients.

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BobKamman
Level 15

If there were a magic bullet that would let high-income W-2 employees reduce their taxes, there wouldn't be enough revenue left over to allow Congress to provide loopholes for the big corporations that fund their campaigns.  To the contrary, there are fewer methods available to high earners -- it doesn't do them any good to buy a rental property with a $25,000 paper loss from depreciation.  

I have 2 clients that are physicians - both make over $1M - they are CMO level and paid a salary. They both get 1099 NEC income from clinical work at different hospitals and I report on Sch C. Each of them have SEP accounts and contribute the max which helps some but frankly there's nothing that puts a dent into making their tax situation better as others have already stated.

HOPE2
Level 9

I think they better to switch S-corp.

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@HOPE2 

My MD's 1099 income is not material enough to warrant the hassle of being an SCorp. 

HOPE2
Level 9

My MD's 1099 income is not material enough to warrant the hassle of being an SCorp, 

what do you mean?

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TaxGuyBill
Level 15

@HOPE2 wrote:

I think they better to switch S-corp.


 

Be careful about immediately recommending a S-corporation, especially if their wages/salary would be less than the Social Security maximum.

If their wages/salary will be less than the Social Security maximum, the client needs to know exactly how the S-corporation arrangement would affect their potential Social Security benefits.  If you are not explaining that to the client, you should NOT be recommending a S-corporation.

It's < $50k before expenses & SEP. Besides being an SCorp will only save them on the SE Medicare portion since they are maxing SS through their W-2 wages. My MD's only want to speak with me once a year when it comes to their taxes. Being an SCorp requires running a payroll, another tax return and more fees to me. For < $50k they do not want to be bothered at this level.

IRonMaN
Level 15

Back to my comment 4 hours ago ------------------- if they are a W-2 employee, what are you going to have for income to go into a sub S?


Slava Ukraini!
TaxGuyBill
Level 15

@IRonMaN wrote:

Back to my comment 4 hours ago ------------------- if they are a W-2 employee, what are you going to have for income to go into a sub S?


 

Picky, picky ... You want the corporation to have income?  I thought that TicTok told me to open a corporation so I can deduct my vacations.  🤣

@IRonMaN 

It's common for executive level physicians who are paid W2 wages to contract with hospitals outside their normal work hours and get paid as a 1099 for clinical work.

IRonMaN
Level 15

I know that, but Hope is never one to provide a lot of details so I'm not sure exactly what she is envisioning in this whole scenario. 


Slava Ukraini!
PATAX
Level 15

@TaxGuyBill 👍 clowns say a lot of things about opening up businesses, and deductions. Remember years ago about the home-based businesses and all the "deductions" that they were supposed to get. Did the clowns tell them what to do when they get audited? Did the clowns pay the back taxes and the interest and the penalties and the fees for the audit? Time to go to sleep before I get worked up.

HOPE2
Level 9

I thought they have more than $50k after expense, net income

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HOPE2
Level 9

Thanks and that is nice point you mentioned.

Social security cap is $160200 and if he/she earned less than $160200 what happened? I would like to compare with what is in my thought from the past. For physicians they reach to social security benefits may sooner than the others due to their income during 10 years. I have had always this question in my mind 40 points need to complete to get max of social security benefits and how affects their earning or other people earning after 10 years when they already caught 40 points. Could you please give me numbers regarding if wages less than social security max so I can correct whatever already planted in my thought. Greatly appreciated it!

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TaxGuyBill
Level 15

@HOPE2 wrote:

Thanks and that is nice point you mentioned.

Social security cap is $160200 and if he/she earned less than $160200 what happened? I would like to compare with what is in my thought from the past. For physicians they reach to social security benefits may sooner than the others due to their income during 10 years. I have had always this question in my mind 40 points need to complete to get max of social security benefits and how affects their earning or other people earning after 10 years when they already caught 40 points. Could you please give me numbers regarding if wages less than social security max so I can correct whatever already planted in my thought. Greatly appreciated it!


 

The 10 years is if a person qualifies for Social Security or not.  The AMOUNT they receive is based on their 35 highest years of wages (indexed for inflation).

For example, let's say a person was self employed on Schedule C, and had a profit of $80,000.  Then he changes to a S-corporation with $60,000 of wages and $20,000 of distributions.  He now just lowered his income for Social Security purposes (assuming this is one of his 35 highest wage years), which means his potential Social Security benefits will be lower than if he had continued to report his business on Schedule C.

It has a pretty significant impact on Social Security benefits if their 35-year average is below the second "bend point" (roughly $80,000-ish in today's dollars).  It still impacts things if their 35-year average is over the second "bend point" ($80,000-ish in today's dollars), but the impact is smaller.

Obviously there can be advantages to having extra money 'now' versus having potential benefits (retirement, disability, spousal benefits, etc.) in the future.  But in my opinion unless the client knows exactly how their potential benefits are being affected, they should NOT be making the S-election.

HOPE2
Level 9

Thanks @TaxGuyBill, useful as always. 

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HOPE2
Level 9

Let me ask a question. Is it possible to reach the max social security benefits during 10 years? I know the title is not related but it is indirectly!

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TaxGuyBill
Level 15

The amount is based on their highest 35 years of income.  So if they max things out for 10 years, then the rest of the amount is based on the other 25 highest years.

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HOPE2
Level 9

Yes for 35 years but as I knew the maximum Social Security benefit in 2023 is $3,627 at full retirement age. It's $4,555 per month if retiring at age 70 and $2,572 if retiring at age 62. If one reached the $4555 after 20 years or 25 years what is the advantage of the rest up to 35 years will be paying FICA.

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TaxGuyBill
Level 15

@HOPE2 wrote:

Yes for 35 years but as I knew the maximum Social Security benefit in 2023 is $3,627 at full retirement age. It's $4,555 per month if retiring at age 70 and $2,572 if retiring at age 62. If one reached the $4555 after 20 years or 25 years what is the advantage of the rest up to 35 years will be paying FICA.


 

You can't reach that full amount with less than 35 years.  In order to get those maximum amounts you would need to 'max out' the Social Security wages for 35 years.  Anything less than 35 years will result in a lower benefit.

Jim-from-Ohio
Level 11

SEP contribution does not save on the SE tax. 

Thank you Jim from Ohio. You are absolutely correct. SEP saves on overall income tax. 

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qbteachmt
Level 15

Oh, I'm am seeing lots of conflicting info here.

"I think they better to switch S-corp."

Why? For which work? If they are an employee now, why would you change them to carry the full burden as a contracted service provider? If this is for the same work as now, you seem to be overlooking they'll still be an employee, just to a different company (their own S Corp) and now you are proposing they carry all the risk. Do you realize the horrendous malpractice provisions a medical service provider has to navigate? Why would you shift that from the hospital employer to their own S Corp employer?

"It's < $50k before expenses & SEP."

That's one specific person. 

"I thought they have more than $50k after expense, net income"

I don't know if Hope sees that statement presented as a potential rule-of-thumb. That's not an S Corp guidance and that's not Hope's client.

"Besides being an SCorp will only save them on the SE Medicare portion since they are maxing SS through their W-2 wages."

No, it doesn't. Being an employee means there is an employer and an employee share of SS and Medicare. Not being an employee for earned income means the entire amount is the responsibility of the taxpayer, who gets an expense credit for the "employer" share, which is why the 15.3% (6.2% Social Security and 1.45% Medicare, x 2 when you are both the employer and the employee) is reduced on Sched SE (it's a bit recursive). There is the Additional Medicare that is paid from employee only. Moving to an S Corp, as a sole shareholder, means it's still you paying. Now you are paying through your corporate entity. It's still your pocket all of this is coming from; the payer name on the check is different. And being an employee means the employer typically has to pay into Unemployment. And someone, as I mentioned, has to pay all operational costs, such as insurance, benefits, provide for equipment. And now your Doctor likely needs to hire administrative staff, because a Doctor has better things to do than run their S Corp entity and meet all the requirements to keep that solvent and compliant.

401(k) limits are lower than SEP limits. Your Doctor can do work separately from the hospital employer, and that income might qualify for establishing an SEP. That wasn't the question. We were not asked, "How can my Doctor work more, make more, and take advantage of tax breaks?"

And we don't know if this person spends it all, or has investments, and if he has investments, are these the best investment mix to be tax advantaged? Because payroll doesn't have the many options that real life offers, if you want to look for places and ways to leverage some tax breaks.

"TicTok told me to open a corporation so I can deduct my vacations."

Only if you also establish a website. And that is through the same MLM that told you "this one trick no one wants you to know about." OMG, I had a client that went to one of these seminars and bought into all of it, then asked me to consult. I might be the only one that made money in their scheme.

"Could you please give me numbers regarding if wages less than social security max"

I doubt that any Doctor intends to retire on Social Security as their only source of income.

*******************************
"Level Up" is a gaming function, not a real life function.
HOPE2
Level 9

I know for 35 years average but not necessary to work for 35 years as far as I know. May people did not work for the 8 years when they are in school and after that they worked for 27 years with high income and get the max of SS. A calculator of SS when I used just for knowing I put $0 for 7 years and for the rest I left high then reached to max.

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TaxGuyBill
Level 15

@HOPE2 wrote:

I know for 35 years average but not necessary to work for 35 years as far as I know. May people did not work for the 8 years when they are in school and after that they worked for 27 years with high income and get the max of SS. A calculator of SS when I used just for knowing I put $0 for 7 years and for the rest I left high then reached to max.


 

Either you entered something wrong, or the calculator that you used is incorrect.

As I've said before, it is based on 35 years.  Anything less DOES lower your benefit. 

https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html