As a locum tenens provider, you’re considered an independent contractor and you need to be prepared to pay your own taxes. Your hiring firm may not be required to withhold any federal or state taxes from your compensation. Additionally, you’ll most likely need to remit estimated taxes each quarter to the Internal Revenue Service (IRS) or state, depending on your situation.
Tax rates can actually be lower for independent contractors receiving a 1099. With typical W-2 positions, your gross pay is taxed at your ordinary income tax rate plus ½ of FICA (the employer pays the other half). As an independent contractor, you can write off work-related expenses, including, in some instances, travel, supplies, and moving expenses. Consult your tax preparer early so you can plan accordingly and capture write-offs applicable to your situation. You will pay both the employer and employee share of FICA taxes, however, you will be paying based on your net income (after the write-offs) instead of gross.
As an independent contractor, you are considered self-employed and can open a Limited Liability Company (LLC) or Corporation to receive your income through. Now, you’re a small business owner!
Here are some great resources about deductions: IRS Publication 463 Travel, Entertainment, Gifts, and Car Expenses; IRS Pub. 535 Business Expenses; IRS Pub. 334 Tax Guide for Small Businesses; and IRS Pub. 1542 Per Diem Rates (For Travel within the Continental United States).
Cost of Opening a Business
Deciding to open an LLC or Corporation is a decision you should make after speaking with a tax professional. Everyone’s situation is unique, but for the majority of Locums providers, becoming your own business saves you even more, not to mention the asset protection provided by a business. Most states require an annual filing fee to keep your business “active” in that state, and you will have to pay for corporate tax preparation, both of which are deductible business expenses.
This cost covers a one-hour consultation, filing of the articles of incorporation in your state, applying with the IRS to receive a Federal Employer Identification Number (FEIN), preparation of Form W-9 with your new business name, and for some, the IRS application to be treated as an S-Corporation.
Every state has varying filing fees and state tax laws, during your consultation, we will provide you with the cost of your state’s filing fees and taxes.
What is an S-Corporation?
The best way to remember “S-Corp” is to think of it as S for Small. About 95% of small businesses file their federal taxes as a pass-through entity. An S-Corporation is a pass-through, which is just a fancy way of saying that the individual owners of the company pay the taxes at the personal level. The business is generally NOT subject to corporate tax rates and avoids double taxation. Note, an LLC can also be an S-Corporation without changing its name!
Benefits of an S-Corp
Once your business’s election to become an S-Corporation is accepted by the IRS, you are ready to save more on your federal and state taxes.
Paying yourself, tax, and retirement savings
As an S-Corp, you can pay yourself a salary, allowing you to continue to pay into FICA tax and pay your income tax with each paycheck instead of making those quarterly estimated payments. Paying yourself a salary from your own business means you are an employer. Employers can open more complex retirement accounts such as SIMPLE IRAs, SEPs, and even 401-Ks.
Running payroll for yourself may sound complex, but we make it easy. Our payroll services start at $90 per quarter. We file and pay everything electronically on your behalf, including, providing you your own W2 at year-end. Imagine receiving a W-2 from your own business!
Get the most out of being a Locums Tenens and book your virtual consultation today!