How Physicians Can Leverage Deductions in 1099 Work

Many physicians engage in work where they are paid as a contractor rather than as an employee. Their income is reported to them on a Form 1099 and this type of work is often referred to as “1099” or “1099 contractor work.”

Many physicians engage in work where they are paid as a contractor rather than as an employee. Their income is reported to them on a Form 1099 and this type of work is often referred to as “1099” or “1099 contractor work.” Some examples include locum tenens, expert witness, telemedicine, medical review, pharmaceutical research, consulting, and coaching.

When you receive 1099 income, you’re also allowed to deduct any “ordinary and necessary” business expense that you paid related to generating that income. This article will cover what some of these deductions are and how they reduce your tax bill.

To understand what a deduction is you first need to understand the tax formula as shown below:

Tax Formula:

Taxable income is used to calculate your tax liability. A higher taxable income means more income tax and a lower taxable income means less income tax.

How Does a Business Deduction Reduce My Tax Bill?

A business deduction in the above formula reduces your taxable income and therefore your tax liability, but by how much?

The tax savings from a deduction is calculated by multiplying the deduction by your marginal tax rate. For example, 

$888 DEA license fee

X 37% marginal tax rate

= $329 tax liability reduction

This means that a deduction only reduces your tax liability by a portion of the deduction. For this reason, you should never pay for something simply to generate a tax deduction because you’re worse off financially. 

Examples of Deductions

Section162 of the tax code is what allows you to deduct business expenses related to your 1099 work. It says “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” (emphasis added).

Here are some common expenses that physicians who do 1099 work deduct:

*From what I see with my clients. Your situation will vary.

**Assumes a 42% marginal tax rate (37% federal tax rate + estimated 5% state tax rate). Your situation will vary. 

Your marginal tax rate is the tax rate on the next dollar of income. We use your marginal rate when quantifying the benefit of a deduction because that’s the amount by which your tax will change.

This is different from your effective tax rate which is your total tax divided by your total income. If we used your effective tax rate to measure the benefit of a deduction we would understate the tax savings.

Home office

If you use a part of your home exclusively and regularly for your work, you can deduct a portion of your rent, mortgage, utilities, insurance, and other expenses related to your home office.

You can also count more of your driving as a business deduction if you have a home office.

Vehicle

If you use your car for work-related purposes, such as traveling to different locations, visiting patients, or attending conferences, you can deduct the standard mileage rate or the actual expenses of your car, such as gas, maintenance, and depreciation.

CME

If you attend continuing medical education courses or seminars to maintain or improve your skills, you can deduct the cost of tuition, fees, books, materials, travel, and lodging.

If you have a W-2 job it’s best to have your employer cover all that they will and then to deduct whatever CME they won’t cover against your 1099 income.

Licensing

If you pay fees to renew your medical license, board certification, or professional membership, you can deduct those fees as business expenses.

Cell phone

If you use your cell phone for work-related calls, texts, or emails, you can deduct a percentage of your cell phone bill that corresponds to your work usage.

Meals – Out-of-town Travel

If you are out-of-town on a temporary assignment (lasting less than one year and expected to last less than one year) you can deduct a per diem rate for every day you’re there rather than tracking your actual spending on meals. The daily rate varies by location but ranges from $50-$75 per day. For longer assignments this can really add up.

Deductions By Type Of 1099 Work

Considerations

While tax deductions can help you save money on your taxes, you should also be aware of some potential pitfalls. Here are some tips to avoid common mistakes when claiming tax deductions:

Do Not Spend Money Just to Get a Tax Deduction

Remember that a tax deduction only reduces your taxes by a fraction of the amount you spend. You should only spend money on things that are necessary and beneficial for your work, not just for the sake of getting a tax deduction. After-tax income is what matters.

It Is Better to Have Someone Else Pay An Expense Than to Have a Deduction

Many locums agencies cover costs like travel, mileage, and housing for their assignments. If you have a W-2 job they may cover most if not all of your licensing and CME. 

Don’t Forego A Deduction For Fear of an Audit

There are many misconceptions out there around certain deductions and their likelihood to trigger an audit. Home office is the most commonly cited. As long as you’re doing things correctly you don’t need to fear an audit.

Use a Dedicated Checking Account for your 1099 Work

By depositing all of your 1099 income and paying for your 1099 expenses from a single account it makes it easier to keep track of and deduct your expenses.