Does Physician Locum Work Qualify for the Income Business Deduction?
The answer is often yes, but it’s nuanced: Physician locum work can qualify for the income business deduction (also known as the qualified business income deduction or QBI deduction) under Section 199A of the Internal Revenue Code, provided certain requirements are met, including not performing the services as an employee.
Understanding the Section 199A Deduction for Locum Physicians
The Section 199A deduction, often referred to as the qualified business income (QBI) deduction, was introduced as part of the Tax Cuts and Jobs Act of 2017. It allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. The key here is “qualified business income,” which requires careful consideration for locum tenens physicians.
Determining Qualified Business Income (QBI)
QBI generally includes the net amount of income, gains, deductions, and losses from a qualifying trade or business. For locum tenens physicians, this typically means the income earned from providing medical services, minus ordinary and necessary business expenses. However, it is crucial to understand what constitutes a qualifying trade or business.
- Income Sources: QBI primarily includes fees for service, payments from agencies, and any other revenue directly related to your locum tenens work.
- Deductions: You can deduct expenses like travel, malpractice insurance, continuing medical education (CME), licensing fees, and home office expenses (if applicable), as long as they are directly related to your locum tenens practice.
- Non-QBI Items: Certain items are not included in QBI, such as capital gains or losses, interest income not directly related to the business, wage income, and certain dividend income.
Independent Contractor vs. Employee: A Critical Distinction
Does Physician Locum Work Qualify for the Income Business Deduction? The answer hinges largely on your classification as an independent contractor versus an employee. The 199A deduction is primarily intended for those operating their businesses as independent contractors. If you are classified as an employee, your income is considered wage income and is not eligible for the QBI deduction.
Consider these factors to determine your worker classification:
- Control: Do you control your schedule, work location, and how you perform the services?
- Financial Risk: Do you bear the financial risk of your locum tenens assignments, such as paying for your travel or insurance?
- Relationship: Is your relationship with the facility or agency a long-term employment relationship, or is it project-based?
If you answer “yes” to most of these questions, you are more likely to be classified as an independent contractor. Misclassification can have significant tax consequences, so consult with a tax professional if you are unsure.
Understanding the Specified Service Trade or Business (SSTB) Rules
The 199A deduction includes special rules for specified service trade or businesses (SSTBs). An SSTB involves the performance of services in fields such as health, law, accounting, performing arts, or consulting. However, these rules primarily affect high-income earners.
For taxpayers with taxable income below a certain threshold (which varies annually), the SSTB rules do not apply, and they can generally take the full 20% QBI deduction. For taxpayers with income above a higher threshold, no QBI deduction is allowed. Taxpayers with income between these thresholds have a phase-in of the SSTB rules, which may reduce their QBI deduction.
Planning for the 199A Deduction as a Locum Physician
Taking steps to maximize your eligibility for the 199A deduction is essential.
- Maintain Accurate Records: Keep detailed records of all income and expenses related to your locum tenens work. This includes invoices, receipts, and contracts.
- Consult with a Tax Professional: A qualified tax advisor can help you navigate the complexities of the 199A deduction and ensure you are taking advantage of all eligible deductions.
- Optimize Business Structure: Consider operating your locum tenens business as a sole proprietorship, LLC, or S corporation. Each structure has its own tax implications, and the optimal choice depends on your individual circumstances.
Frequently Asked Questions (FAQs)
Does Physician Locum Work Qualify for the Income Business Deduction? Here are some common questions to help you understand this deduction further:
What is the Qualified Business Income (QBI) deduction?
The Qualified Business Income (QBI) deduction, established under Section 199A of the Internal Revenue Code, allows eligible self-employed individuals and small business owners, including locum tenens physicians, to deduct up to 20% of their qualified business income, subject to certain limitations.
How do I determine if I am an independent contractor or an employee for tax purposes?
Several factors determine your worker classification, including the level of control you have over your work, the financial risk you bear, and the nature of your relationship with the facility or agency. Generally, if you control your schedule, bear financial risk, and have a project-based relationship, you’re likely an independent contractor. Consult with a tax professional for definitive guidance.
What are the income thresholds that affect the 199A deduction for Specified Service Trade or Businesses (SSTBs)?
The income thresholds for SSTBs vary annually. Generally, for taxpayers below a certain income threshold, the SSTB rules do not apply, allowing the full 20% QBI deduction. Above a higher threshold, no QBI deduction is allowed. Between the thresholds, a phase-in applies. These limits are adjusted each year by the IRS, so it’s crucial to check the latest guidance.
What types of expenses can I deduct as a locum tenens physician to reduce my taxable income?
You can deduct ordinary and necessary business expenses related to your locum tenens practice, such as travel expenses, malpractice insurance premiums, continuing medical education (CME) costs, licensing fees, and home office expenses if you meet the requirements. Detailed record-keeping is crucial for substantiating these deductions.
Can I claim the QBI deduction if I operate my locum tenens business as a sole proprietorship?
Yes, operating as a sole proprietorship is a common way for locum tenens physicians to conduct their business, and the income generated can potentially qualify for the QBI deduction, assuming all other requirements are met.
What if I operate my locum tenens business through an S corporation?
Operating through an S corporation can also allow you to claim the QBI deduction on your share of the corporation’s qualified business income. Consult a tax advisor to determine if an S corporation is the best structure for your business.
How does the home office deduction work for locum tenens physicians?
You may be able to deduct expenses related to a home office if it is exclusively and regularly used for your locum tenens business and is your principal place of business or a place where you meet patients or clients. Specific requirements must be met to qualify for this deduction.
What records should I keep to support my claim for the QBI deduction?
You should keep detailed records of all income and expenses related to your locum tenens work, including invoices, contracts, receipts, bank statements, and any other documentation that substantiates your business activities. Maintaining organized records is essential for a successful tax return.
What happens if my taxable income exceeds the threshold for the QBI deduction?
If your taxable income exceeds the applicable threshold, the amount of the QBI deduction may be limited. For SSTBs, it may be reduced or eliminated depending on how far your income exceeds the threshold. Consult a tax professional for personalized advice.
Can I deduct health insurance premiums as a self-employed locum tenens physician?
Yes, you can generally deduct the amount you pay for health insurance premiums for yourself, your spouse, and your dependents if you are self-employed, including as a locum tenens physician. This is an above-the-line deduction, meaning it’s taken before calculating your adjusted gross income. However, certain conditions apply, so consult a tax professional.
Are there any other deductions besides the QBI deduction that locum tenens physicians should be aware of?
Yes, locum tenens physicians can also deduct self-employment taxes, contributions to retirement plans (such as SEP IRAs or Solo 401(k)s), and other business-related expenses. Working with a tax advisor is crucial to identify all applicable deductions.
Where can I find more information about the QBI deduction?
The IRS website (IRS.gov) provides detailed information about the QBI deduction, including publications, FAQs, and tax forms. Consult IRS Publication 535, Business Expenses, and Section 199A regulations for comprehensive guidance.
Navigating the intricacies of the Section 199A deduction can be complex. This information is for general guidance only and should not be considered professional tax advice. Consulting with a qualified tax advisor is highly recommended to ensure you are in compliance with all applicable tax laws and regulations and are maximizing your tax savings.