Making the transition from a W2 to a 1099 filer as a physician can unlock significant tax deductions that can minimize your tax burden and free up your funds so you can reinvest in your business. Potential deductions available for 1099 filers include the home office deduction, auto or vehicle expenses deductions, CME and CME travel, medical malpractice, the QBI deduction and more. While the tax savings can be considerable, it’s important to consult with tax professionals to ensure you’ve identified all possible qualifying deductions. Brian McCook, Anders partner and health care practice leader, explained the different deductions physicians could potentially take part in as a 1099 filer during his appearance on the Financial Residency podcast with Dr. Tammy Crouse.
Key Takeaways:
- Tax deductions offer a way to significantly reduce taxable income, lowering your overall tax burden
- Some fees or dues, such as fees for medical malpractice insurance or annual dues paid for membership in a society, may be able to be deducted
- The QBI deduction can be used to reduce your taxable income by 20%, but the calculation needed to qualify for the deduction is complicated and may require the help of a tax professional to ensure accuracy
- Work with a qualified professional to determine which deductions work best for you and ensure expenses are being reported properly
Tax Deductions Available to Physicians Filing a 1099
Several tax deductions are available to 1099 filers that W2 employees aren’t eligible to claim anymore. Business owners or 1099 physicians may be eligible for those deductions and can use them to reduce your taxable income which in turn reduces your tax burden. It’s worthwhile to identify and track expenses so you can do your calculations at the end of the year to determine which are truly deductible.
Working with a tax professional can help you identify and capture all eligible business expenses and minimize your net self-employment tax. Attempting to do so on your own could lead to eligible deductions being left on the table or with you taking more deductions than is allowable and putting yourself at risk of an audit from the IRS. Some tax deductions available to 1099 small business owners may include the following:
- Home office – If you’re utilizing your home or part of your home for administrative work, and that space is dedicated to those administrative duties, it is an allowable deduction on your tax return. Take the square footage of the business use of the home and divide it by the total square footage of the home to find the business eligible percentage of the home expenses. For instance, 100 sq ft of business space in a 1,000 sq ft home would equal a 10% eligible business deduction for all indirect expenses. This might include mortgage interest, real estate taxes, insurance, paid utilities, repairs and maintenance to the home, landscaping and security. Homeowner’s association (HOA) fees don’t count towards indirect expenses and aren’t eligible for a business deduction. If you are certain you have at least $1,500 of eligible home deductions, you may claim safe harbor rather than going through the specific form to list the expenses and allocations separately.
- Office supplies and equipment – Electronics and furniture, such as iPads, computers or desks used in your home office may be deductible. If they aren’t, depending on the specific situation, you can capitalize those purchases and they can be depreciated over a period of a few years.
- Auto or vehicle expenses – When you drive anywhere for a business-related purpose, particularly if your home office serves as the core hub of your business, your mileage can create a tax deduction for you. For example, if you complete some administrative work in your home office before driving into the hospital or clinic where you then provide patient care, the mileage between the two locations becomes deductible. The drive home from wherever you’re working would also be considered eligible. You can either claim a business mileage rate on all the eligible miles for the year or you can potentially claim actual expenses, whichever is greater. If you use actual expenses, you are required to use that for the remainder of the life of the vehicle.
- Continuing Medical Education (CME)– Any expenses related to CME that you would incur to keep your licenses current is also deductible.
- Business or CME travel – Travel for business purposes, including travel to CME, may be eligible for deductions.
- Business meals – While no longer available to W2 tax filers, 1099 filers are still allowed to deduct business meals from their tax returns. Anytime you’re eating out and discussing what you do or generating opportunities for new revenue, it becomes an eligible business expense.
- Medical malpractice – As a 1099, you may potentially be able to negotiate with the hospital you’re contracted to pay medical malpractice insurance fees. If this is an expense you pay yourself, it becomes an eligible business deduction you can claim to reduce your taxable income.
- Annual dues – Whether you pay annual dues to a society you belong to or for privileges at the hospital where you work, those fees can be deducted from your taxable income as well.
- Cell phones – You may be able to deduct your cell phone bill as long as any personal use is “de minimis,” or very little.
- Retirement plans – You can match your own contributions to your 401(k) and the match you make as the employer can be considered a business deduction even though you’re still putting that full amount into your retirement account.
- Qualified Business Income (QBI) Deduction – On a macro, highly simplified level, the QBI deduction allows you to deduct up to 20% of your self-employment income. A taxpayer with $100,000 of self-employed income could potentially receive a $20,000 QBI deduction, bringing the overall taxable income down from $100,000 to $80,000. Be aware that the QBI deduction is a very complex calculation that can be used in addition to itemized expenses. Be prepared to take advantage of it to the extent that you are allowed.
Anders Health Care advisors work with health care organizations to minimize your tax burden and empower you to focus on providing the best patient care possible. Learn more about how we can create a custom tax planning strategy, and the associated costs, by contacting Anders below.
