By Chris J. Roe, CPA, PFS
We’ve had numerous inquiries from physicians about their desire not to be employed but to contract as independent physicians.
Forty to fifty years ago, physicians ran their own practices, doing the hiring, billing, and marketing all themselves. As time moved on and dramatic changes occurred in the healthcare industry, an increased number of physicians became employees instead of independent business owners. Health care systems, insurance companies, and the like either bought up practices or forced physicians to join them out of fear these systems would adversely affect their livelihoods. But now, the landscape is changing again.
The wave of the future may be what we’ve dubbed the “hybrid physician model.” The hybrid physician model allows doctors to move from being employees to owning their own practice again. They won’t have to experience the hassles of hiring people, billing for services, marketing, and other administrative duties that come along with owning a business—all while earning a much higher annual income and receiving the enhanced income tax benefits of being a business owner.
In exploring the hybrid model, we’ve listed nine common myths physicians have and addressed each of them below.
Myth #1: Medical Malpractice Is Expensive
Physicians believe obtaining medical malpractice on their own will be cost-prohibitive, but this is not the case. Recently, we collaborated with a physician contracting directly with a medical facility. She realized she will receive an additional $80,000 per year in compensation, but was going to turn down the ability to go independent. Her initial mindset was medical malpractice insurance will be unreasonably priced and the cost will either exceed additional compensation or make the little benefit not worth the effort. However, after our conversation, she realized she can obtain medical malpractice insurance for $11,000 per year and we can assist in getting all other benefits in place. Our conversation changed her mindset regarding independence. We’ve built-in resources and relationships to help physicians nationally obtain medical malpractice for themselves or their group.
Myth #2: Health Insurance Is Hard to Obtain
While we find independent physicians struggling through the maze of health insurance, we recently uncovered a national resource that can place independent health insurance for physicians quickly. The cost ranges from $1,000 to $2,000 plus per month, and the premiums are tax-deductible if you’re self-employed. So, while the cost is high, your additional compensation and other benefits as an independent physician should far outweigh this cost.
Myth #3: Forming an LLC or Corporation Will Protect My Assets
While you may get limited asset protection by operating in a business entity, you’re on the hook if it’s you providing the medical services. However, if you employ other physicians or healthcare professionals to provide services, then you have a layer of protection from their malpractice. However, you must follow the business formalities each year, such as updating corporate records, holding meetings, and documenting business decisions.
Myth #4: An S-Corp Will Save Me a Bunch of Taxes
Generally, being an S-Corp versus a sole proprietor may save social security tax depending on your salary and will save you Medicare tax. Any profit distribution taken over your wage is not subject to payroll taxes. However, the IRS is keenly aware of this, so you cannot set your salary too low. Additionally, setting your salary low will affect the amount your business can contribute to your retirement plan. Finally, depending on income level, your Section 199A business deduction may be greater as a sole proprietor versus an S Corporation. We recommend a detailed tax analysis before selecting which tax structure is best for you.
Myth #5: S Corporations Are Simple to Run
When running an S-Corp, you’ll need to set up payroll to pay your wages. This requires an accountant or payroll service to process checks and applicable withholding along with filing the necessary payroll tax returns to the Federal and state governments. Additionally, you may be required to obtain workers’ compensation and unemployment insurance.
Myth #6: I Can Wait Till End of Year to Do My Accounting and Taxes
An S-Corp requires a separate Federal and state income tax return. These returns require more information about the business than a typical Schedule C (Form 1040) on your personal return. Since you’re self-employed, you’ll file quarterly income tax estimates for Federal and state income taxes. This needs to be calculated quarterly by an accountant. Having good electronic accounting records can make this less costly. We recommend you hire an accountant to do the monthly accounting so that quarterly and annual tax filings are seamless.
Myth #7: Using My Checking and Credit Cards for Business Makes Things Simple
While not having an additional checking account and credit card for the business seems like simplification, it makes the business accounting more complex and may cause legal issues with your business structure. Moreover, in our experience, it makes accounting and taxes very costly.
First, it takes your accounting professional more time to sort through the business transactions, but more importantly, we often see missed business deductions on the tax returns. Thus, you’re paying more taxes than required. We recommend you set up a bank account and credit card in the business’s name and use it exclusively for business income and expenses. As a result, your monthly accounting will be accurate, allowing you to pay the minimum amount of taxes you owe and to understand your business performance.
Myth #8: Forming an Entity and Doing the Taxes and Accounting Myself Will Save Me Money
If you’ve this thought, you’re not 100% wrong. We can all do things ourselves, but there’s always a cost or trade-off. So, while you may save money, is it worth your time and effort to do this yourself? What happens if you make a mistake? You normally find out at the wrong time, costing you thousands. As a professional, we recommend you stick to doing what you do best and leave the rest to experts.
While it may cost more money upfront, your peace of mind and time savings is worth it. One of our key tenants at Rx Wealth for managing a physician’s financial structure is to transfer all risk from the physicians to other parties when the cost of doing so is small. Your cost for having professionals set up the business, do accounting and tax work each year, and oversee the operations are small in comparison to the lifetime value of your earnings. Do not be penny-wise, pound foolish.
Myth #9: I Can Negotiate My Own Reimbursement Contract
While you may be the best person to understand the economics of your contract, we recommend you hire an attorney who has done this before. There will be plenty of legal stuff, such as termination language, restrictive covenants, and patient ownership to cover, and who knows, the attorney may even negotiate a higher compensation rate than you. While it’ll cost some money upfront, it’s money well spent to make sure you are legally protected.
Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at email@example.com, or on the web at rxwealthadvisors.com.
The situations or opinions mentioned in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.