Today’s healthcare provider environment offers private practice models that do not necessarily include the overhead (and associated risk) of a brick and mortar private practice. And while attention is often paid to what types of work are available – from Locums employment to telemedicine – what is very frequently overlooked is the idea of how to structure your business. If you WERE starting a brick and mortar private practice, you’d have to understand how business entities work; why is the information any less relevant for those providers who want to work in a self – employed capacity, without a physical building?
To any physician that is considering any employment model that includes so-called contractor status – from a tax perspective, your income is classified in a completely different capacity than regular employees. ‘Regular’ meaning, in IRS speak, W-2 income, named for the IRS tax form you submit come april 15. That system is pretty cut and dry; your taxes are taken out of your gross pay and you get the remainder, and then based on your elections (such as dependents, head of household, etc) you could get a refund come tax time.
‘Contractor’ status, or 10-99 income, does not operate this way. You receive all of the gross proceeds from your work, and you are solely responsible for paying all the taxes come tax time – which could be quarterly or yearly, depending (Disclaimer: consult your accountant on anything specific, this is designed to provoke thought and nothing herein should be taken as advice without dialogue with a qualified professional). With that in mind, here’s some helpful points to consider if you’re going to operate with any 10-99 income sources:
- SAVE! Since taxes aren’t taken out for you, budget accordingly so that April 15th doesn’t bring a surprise huge tax bill. If you find yourself spending whatever is in your checking account, open a separate savings bank account and deposit a certain % (say 20%) of each 10-99 income check there, and earmark these funds for taxes.
- Use a business entity to receive your paychecks. In most cases, having a formal business entity structured – with a bank account attached to it – is preferable to getting paid into vs. using your own name and checking account. It comes down to two main reasons: the business acts as an asset protection vehicle, and helps with tax efficiency. This is not the savings account for taxes mentioned above; this is the account for the business, that you’ll use to pay all biz expenses, and accept pay into (then move it wherever it needs to go, like your personal account or savings).
- Understand how tax deductions work. With a business set up and bank account attached, you can now segregate business and personal expenses, by using the right account depending on the expense being for the biz or personal. When tax time comes and you have to produce records of business expenditures, you log online to your bank’s system and print out all the records you need…. Easy. If your business is a sole proprietorship, that takes care of some of your accounting, without any effort!
- Never co-mingle business and personal funds. You don’t use your biz account for that 60” UHD TV in the living room; you don’t use your personal account to buy business travel airline tickets. Keep them completely separated! The business entity is designed to limit your liability for lawsuits, and protect personal assets from lawsuit exposure – improperly managing funds between personal and business accounts can reduce this valuable protection.
- Understand the difference between business entities. Practicing physicians who want to wrap their medical license inside a sole proprietorship may want to (or have to) use a different business entity based on the state they live in. Some states allow you to practice with an LLC (Limited Liability Company) as your business model, some will require other types of entities like a PC (Professional Corporation) or even PLLC. There’s no cookie cutter answer here, so consult your advisory team!
- Forming your company correctly isn’t a DIY project. After the entity itself is selected and formed, there may be state statutes that require additional steps in order to conduct business in your state. These can include publication requirements, registered agent elections (if you form your business in a state other than where you live), or other reporting requirements with the state. Have a trusted advisor talk you through it.
- If you have partners, you need written agreements. To sit down and have to clearly delineate everyone’s role and responsibility in the company will force you to consider parts of your business that you may never have before. This is a useful thought provoking discipline… as well as being absolutely necessary! And when done, like the entity itself, now you and your partners have your interests protected, and can focus on growing the business in harmony.
These points could each fill their own pages, so this is just an overview of some general considerations we have found to be of use in the business world – that happen to apply equally well in medicine. Having the right team to work with you is key to helping create your most efficient practice, whatever that might look like. A business entity creates liability protection, streamlined accounting, tax efficiency, asset segregation, and it’s just plain more professional. Remember that in any private practice, whether you have an office or not, you are your own brand – building that is just as valuable to you as your medical credentials.