Tax Implications for Moonlighting Doctors
by Ryan Turner
The "T" Word
Taxes, taxes, taxes. That annoyance you dislike paying and dislike figuring out for yourself even more.
This read should help you better understand the tax implications for the income you gain as you moonlight and how you can best prepare for when Uncle Sam visits you every April.
1099 vs W2 - What are they and what's the difference?
You have likely heard both of these terms before. Here’s the general scoop:
- “W2 Workers” are those that are employed in the typical fashion (full- or part-time) where the employer withholds money for taxes and other fees before the paycheck hits your account.
- “1099 Workers” are contract workers who essentially represent their own business and are providing services to another business. In this case, the employer typically does not take out taxes and fees before payment; the employer expects the 1099 employee to take care of these expenses after-the-fact.
Why should you care, you ask?
Moonlighting contracts are typically 1099. This means that when you are paid after a moonlighting shift, you will receive the entire payment for your services (woohoo!). However, you are still responsible for paying federal and state taxes as well as social security and Medicare taxes. Around February of every year, you should start looking for an official-looking letter from the hospital or other facility you picked up extra shifts from, and the form inside will probably say “1099-MISC” on the bottom-left corner. This will tell you how much you made moonlighting at that facility during the previous calendar year, and unless it lists an amount in Box 4 (“Federal Income Tax Withheld”), the full amount of your earnings on the form is still taxable.
Set Aside Tax Money Now!
Getting a huge paycheck from a side gig like moonlighting is exciting. It may allow you to pay down some student debt, go on a spontaneous vacation, or buy something fun for yourself.
Before you go out and splurge, hold your horses and your credit card for a minute:
Remember that you are likely on the hook for taxes and fees on those earnings at the end of the year. In fact, most jobs like this require you to pay quarterly (see irs.gov form 1040 ES or a trusted tax professional for more details). As you get paid for your moonlighting, you should set aside a portion of the money to cover the expected taxes due every few months - this should be based on what you expect your marginal tax rate to be in the coming year. If you’re not sure of your marginal tax rate, we recommend setting aside more than you will likely need (~40% of your earnings). This way, after paying taxes, you will likely have money left over instead of coming up short.
Insurance & Benefits
Most moonlighting physicians maintain full-time employment at another institution. In this case, you will typically receive insurance and benefits from your primary employer. Increasingly, however, doctors are making a full-time living working only moonlighting shifts. If this is your situation, you will likely need to take care of insurance and benefits on your own. In most cases, 1099 employment does not come with these perks.
Not having health insurance can result in fee penalties on your annual taxes as well as huge potential liabilities if something happens to you or your immediate family. So don’t risk the hurt - go find some coverage if you currently lack it.
Tracking Expenses
If you are moonlighting as a 1099 employee, you should be even more aware of expenses that you incur due to the job. At the end of the year, any valid business-type expenses can offset your income and reduce your tax liability. These expenses could include travel mileage between shift and malpractice insurance. There are many apps and tools to help you keep track of these things, but even a basic spreadsheet could work great.
Get Professional Advice
This article is designed to give you a basic understanding of tax-related things to be aware of when working as a moonlighting doctor. However, you should seek professional advice from a CPA regarding your personal tax position and how to best report your moonlighting activities on your tax forms.
Follow these general guidelines, and you can do your best to minimize the hurt when filing your taxes in the future. Until then, get out there and moonlight!
References
Taxes in the Gig Economy (TechCrunch, August 2017)
IRS Form 1040-ES, Estimated Tax for Individuals
Tax tips for doctors and young physician families (KevinMD.com, May 2015)