With stimulus checks starting to hit bank accounts in March, it's easy to overlook the less exciting annual torture that is tax season at the IRS. At this writing, the IRS has extended the 2020 tax filing deadline, and taxes are due on May 17th. This is an excellent time to remind locum tenens professionals to keep a few things in mind.
Doctors, like other professionals, employ Latin phrases that sound distinctive. In Latin, however, the term locum tenens literally means to hold the place of someone. Today's more matter-of-fact business world calls locum tenens temporary workers or independent contractors. In practical terms, preparing taxes for locum tenens is more complicated than tax preparation when those doctors are direct employees of a healthcare organization.
Naturally, as we are not fiduciaries, these are our suggestions. We strongly recommend you discuss all tax issues with your professional tax adviser before implementation. Only your tax adviser knows the complexities of your tax situation.
COVID-19 Effects on Healthcare Providers
The COVID-19 pandemic continues to impact US business. For thousands of workers, COVID-19 meant learning to work remotely from home. For doctors, it meant high unemployment as elective procedures were put on hold as hospitals struggled to keep up with the critical hospitalizations of COVID-19 patients. Physician's offices lost 243,000, and other healthcare providers lost 205,000 jobs.
The U.S. Congress passed the Cares Act and the Paycheck Protection Program in the Spring of 2020. The laws established a Provider Relief Fund totaling $178 billion earmarked for hospitals and healthcare providers. The money is intended to reimburse healthcare providers for eligible expenses as well as lost revenue resulting from the impacts of COVID-19. In addition, the COVID-19 Uninsured Program reimburses providers who treat/test uninsured patients with COVID-19. These reimbursements do not need repayment provided that the healthcare professional comply with the terms and conditions of the programs.
Significant legislative changes affecting personal and business taxes require a tax professional's advice before you file.
Plan Ahead for Medicare and Social Security Taxes for Next Year
In the general scheme of things, an employer pays half of the Medicare and Social Security taxes each year. The Social Security tax rate of 6.2% and Medicare tax rate of 1.45% are combined into something called the Federal Insurance Contributions Act rate, or FICA as it is more popularly known. The FICA rate for 2020 was 7.65% up to the Social Security wage base. The Social Security wage base in 2020 was $137,000.
In comparison, self-employed individuals are responsible for covering 100% of their Medicare and Social Security taxes each year. All 2020 self-employment income was subject to Medicare tax. The self-employment tax rate for 2020 was 15.3%. This is a combination of the 12.4% tax rate for Social Security and the Medicare tax of 2.9%, up to the Social Security taxable wage base.
Important rate changes occur in 2021 for self-employed individuals:
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The Social Security wage base applicable to employees and self-employed individuals increased to $142,800.
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The self-employment tax rate is now 12.4% Social Security tax on the first $142,800 in self-employment income (to a maximum of $17,707.02) plus
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2.9% Medicare tax on the first $200,000 in self-employment income ($250,000 for joint filers; $125,000 for returns filed separately); plus
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3.8% (2.9% plus .9% additional Medicare tax) on all self-employment income over $200,000 ($250,000 on joint returns; $125,000 on returns filed separately).
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The law requires breaking down the Social Security tax and Medicare tax into quarterly payments, and some filers may find the practice helpful. Estimated taxes are the way that you can pay quarterly Social Security and Medicare taxes. Form 1040-ES is the IRS tax form used for this purpose. The form has a worksheet to help you figure your estimated taxes, and you will need last year's tax return to figure it out. If the worksheet confirms you owe quarterly taxes, the form has vouchers to send in with your quarterly payment. Quarterly payments are due on April 15, 2021, June 15, 2021, September 15, 2021, and January 15, 2022.
For example, suppose you estimate that you will earn $250,000 in 2021. Your Social Security tax will be $17,707 (rounded), the maximum amount based on the revised Social Security wage base. Your Medicare tax will be $5,800, plus the additional Medicare tax will be an additional $9,500. That's a total of $33,007, or $8,252 when broken down into quarterly payments.
Other Financial Planning Options
Here are a few other suggestions to help you weather economic storms.
Emergency Fund. Financial experts believe that you should have money in an emergency fund. How big that fund is will depend on several factors such as your lifestyle, the number of your monthly expenses, whether you have dependents and the amount of your monthly income. The general rule is that an emergency fund should cover three months of expenses.
Retirement Plan. A SEP-IRS is one option for a retirement plan for independent contractors. IRS says that you can contribute up to 25% of your net self-employment income (not including contributions for yourself) up to a maximum of $58,000 in 2021. That's up from $57,000 in 2020. See Publication 560 for details, tables, and worksheets for calculating your contributions.
Another option is an individual 401(k), which creates more paperwork for you. You can contribute up to $56,000 per year, and you will need to hire a custodian for your 401(k) account.
Health benefits
One of the advantages of self-employment is that you get to design the health benefits package that best fits your needs, including short and long-term disability programs. Of course, you have to pay 100% of the premiums because you have no employer to pay its share. If you are married, the best option may be to join your spouse's employer-provided health care plan.
If you need to develop your plan, one option is a Health Savings Account (also known as an HSA). The premiums are deductible, and you can make deductible contributions to the HSA. There are limits on contributions ($3600 in 2021) for self-coverage or family coverage up to $7,000. If you are over age 55, you can make catch-up contributions up to $1,000. HSAs are tax-favored in three ways:
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- you pay no taxes on your contributions
- you pay no taxes on income growth on the contributions
- you pay no taxes when you make distributions for eligible medical expenses.
When it comes to health insurance or disability coverage, an insurance broker can help you negotiate the best coverages available for your situation.
Remember: We are happy to share our suggestions on these issues; however, we urge you to seek professional advice from a qualified tax professional who is bound to serve you in a fiduciary capacity.
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