Side practices like consulting, teaching, telemedicine, or a small clinic are increasingly common among physicians who supplement their main practice. Even though side practices may raise income, they add extra layers of tax complexity. Good planning can minimize tax liability, safeguard cash flow, and ensure compliance with federal and state laws. Below is a practical guide to navigating tax planning for doctors who run side practices.

Why Side Practices Matter A side practice transforms the tax nature of your earnings. Income that would otherwise be taxed as salary becomes self‑employment income subject to the self‑employment tax (Social Security and Medicare). A blend of W‑2 income from your primary job and 1099 income from a side practice produces a hybrid tax environment. Different income sources have separate deduction rules, reporting obligations, and timing aspects.

Key Tax Concepts for Doctors 1. SEAT – 15.3% on net self‑employment income. 2. Qualified Business Income (QBI) deduction – up to 20% of qualified business income under Section 199A, subject to limitations. 3. Corporate rates – incorporating may provide lower tax rates and distinct liability. 4. State Taxes – many states tax medical income uniquely; some offer special exemptions or lower rates for doctors.

Deciding on the Correct Entity

Schedule C Sole Proprietorship

Easiest to set up; income reported on Form 1040 Schedule C. All expenses are deducted on the same form; no separate corporate filing required. SE tax is due on the net profit.

Limited Liability Company

A single‑member LLC behaves like a disregarded entity, matching a sole proprietorship unless you opt for corporate tax. A multi‑member LLC files Form 1065, with each member receiving a K‑1. Offers liability protection without corporate formalities.

S‑Corporation

Pay yourself a reasonable salary (W‑2) and take the rest as shareholder distributions. Salary incurs payroll taxes, but distributions avoid SE tax. Needs payroll setup, quarterly payroll tax filings, and adherence to IRS reasonable‑compensation rules.

C‑Corporation

A distinct legal entity; profits taxed at the corporate level (21% federal) and again upon dividend distribution. Ideal for larger side practices or when you plan to reinvest earnings. Requires detailed corporate governance and annual meetings.

Best Practice: Most physicians opt for an S‑Corp or LLC with an S‑Corp election to balance simplicity, liability protection, and tax efficiency. Nonetheless, the choice relies on revenue, number of staff, and future goals.

Deductible Cost Items

Office Rent or Lease

Utilities, Internet, and Phone

Professional Liability Coverage

CME and Licensure Fees

Medical equipment and supplies like instruments and computers

Marketing and Advertising

Capital Asset Depreciation

Premiums for Health Insurance when self‑insured

Travel and Meals related to business (50% meals deduction)

Home Office Deduction – if you use a dedicated space for patient care or administrative tasks.

Remember: All expenses must be ordinary, necessary, and 法人 税金対策 問い合わせ directly related to the side practice. Document everything with detailed records, receipts, and a mileage log if you claim a home office or vehicle deduction.

Timely Self‑Employment Tax Payments

• If your side practice yields $1,000 or more in SE tax, quarterly estimated payments (Form 1040‑ES) are required.
  
• Apply the safe‑harbor rule: pay 90% of last year’s tax or 100% of this year’s tax, increasing to 110% if AGI > $150,000.
  
• Automating payroll for an S‑Corp lowers the chance of underpayment penalties.
  
  

Qualified Business Income Deduction

• A QBI deduction offers a 20% cut on qualified business income from a pass‑through entity.
  
• High‑income doctors face limits: wage and capital restrictions, plus the 20% threshold.
  
• A careful review of your total income and the type of side practice is essential to maximize the deduction.
  
  

Health Insurance and Retirement

• Self‑insured doctors can deduct 100% of their premiums from gross income.
  
• Create a Solo 401(k), SEP IRA, or defined‑benefit plan to defer earnings and lower taxable wages.
  
• IRS limits contributions to these plans; a financial advisor can guide you to stay within limits.
  
  

Documentation and Recordkeeping

• Separate bank accounts for primary practice and side practice.
  
• Record all income and expenses in a detailed ledger.
  
• Employ accounting software designed for medical practices to monitor reimbursable items, deductions, and tax docs.
  
• Store records for at least seven years to cover possible audits.
  
  

State and Local Considerations

• Certain states like Texas, Florida, and Nevada impose no state income tax, simplifying your setup.
  
• Others (e.g., California, New York) impose additional taxes on medical income.
  
• Look into local licensing fees, business taxes, and health department permits that could apply.
  
  

Timing Strategies

• Delay income: Transfer receipt of sizable invoices to the next year to lessen current year tax.
  
• Speed up deductions: Pay rent or acquire equipment before year‑end to raise deductions.
  
• Consider using a "cash‑basis" entity to match income and expenses more closely.
  
  

Hiring Workers or Contractors

• Employees need payroll taxes, benefits, and adherence to labor regulations.
  
• Independent contractors (1099) can reduce payroll burden but increase audit risk.
  
• Hire a qualified tax professional to classify workers correctly and dodge penalties.
  
  

Working with a Tax Professional

• A CPA or tax attorney with experience in medical practice tax matters can help you choose the right entity, optimize deductions, and ensure compliance.
  
• Partner with a professional who can assist with quarterly estimates, payroll setup, and audit defense.
  
• Regularly review your tax strategy.
  
  

Pitfalls to Avoid

• Combining personal and business expenses in one bank account.
  
• Neglecting detailed mileage logs for vehicle usage.
  
• Underestimating SE tax and missing quarterly payments.
  
• Overlooking QBI limitations and failing to structure the side practice to qualify.
  
• Ignoring state‑specific tax rules for medical professionals.
  
  

Final Thoughts

Running a side practice can significantly increase your income, but it also introduces a range of tax responsibilities. Picking the proper entity, maximizing deductible expenses, monitoring SE tax, and employing retirement and health‑insurance tactics helps you preserve more earnings. Consistent work with a qualified tax professional and diligent recordkeeping form the foundation of sound tax planning for doctors with side practices. With the correct approach, you can dedicate yourself to quality care while reducing your tax load.