New Academic Attending - Benefits to doing Locums?

[olbaid07]

Hello.  I'm a new anesthesiology academic attending.  Married and childless (fur baby for now).  Don't own a home yet.

Currently my setup is as follows as a W2 employee:

30k in 401A (directly by employer)

18K in 403B (by me w/ no matching available)

18k in 457 (by me w/ no matching available)

5.5K (x2) in Backdoor Roth IRA for spouse and I

No HSA available to me

No investments in 529 plan (yet - in South Carolina we can get a deduction of up to $700 on state taxes)

I've read through the classics on this forum and it has me really entertaining the idea of starting a C-corporation and doing Locums in order to be able to set up an individual 401K and to be able to make deductions.

Questions assuming I can make an additional 30K via Locums:

1) Is this the best way to structure my supplemental income? (ie: C-Corp vs 1099)

2) How much would I be able to contribute to the individual 401k assuming 30K locum salary?

3) Anything else I should / could be doing?

[willpmd]

i have no answers, but am very interested in the response!

[jfoxcpacfp]

olbaid07 wrote:

Hello.  I’m a new anesthesiology academic attending.  Married and childless (fur baby for now).  Don’t own a home yet.

Currently my setup is as follows as a W2 employee:

30k in 401A (directly by employer)

18K in 403B (by me w/ no matching available)

18k in 457 (by me w/ no matching available)

5.5K (x2) in Backdoor Roth IRA for spouse and I

No HSA available to me

No investments in 529 plan (yet – in South Carolina we can get a deduction of up to $700 on state taxes)

I’ve read through the classics on this forum and it has me really entertaining the idea of starting a C-corporation and doing Locums in order to be able to set up an individual 401K and to be able to make deductions.

Questions assuming I can make an additional 30K via Locums:

1) Is this the best way to structure my supplemental income? (ie: C-Corp vs 1099)

2) How much would I be able to contribute to the individual 401k assuming 30K locum salary?

3) Anything else I should / could be doing?

Click to expand...

1. C-corp and 1099 are comparing apples to oranges. 1099 is a method of income payments and reporting. A corporation is an entity. Unless the tax law significantly changes to make a C better for physicians, C is absolutely NOT the way to go. You will need to be a sole prop, LLC, or S-corp. The facts and circumstances will dictate.


2. $6k assuming you have no related expenses. The calculation is based on net - not gross - income.


3. Plenty. There are books written about these topics. This is not a DIY project to attempt without the counsel of an experienced CPA.

[DMFA]

It will not be worth doing corporate taxes for a single earner since you're not supposed to take a distribution for actual work done by you anyway, hence there's no tax benefit. Your earnings would be paid 1099 untaxed to you as a sole prop.

You will owe both employee and employer portions of FICA, 6.2% SS and 1.45% MCR, so 7.65% x 2 = 15.3% on it, in addition to income tax at your marginal rate.

You can contribute up to 20% net profits to an individual 401(k). That is defined as 0.2 x (revenue - expenses - [0.5 x self-employment tax]). This will end up being more like 18.5% of revenue minus expenses.

[StarTrekDoc]

Another option to KIS:  Moonlight or simply higher compensation/work within the institution to bolster the pension base?   No tax deferrable benefit, but a lot easier bookkeeping.

[RadMD]

If Locums isn't a possibility, WCI also talks about doing an online survey just to receive a 1099 and qualify for solo 401ks, etc.  Doesn't matter how much 1099 income you have, if you have any at all, it opens the doors for ya.

[jz]

Aside from the financial question, working locums in a community will accelerate your professional development. Consider working at the same shop long term to establish your footing.  The community setting will challenge you to grow.  Congratulations on your next step.

[RogueDadMD]

RadMD wrote:

If Locums isn’t a possibility, WCI also talks about doing an online survey just to receive a 1099 and qualify for solo 401ks, etc.  Doesn’t matter how much 1099 income you have, if you have any at all, it opens the doors for ya.

Click to expand...

I don't think I have heard this before.

I have maybe $1000 in 1099 income a year (teaching PALS resuscitation courses occasionally).  I can open up a solo 401k and put in $10k if I wanted?  That seems odd.  I must be missing something here...

[DMFA]

RDMD - yes, you could open one, but if you're already maxing the employee portion with other 401(k) or 403(b), you can only put in 20% of net profit.

[jfoxcpacfp]

To tag onto @DMFA's corrrect information, the reason many (if not most) docs open a SOLO-k with a small amount of income is for backdoor Roth insurance. The amount you contribute is not as important as having the receptacle for future rollovers of retirement plan monies when you change jobs. So even if you contribute only $200, mission accomplished. Otherwise, you are stuck with either leaving your retirement accounts behind with your old employer, rolling to your new employer (both of which cause you to lose a measure of control over your choices) or rolling out to an IRA.

[RogueDadMD]

Ah, excellent advice as always.

So another question. Last year I earned even less than previous years and was below the cutoff to get a 1099. I still reported the income ($500 maybe?)

Do I have to have had the 1099 to open a solo 401k this year? I did max my regular work 403b.

If I deduct expenses against my $500 or $1000 then then I can only contribute 20% of that remaining total?

My blog has $0 income so far. But I will be able to deduct internet and hosting the expenses and other things against my ordinary income (correct?). Once I have actual blog income do I need to set up an LLC or something to actually do the solo 401k?

[jfoxcpacfp]

Rogue Dad, M.D. wrote:

Ah, excellent advice as always.

So another question. Last year I earned even less than previous years and was below the cutoff to get a 1099. I still reported the income ($500 maybe?)

Do I have to have had the 1099 to open a solo 401k this year? I did max my regular work 403b.

If I deduct expenses against my $500 or $1000 then then I can only contribute 20% of that remaining total?

My blog has $0 income so far. But I will be able to deduct internet and hosting the expenses and other things against my ordinary income (correct?). Once I have actual blog income do I need to set up an LLC or something to actually do the solo 401k?

Click to expand...

The payor of payments to another < $600 for services does not require the payor to issue a 1099 to the recipient. Whether or not you get a 1099, you are still required to report the income. I'm glad you did, as ppl are often confused by the distinction. You do not have to receive a 1099 to open a SOLO-k, just need to have SE income (gross business receipts less business expenses). The contribution is calculated on the bottom line, iow.

You also don't have to set up an LLC to have a 401k. However, I would recommend an LLC for your blog, anyway, for protection. You doctors tend to be lawsuit magnets, ya know.

[Sean]

Also, even if your side gig shows a loss, i.e. your expenses exceed your gross revenue as you're just starting out, you can still open a solo 401k as long as you have an EIN and some 1099 income, no matter how small.  If you show a loss, you obviously cannot contribute to the solo 401k.  However, the advantage is that, as Johanna said, you've established a receptacle for any rollovers from prior 401k's, IRA's, and any future profit sharing funds once your side gig turns a profit, as well as be able to do a back door Roth without having to deal with pro rata calculations.

Agree, Johanna?  Or am I way off?

Re: calculations, is it correct for a sole proprietor that:

Gross Revenue - Expenses = Net Income

Net income x 92.35% x 15.3% = Self employment (SE) tax

0.2 [Net income - 0.5(SE tax)] = maximum profit sharing contribution allowed (up to IRS limit) ?

But how's the employEE contribution calculated?  Is it 100% of net income before or after calculating SE tax?

Thanks in advance!

[Dreamgiver]

You might also want to check and make sure your employer will let you work somewhere else. Many will not. If income is the issue, why not just look for a place that pays more? This is a great job market for anesthesia.

[jfoxcpacfp]

Sean wrote:

Also, even if your side gig shows a loss, i.e. your expenses exceed your gross revenue as you’re just starting out, you can still open a solo 401k as long as you have an EIN and some 1099 income, no matter how small.  If you show a loss, you obviously cannot contribute to the solo 401k.  However, the advantage is that, as Johanna said, you’ve established a receptacle for any rollovers from prior 401k’s, IRA’s, and any future profit sharing funds once your side gig turns a profit, as well as be able to do a back door Roth without having to deal with pro rata calculations. Agree, Johanna?  Or am I way off?

Click to expand...

Honestly, I've never considered this angle. Almost all of the discussion on this forum has been about calculating the amount of the contribution, not the requirements for establishing a plan. However, I've found this statement in my research: " It is generally believed that the IRS will consider you eligible if the business being conducted is a legitimate business that is run with the intention of generating profits." (emphasis added) That appears to support your statement, but it came from another vendor, not the throne itself.

I will continue looking but would like to have a definitive answer and, therefore, hope we can rouse @spiritrider to respond and clear this up. @spiritrider, are you reading this?  You're the next best thing to the IRS.