Early Sign on Bonus: Tax Free?

[milkycow]

Possibly signing a contract 2 years before end of residency in an area I've been looking into since med school. They are offering 50K-ish sign on bonus divided over the next 3 years. 1k/mo my 3rd year of residency and 2k/mo my 4th year of residency with the 10+k left fully paid out after working there for a year. So overall 36k over my last 2 years of residency. I was thinking I would rather have the bonus now while in a lower tax bracket then receiving it all at once on attending salary.

I was chatting with my program director today and he stated, that paying down my educational debt would afford me to possibly not having to pay the taxes on the stipend/sign on bonus. I searched the last year of this forum for sign on bonus situations comparable to my own but am still not much closer to answering my question.

I'll be moving to an ED in TX close to family and working as an IC. I'll also be moonlighting my last 2 years of residency as well. If what my program director said was true, then I would definitely throw all my sign on bonus to paying my student loans as well as much of moonlighting money. My resident salary can be used to pay for living, Roth IRA and 403b. Anyone have experience with this pay as you learn tract?

[PhysicianOnFIRE]

I've never heard of such a thing, but that doesn't mean it doesn't exist. I can tell you that I've collected a couple signing bonuses as an attending, and they were treated as taxable income.

[MrsIMDoc]

I looked into this with my signing bonus.  Even if your future employer directly paid your student loans, this is still considered taxable income. The benefit of paying student loans in a lower income bracket means you can deduct up to $2500 of your student loan interest (which you will not be able to do when you are an attending physician if you make average salary). Furthermore you are correct that you are paying tax on it in a lower income bracket, so it is still a good deal.  I would be prepared to pay the income tax on this as 1099 income and not W2 income, so be sure to calculate what you will owe so it is not a surprise.

Is signing a contract this far out (2 years) common in your specialty?

If any of the wiser WCI or CPAs disagree please comment!

 

Edited for grammar

[milkycow]

@Rex I also doubted it was too good to be true.

So the main benefits is I get to extract more utility from my sign on bonus by spreading it out while still a resident and paying at the lower tax bracket and doing deductions for student loan repayment. My ultimate goal at the beginning of residency was to trim my student loans below 6 figures, and it looks like I'm on tract while taking care of my Roth IRA and 403b

@MrsIMDoc I don't think it is common. There are probably few places that offer this in less desirable areas. If I do change my mind, I just have to either pay the full amount back or a prorated portion if I worked there for some time. It is a 2 year commitment.

[DMFA]

It will be *paid* to you tax-free, likely...but that just means nothing is withheld, and you still owe taxes on it all yourself...plus the employer portion of payroll taxes (SS/MCR). Don't fall into that trap of "hey, here's all this tax-free money!" and then when you file your taxes, wonder why you owe $20,000.

[Tuxedo]

DMFA wrote:

It will be *paid* to you tax-free, likely…but that just means nothing is withheld, and you still owe taxes on it all yourself…plus the employer portion of payroll taxes (SS/MCR). Don’t fall into that trap of “hey, here’s all this tax-free money!” and then when you file your taxes, wonder why you owe $20,000.

Click to expand...

It might be paid tax free.  But it probably shouldn't.  IRS rule 2004-109 states: Amounts an employer pays as bonuses for signing or ratifying a contract in connection with the establishment of the employer-employee relationship are wages for purposes of FICA, FUTA, and Federal income tax withholding.

 

Guess how I know  :roll: .

[Hank]

Even if the bonus is taxable, far better to get paid over a few low income years instead of during a higher income attending year.  Plus that's interest that won't compound on your student loans.

[Zaphod]

I have heard it structured as a loan if you end up not accepting, but for the most part its taxable on your end but agree with everyone noting its best taken in full at your lower paid years.

[Craigy]

No such thing as a free lunch.

[G]

On a bit of a tangent, don't lose the forest for the trees when it comes to signing up with a group so far in advance.

In our small-ish democratic fee-for-service EM group, we see a lot of residents who have already signed with big contract groups.  As a resident, that extra money is astounding.  But they will be making about 2/3 or less of what our partners make for the rest of their careers.  There is a reason that corporations are snagging residents and it's not to improve the doctors' bottom lines.  50k is a nice bonus, but depending on your specialty, it could be an extra day of call each month for that first year.  If you end up staying at the job (inertia and whatnot), it is a rounding error when considered in the context of a 20-30 year career.

Not saying any of this applies to you, just an observation.  And BTW I agree with everybody above regarding no free lunches.

[jfoxcpacfp]

I love it when administrators give ad hoc tax advice. The sign-on bonus is taxable. PeriodDotPeriod. Best to take it now in your low bracket and set up a SOLO-k with some of it.