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. Proper planning can reduce liability, preserve cash flow, and keep you compliant with federal and state regulations. This is a practical guide to navigating tax planning for doctors with side practices.

Why Side Practices Are Important A side practice changes the tax character of your earnings. What would normally be taxed as salary is now treated as self‑employment income, subject to Social Security and Medicare taxes. A blend of W‑2 income from your primary job and 1099 income from a side practice produces a hybrid tax environment. Each type of income has different deduction rules, reporting requirements, and timing considerations.

Key Tax Concepts for Doctors 1. SEAT – 15.3% on net self‑employment income. 2. QBI deduction – up to 20% of qualified business income per Section 199A, with limitations. 3. Corporate rates – incorporating may provide lower tax rates and distinct liability. 4. State taxes – numerous states tax medical earnings differently; some provide special exemptions or reduced rates for medical professionals.

Choosing the Right Entity

Schedule C

Simplest to set up; earnings are reported on Form 1040 Schedule C. All expenses are deducted on the same schedule; no separate corporate filing. SE tax is due on the net profit.

Limited Liability Company

Single‑member LLC treated as a disregarded entity; same as sole proprietorship for tax purposes unless you elect corporate taxation. Multi‑member LLCs file Form 1065; each member receives a K‑1. Provides liability protection without corporate formalities.

S‑Corp

Set a reasonable salary (W‑2) and take the surplus as shareholder distributions. Salary is subject to payroll taxes, but distributions are not subject to SEAT. Requires payroll setup, quarterly payroll tax filings, and compliance with IRS reasonable‑compensation rules.

C Corporation

A distinct legal entity; profits taxed at the corporate level (21% federal) and again upon dividend distribution. Useful for larger side practices or when planning to reinvest profits. Needs 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.

Tax‑Deductible Expenses

Rent or Lease of Office Space

Utilities, internet, and telephone

Professional Liability Insurance

Continuing Medical Education (CME) and Licensure Fees

Medical equipment and supplies like instruments and computers

Advertising and Marketing costs

Capital Asset Depreciation

Health Insurance Premiums (if self‑insured)

Business‑related Travel and Meals (50% deduction for meals)

Home Office Deduction if you have a dedicated space for patient care or admin tasks.

Remember: All expenses must be ordinary, necessary, and directly related to the side practice. Keep detailed records, receipts, and a mileage log if you’re claiming a home office or vehicle deduction.

Paying Self‑Employment Tax on Time

• Quarterly estimated tax payments (Form 1040‑ES) must be made if your side practice generates $1,000+ in SE tax.
  
• Use the "safe harbor" rule: pay 90% of last year’s tax or 100% of this year’s tax (110% if your adjusted gross income exceeds $150,000).
  
• Setting up automatic payroll for an S‑Corp reduces the risk of underpayment penalties.
  
  

QBI Deduction

• QBI permits a 20% deduction on qualified business income from a pass‑through entity.
  
• High‑income doctors face limits: wage and capital restrictions, plus the 20% threshold.
  
• Analyzing total income and side practice type is vital to maximize the deduction.
  
  

Health Insurance and Retirement

• Premiums paid by self‑insured doctors are fully deductible from gross income.
  
• Set up a Solo 401(k), SEP IRA, or 法人 税金対策 問い合わせ defined‑benefit plan to defer income and lower taxable wages.
  
• Contributions to these plans are limited by IRS rules; a financial advisor can help you stay within those limits.
  
  

Documentation and Recordkeeping

• Maintain separate bank accounts for the main practice and side practice.
  
• Record all income and expenses in a detailed ledger.
  
• Use medical‑practice‑specific accounting software to track reimbursables, deductions, and tax documents.
  
• 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.
  
• States such as California and New York impose extra taxes on medical earnings.
  
• Look into local licensing fees, business taxes, and health department permits that could apply.
  
  

Timing Tactics

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

Hiring Employees or Contractors

• Employees require payroll taxes, benefits, and compliance with labor laws.
  
• Independent contractors (1099) cut payroll overhead but heighten audit risk.
  
• Hire a qualified tax professional to classify workers correctly and dodge penalties.
  
  

Collaborating 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.
  
  

Common Pitfalls to Avoid

• Mixing personal and business expenses in the same bank account.
  
• Not maintaining detailed mileage logs for vehicle use.
  
• Failing to estimate SE tax accurately, leading to missed quarterly payments.
  
• Overlooking QBI restrictions and not setting up the side practice to qualify.
  
• Neglecting state‑specific tax rules applicable to medical professionals.
  
  

Wrap‑Up

Running a side practice can raise your income substantially, but it also creates numerous tax responsibilities. By selecting the appropriate entity, maximizing deductible expenses, staying on top of self‑employment tax, and leveraging retirement and health‑insurance strategies, you can keep more of your earnings. Regular collaboration with a qualified tax professional and meticulous recordkeeping are the cornerstones of effective tax planning for doctors with side practices. With the proper strategy, you can concentrate on high‑quality care while cutting your tax burden.