Physician Side Gigs: Business Structure, Taxes, and Investment Strategies
Taking on a side gig can be an exciting way for physicians to earn extra income, explore interests, and maximize financial opportunities. But let’s be honest—when it comes to managing a side hustle, the details can get overwhelming. How should you set it up? What’s the deal with taxes? And are there smart ways to invest that extra cash? These are the questions every physician with a side gig needs to address.
Fortunately, you’re not alone. Today, we’ll dive into the essentials: choosing the right business structure, managing taxes for your 1099 income, and making the most of investment opportunities tied to your side hustle. Ready to take charge of your side income? Let’s get started.
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Choosing the Right Business Structure
When starting a side gig, your business structure matters. It’s not just about paperwork—it influences everything from taxes to liability protection.
Sole Proprietorship: Quick and Simple
As a sole proprietor, you’re the business. It’s simple, minimal in setup, and operates under your name. But don’t overlook the importance of getting an Employer Identification Number (EIN) from the IRS. Why?
- Protect your Social Security number: Think of the EIN as your business’s Social Security number. It’s safer and more professional.
- Handle future compliance: If you start a solo 401(k) down the road, your EIN will be essential.
That said, sole proprietorships come with risks. Without additional layers of business protection, your personal assets could be vulnerable in a lawsuit. That’s where other structures, like LLCs, come into play.
LLC: More Structure, Better Organization
A Limited Liability Company (LLC) is a popular choice for side gigs. The name suggests liability protection, but that’s not its only role. The real appeal is creating a formal entity for your business, separate from your personal life.
For example, imagine you open a storefront for your side gig, and someone slips on your wet floor. If you’re a sole proprietor, your personal assets might be on the line in a lawsuit. With an LLC, only the business assets are at risk—if you run the business properly.
Key tips for operating an LLC correctly:
- Open a business bank account and credit card under the LLC’s name.
- Don’t mix personal and business finances.
- Treat it like an actual business, not just a side hobby.
But don’t assume an LLC is foolproof. If you misuse its benefits—like paying for personal expenses out of your business account—lawyers could “pierce the corporate veil.” Translation: you lose your protections.
S Corporation: Worth the Complexity?
You might hear about S Corporations (S Corps) if your side gig grows significantly. Despite the name, an S Corp isn’t a separate business entity—it’s a tax election you file with the IRS.
The key advantage? S Corps lets you split your earnings. You can take part of your income as a salary, which is taxable, and the rest as distributions, which often face lower taxes. But tread carefully. If your side hustle earns $20,000-$40,000 a year, the added complexity of payroll and salary calculations may not be worth it yet.
Once your income hits a certain threshold, making the S Corp election can lead to significant tax savings. Just be sure to work closely with your accountant.
Tackling Taxes on 1099 Income
Taxes are a major shift when you move from W-2 income to 1099 side gig earnings. The freedom to earn extra income is great, but it comes with higher responsibilities—and, occasionally, surprises.
The Reality of 1099 Taxes
If you’re new to 1099 income, here’s the first thing to understand: nothing is withheld for taxes. You’re responsible for federal income tax, state tax, and all employment taxes. For most people, this means setting aside 30% to 50% of every check for taxes.
Why so high? As a 1099 earner, you pay both employer and employee sides of Social Security and Medicare taxes—what’s called self-employment tax (15.3%). Combine that with your regular income tax rate, and the total creeps up quickly.
Don’t Forget Quarterly Tax Payments
1099 income means you’ll likely need to make quarterly estimated tax payments to the IRS. These are due four times a year and are based on your side gig income. Missing these deadlines or trying to “catch up” at the end of the year could lead to penalties. Plan ahead and stay on track.
Deductions: The Bright Side of 1099 Income
Here’s the silver lining: you get access to business deductions, which can offset a big chunk of your tax burden. Think of these as opportunities to turn your work expenses into tax savings.
Standard deductions physicians can take advantage of:
- Home office expenses: Dedicate a corner or room exclusively for work, and you can deduct $5 per square foot (up to $1,500) or itemize actual costs like utilities and mortgage interest.
- Equipment and supplies: Computers, stethoscopes, scrubs—you name it.
- Professional costs: CME trips, licenses, and subscriptions are all fair game.
- Cell phone and internet: If used for work, these costs are deductible too.
- Health insurance premiums: Only if you pay them out of pocket for your 1099 work.
Important reminder: never double-dip. If your W-2 employer reimburses your CME costs, you can’t deduct it again for your 1099 income.
Plan Ahead for Taxes
Every time side gig money hits your account, immediately set money aside for taxes. Most physicians should aim to save 50% upfront. It sounds painful in the short run, but your future self will thank you when tax season rolls around.
Investing Side Gig Income
Wondering what to do with all this extra 1099 income? Smart investing can help secure your financial future while offering even more tax breaks.
Solo 401(k): A Game-Changer
One of the best perks of 1099 income is access to a solo 401(k). If you’re already maxing out your retirement accounts through a W-2 job (like a 403(b)), the solo 401(k) gives you a whole new bucket to save for retirement.
For 2024, you can contribute:
- $23,000 as an “employee.”
- Up to $69,000 total, including “employer” contributions based on your profits.
This allows for significant pre-tax savings, which lower your taxable income for the year. Plus, solo 401(k) plans won’t block your ability to do backdoor Roth IRA contributions—something SEP IRAs typically do.
Roth or Pre-Tax?
If you’re in a high tax bracket, it’s usually smarter to take the tax break now with pre-tax contributions. Down the road, during retirement, you can explore Roth conversions when your income likely drops.
Cash Balance Plans for High Earners
Is your 1099 income six figures or more? Beyond a solo 401(k), consider a cash balance plan. Think of this as an old-school pension plan—designed for high-income earners to stash even more money pre-tax. With this setup, you might be able to contribute an additional $100,000-$200,000, depending on your situation. The savings add up for physicians in high-tax states like California or New York.
Putting It All Together
Physician side gigs come in all shapes and sizes—some bring in a few thousand dollars a year, while others generate hundreds of thousands. No matter where you fall on the spectrum, careful planning can help you make the most of your effort.
A Special Note for Academic Physicians
If you’re an academic physician with a W-2 job and side gigs, you’re in a particularly unique position. Combining university retirement benefits with 1099 income opens doors to extra savings and advanced tax planning strategies. It’s a sweet spot for financial optimization.
The Bottom Line
Starting or managing a side gig as a physician doesn’t have to be intimidating. You can turn your extra income into a financial powerhouse with the right business structure, proactive tax planning, and smart investing. Whether you’re just starting out or already building momentum, there’s always room to improve your approach.
So, what’s your next step? Define your goals, get your financial team on board, and start taking action. Your future self will thank you.
Looking for a more thorough all-in-one spot for your financial life? Check out our free eBook: A Doctor’s Prescription to Comprehensive Financial Wellness [Yes, it will ask for your email 😉]