Key Points
- Locum tenens providers are independent contractors.
- You must file a Schedule C with your annual tax return.
- Keep good records to take advantage of deductions.
SELF-EMPLOYMENT AND LOCUM TENENS
In most situations, locum tenens practitioners are considered "self-employed." According to the IRS, individuals are self-employed
if they are in business for themselves, carry on a trade or profession as sole proprietors, or are independent contractors.
Under these guidelines, doctors are considered independent contractors unless an employee-employer relationship exists. Individuals
fall into the independent contractor category if the payer has the right to control or direct only the result of the work
and not what will be done and how it will be done.
The independent contractor classification carries important responsibilities. When reporting income from locum tenens opportunities
that meet this classification, you must file a Schedule C with your annual tax return. Furthermore, since most income de-rived
from self-employment is not sub-ject to federal withholding, you must also pay self-employment tax and make estimated tax
payments, in addition to federal income tax. SELF-EMPLOYMENT TAX
Self-employment tax is the equivalent of the tax paid through federal withholding for both Medicare and social security taxes,
and must be paid if net earnings from self-employment exceed $400 annually. It is assessed at 15.3% of the self-employment
income for 2008, of which 12.4% goes toward social security benefits and 2.9% for Medicare.
To report self-employment tax, use Schedule SE of the 1040 form. Notably, self-employment tax is only applied to the first
$102,000 of your earned income and phases out at income levels above this threshold. An important benefit of paying self-employment
tax is the ability to deduct half of the self-employment tax paid from the adjusted gross income, which offsets your federal
tax liability.
ESTIMATED TAX
Because there is no requirement for federal income tax withholding, independent contractors must regularly assess and pay
estimated quarterly federal income tax payments. These payments are actually used to pay both the self-employment tax described
above and income tax. Estimated tax payments are required if you expect to owe $1,000 or more after subtracting withholding
and credits, or if you expect withholding or credits to be less than the smaller of 1) 90% of the tax shown on your 2008 return,
2) 100% of the tax shown on your 2007 tax return (if your income is $150,000 or less), or 3) 110% of the tax shown on your
2007 tax return (if you earn more than $150,000 annually).
Calculating estimated tax due is particularly complex if your income varies from year to year by an appreciable margin. Factors
to take under consideration include your average gross income, eligible credits and deductions, and taxes assessed. Keep in
mind, too, that whether deductions and credits are phased out depends on certain income ceilings and these rules change annually.
Deadlines and forms for submitting quarterly estimated tax payments are available at
http://www.irs.gov/ under Form 1040-ES. Recently, the IRS has also set up the Electronic Federal Tax Payment System (EFTPS) to allow individuals
or businesses to submit estimated federal tax payments electronically by phone or via the Internet. You can arrange for these
payments to be made weekly, monthly, or quarterly by electronic fund transfer and they are free of charge. Filing estimated
tax payments on time is important because there are penalties assessed when insufficient tax is paid through the combination
of withholding and estimated tax payments or when estimated tax payments are remitted later than the specified deadlines for
each quarter.
