Determining Your Salary as a Self-Employed Doctor

This article was originally published at Dr. Incorporated on June 30, 2023 as The Self-Employed Physician’s Guide To Determining Their Salary

How Much Should You Pay Yourself? Understanding the Value of Your Services

In a previous post The Truth About Physician Compensation I emphasized the importance of getting paid what you’re worth. This is crucial whether you're an employee or a self-employed small business owner. Knowing the value of your professional services is essential for negotiating a fair-market-value contract. If you have never done it, I highly recommend $297 well spent is checking your FMV with a Contract Diagnostics’ Compensation Rx.

How Much to Pay Yourself?

A self-employed physician from California, who is a radiologist, posed a great question to me recently as he was learning about the business of medicine:

“What if you own the business and pay yourself?”

This question is relevant whether you're in traditional private practice or doing a practice without walls. BTW, I invite you to take my course “Creating A Practice Without Walls” which is on sale this month for half off using the coupon code “EARLYBIRD’.

In this post, I'll address the radiologist question from the perspective of a single-member professional corporation owner working as an independent contractor via an employment lite agreement—a scenario I'm personally familiar with and can read the long version of it in my best selling book “Doctor Incorporated: Stop The Insanity of Traditional Employment and Preserve Your Professional Autonomy”,and the summary version in my blog post My Journey To Empowering Physicians Through SimpliMD

Your Professional Micro-Corporation Will Be Paid

When operating as an independent contractor in the medical field, your professional services compensation is directed to your corporation rather than to you personally. This comprehensive compensation package encompasses several components, including your salary, any associated benefits, and professional fees. The total value of this package should reflect the fair market value of your services as a medical professional. If you are transitioning from traditional employment to an employment lite agreement, or if you're starting a new position under such an arrangement, it's crucial to ensure that your corporation receives compensation equivalent to the total fair market value labor expense of an employed physician. This "grossed up" figure is designed to cover all aspects of your professional compensation, including your base salary, benefits package, and professional fees.

One significant element to consider in this calculation is malpractice insurance. As an independent contractor, you're typically responsible for securing your own malpractice coverage, which can be a substantial expense. Therefore, the compensation package should account for this additional cost that would otherwise be covered by an employer in a traditional employment setting. It's important to carefully review and negotiate the terms of your agreement to ensure that all these elements are adequately addressed and that the total compensation accurately reflects your value as a medical professional. This approach helps maintain financial parity with employed physicians while offering the flexibility and potential tax advantages of operating as an independent contractor through your own corporation. To go deeper, check out my post Medical Malpractice Considerations For Independent Contractors

Whether employed traditionally or through an employment lite contract, your compensation should be equivalent. The key is to maximize the Fair Market Value of your contract. I recommend Contract Diagnostics' Compensation Rx for only $297 to determine your true value.

Diversifying Revenue

As a professional micro-business owner, incorporating side job incomes can significantly enhance your overall financial stability and contribute meaningfully to your primary job compensation. This diversification strategy mirrors the practices of larger enterprises, demonstrating that even small-scale operations can benefit from multiple revenue streams. By cultivating various income sources, you create a more robust and resilient financial foundation for your micro-business. Diversified revenue sources offer several advantages for small businesses, including reduced financial risk, increased cash flow stability, and potential for growth. These additional income streams can act as a buffer during slow periods in your primary business, providing a financial safety net. Moreover, engaging in side jobs can often lead to new skills acquisition, expanded professional networks, and fresh perspectives that may ultimately benefit your core business activities. You can read more about this in my post: The Rise of 1099 Side Jobs: A Guide To Thriving

How Much Should You Pay Yourself?

Once you have a predictable annual corporate revenue (based on FMV contracts), you can start strategizing your salary—especially if you're a high-income earner like a doctor. Unlike many small business owners, your income is predictable but lacks scalability due to being a single-member corporation—frankly you as a single person you can only see so many patients or do so much work—you have limitations. Thus, your revenue ceiling is defined by the amount of work you can personally handle.

The Fun

For self-employed physicians, the “fun” lies in maximizing the tax efficiency of your earnings. To reflect more on this check out my blog Can Self-Employed Doctors Save Taxes with Lower Salaries? Unlike traditionally employed peers taxed through the W-2 channel, you have options for your earnings flow into your household when you are self-employed. Your household income will come via four basic channels: salary, distributions, tax-advantaged household income/expenses, and tax-deferred retirement plans. Understanding these cash flow channels and how they tax efficiently get money into your household is a critical concept to understand as a micro-business owner. In the end, your household dollars “hit different” in comparison to the periodic paycheck you receive when you are employed by a large corporation.

Reverse Engineering

With predictable professional earnings, you can determine your salary and other household income sources that flow through your micro-corporation to your household through a reverse engineering process. The three variables you should ensure you have to sort out the projected cash flow include:

1. Annual Household Expenses: Know your annual spending, including loan and credit card payments. This is the minimum salary you should set, because in my humble opinion your self-employment salary should cover this expense in full. This will make sure you are not living a consumptive lifestyle that forces you to live paycheck to paycheck. A personal financial plan is. great way to globally organize this. Check out my blog post that explains the power of a personal financial plan: How To Save $5 Million For Financial Freedom

2. IRS-Compliant “Reasonable Salary”: Pay yourself the lowest reasonable salary expected for a physician of your specialty as expected by the IRS. Remember a “reasonable salary” is really a range, and you will be able to pay less FICA tax if you keep your salary in the lower range. This helps minimize payroll taxes while avoiding IRS audits if you are flagged by trying to pay yourself an unreasonably low salary. If you are uncertain about this, make sure to speak to a tax professional.

3. Evaluate which tax classification (S-Corp or C-Corp) is best for your professional corporation in order to maximize your tax-advantaged dollars. This is highly individualized and I recommend you work with a tax professional to analyze this. I am happy to consult with you to guide you to a professional within our SimpliMD network if you are unsure about things. You can go here to schedule a consultation. You can also read my blog post: Choosing the Right Business Entity for Your Professional Micro-Corporation. Here are some general considerations:

   1. S Corporation: Allows profits/losses to flow directly to personal tax returns. Shareholders can pay themselves a reasonable salary and receive additional income through distributions, which are not subject to self-employment taxes. Most doctors with a professional micro-corporation will choose this tax classification.

   2. C Corporation: Separate legal entity for taxes/liabilities. You receive a salary subject to income and payroll taxes. Profits are taxed at the corporate level and distributions may face additional taxes.

The 60/40 Rule

For S-Corp owners, I recommend allocate at least 60% of your micro-corporation’s income to you as a salary and no more than 40% as distributions to ensure compliance and optimize tax savings. Obviously, your business will also have some expenses that will need to be considered before making a distribution (thus it will be less than 40%).

Example: Radiologist in California

Dr. Smith, a radiologist in California, has established a single-member professional corporation and earns $600,000 annually through an employment lite agreement. Here’s how Dr. Smith can structure the income:

• 60% Salary: $360,000 as W-2 income

• 40% Business Channels:

  • Tax Advantaged Household Income/Expenses: $120,000

  • Tax Deferred Retirement Plan: $80,000

  • Business Distributions: $40,000

In this structure, only $360,000 is subject to payroll taxes compared to the full $600,000 if Dr. Smith were traditionally employed. By utilizing the 60/40 rule, Dr. Smith can optimize tax savings and ensure compliance with IRS guidelines.

Summary

Determining your salary involves analyzing financial health, personal needs, market conditions, goals, and tax options. Seek professional guidance and continuously evaluate your situation to establish a fair, sustainable salary structure.

Call to Action

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If you need personal guidance, reach out to me for a business consultation. I would love to get to know your story and help you thrive through a micro-corporation. By consulting professionals specializing in physician finances and leveraging the outlined strategies, you can ensure compliance, optimize your tax obligations, and achieve financial success.