Retained Income: How to Keep More & Work Less

This was originally published August 26, 2022 on Dr. Incorporated as well as KevinMD April 19th, 2022. It has been edited for SimpliMD

Imagine there is a change of seasons and when you place your jacket from last winter and discover cash in the pocket that you had completely forgotten existed. It’s like finding “lost money” that’s been there all along—yours to keep, but hidden from view. For doctors, this scenario is incredibly similar to a valuable but often overlooked concept: retained income.

Most doctors focus on earning active income through their primary job and might dabble in generating passive income through investments or side ventures. But there’s another source of income that can be just as significant—and it doesn’t require any extra work. It’s retained income: the money you already earn but end up “losing” to various forces, with the IRS often being the main culprit.

Retained income is the money you can reclaim, much like discovering that money in your jacket. It’s yours, but you need to know how to access it. In this post, we’ll explore how doctors can start finding this lost money, with a real-life case study showing how a physician managed to retain 15% of their earnings simply by restructuring their income streams.

What Is Retained Income?

Retained income is money you keep by optimizing the way your income is funneled to you. Instead of earning more by working harder, retained income is about holding onto more of what you’ve already earned. When structured properly, retained income can result in significant savings—especially when taxes come into play.

Many physicians are accustomed to focusing solely on the income they bring home through their professional work. And while active income—the money earned from your main job—is important, it shouldn’t be your only focus. Passive income from investments is another valuable source, but it also often gets more attention than retained income.

But what if there were a way to keep more of your active income without needing to earn more or invest extra? Retained income is that hidden source of financial empowerment, and it’s one that many doctors overlook.

The Active, Passive, and Retained Income Distinction

It’s useful to break down your potential income sources into three categories:

1. Active Income – This is the money you earn from your day-to-day job, which could be a W-2 salaried position or other side work.

2. Passive Income – This is the money that flows to you from investments, real estate, dividends, or royalties.

3. Retained Income – This is the money you keep after carefully managing your income to reduce tax liabilities and other expenses.

Many of you are often hyper-focused on your active income. Some venture into passive income strategies like investing in real estate or starting side hustles. But very few of you give much thought to retained income, which involves proactively managing the flow of earned dollars to maximize retention, usually by taking advantage of business structures and tax laws.

Case Study: How One Doctor Retained 15% of Their Earnings

Let’s take a look at Dr. Smith, a mid-career physician who has been working full-time at a hospital for the past decade. For years, Dr. Smith’s income was solely W-2 based, meaning it flowed directly through her employer, who took out all the necessary taxes before it hit her bank account. Like many doctors, she didn’t think much about it.

However, after years of feeling that her take-home pay was lower than it should be, Dr. Smith began to explore ways to retain more of what she was earning. After a consultation with SimpliMD, Dr. Smith restructured her income into a hybrid setup—50% W-2 income from her employer and 50% 1099 income that flowed through her new micro-corporation.

This hybrid approach had significant tax advantages:

• W-2 income still went through her employer, but Dr. Smith was able to minimize the total amount taken out in federal, state, and local taxes.

• 1099 income, paid to her micro-corporation, allowed her to utilize a variety of tax deductions that she couldn’t access as an employee, such as business expenses, retirement contributions, and healthcare costs.

By job stacking—combining her W-2 salary with 1099 independent contractor work through her micro-corporation—Dr. Smith was able to retain an additional 15% of her earnings each year. For her, this meant keeping $45,000 more annually than she had previously, without having to work any additional hours. This newfound money was like discovering “lost money” in her finances that had previously been funneled straight to the IRS.

The Power of Retained Income: Why It’s Like Finding Lost Money

The real beauty of retained income is that it doesn’t require you to put in more hours or take on more work. It’s about using the right strategies to reduce your tax burden and optimize the income you’re already earning. For doctors, this often means incorporating a professional corporation (PC) or limited liability company (LLC) into their financial picture, which offers flexibility and tax advantages.

For employed doctors, the concept of retained income may seem out of reach because they’re used to receiving a W-2 paycheck and not thinking much beyond that. But as Dr. Smith’s case demonstrates, even employed physicians can benefit from setting up a micro-corporation that collects a portion of their earnings in the form of 1099 income. By making strategic decisions about how income is received and taxed, doctors can find that “lost money” they’ve been handing over to the IRS year after year.

How to Start Retaining More Income Today

There are a few practical steps any physician can take to start reclaiming their retained income:

1. Establish a Professional Micro-Corporation Even if you’re currently employed full-time, setting up a micro-corporation can open the door to significant tax savings. This corporation can collect income from various professional services, allowing you to take advantage of business deductions and other tax-saving strategies.

2. Job Stack with W-2 and 1099 Income Consider a hybrid model where part of your income comes through a traditional W-2 paycheck and part comes through 1099 contractor work that flows through your corporation. This approach allows you to optimize taxes and deductions.

3. Maximize Business Deductions As a business owner, you can take advantage of a variety of deductions that aren’t available to W-2 employees, including office expenses, travel, healthcare costs, and more.

4. Consult with a Professional Understanding the nuances of tax law can be complex, which is why it’s often worth investing in a personalized consultation to ensure you’re structuring your income in the most tax-efficient way. Although I am not a legal, accounting, financial, or tax professional, I speak to doctors weekly to offer business guide services and coaching based on my personal experience. Ultimately, doctors prefer to trust other doctors who understand their complex lives to connect them with legal and tax professionals who use the micro-corporation playbook to help them thrive

SimpliMD Can Help You Reclaim Your Lost Income

At SimpliMD, we specialize in helping doctors reclaim their retained income through the strategic use of professional micro-corporations. By creating your own micro-business, you can keep more of what you earn without having to work harder.

For only $99, you can receive a personalized micro-business consult that includes a full-year of SimpliMD membership (valued at $2500) with access to our suite of business products designed for physicians. You’ll also learn how to retain more of your earnings and take control of your professional life.

You can also download my free e-book 4 Strategies Doctors To Retain More of Their Earnings.

If you’re ready to take the next step, check out my course, “Creating A Practice Without Walls.” This course teaches you how to create a micro-corporation that gives you more agency in the marketplace, opening the door to both financial freedom and professional autonomy.