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Why Micro-Corporations Are the Tax-Smart Solution for Doctor Side Jobs

Oct 31, 2024

This was originally posted on Doctor Incorporated February 17, 2023 and has been edited for SimpliMD

As a doctor with a traditional W-2 position, you might have found yourself exploring side gigs to supplement your income or add more variety to your professional life. With physician shortages and the rise of telehealth, these opportunities are expanding. Yet, many of you quickly discover the pitfalls of having side income classified as W-2 earnings, which can push you into higher tax brackets without offering the tax advantages available to other structures. In the end you discover that the dollars from your side hustle actually benefit you less than expected.

A W-2 side job increases your income, but the extra earnings often result in a smaller take-home pay due to higher taxes

There is a solution to this conundrum, and it involves creating a micro-business for your side work and then making sure you job stack your extra work as 1099 income rather than W-2 income.

When I talk about "micro-business" or "micro-corporation," I'm describing a highly efficient business model with just one member. This structure is incredibly streamlined, often functioning entirely online, and is ideally suited for offering professional services. By embracing this approach, you can enjoy the benefits of minimal overhead and maximum flexibility, making it an excellent choice for today's dynamic healthcare market environment.

Start Your Business

When considering micro-business structures, it's important to weigh your options carefully. The simplest choice is a sole proprietorship, while slightly more complex alternatives include single-member corporations, also known as micro-corporations. Many doctors and their tax advisors favor the sole proprietor structure due to its simplicity and tax benefits. However, it's crucial to recognize the potential drawbacks of this setup—particularly the lack of asset protection it offers, which is a significant concern for individuals with substantial net worth like yourself. Additionally, once your side income surpasses $20,000, transitioning to a single-member micro-corporation becomes more tax-efficient than maintaining a sole proprietorship. This strategic shift could provide you with greater financial security and savings in the long run.

Incorporating yourself as a micro-corporation is a powerful way to keep more of your side income, leverage valuable tax strategies, and build greater professional autonomy. Let’s explore how setting up a micro-corporation can help you maximize your side gig income, ease your tax burden, and enhance your career flexibility.

Understanding the Problem: Why W-2 Income Can Feel Like a Tax Trap

When you earn side income as a W-2 employee, that money is subject to all the usual income and payroll taxes. If you are making $400,000 or more, that additional W-2 income can place you squarely in the IRS’s tax crosshairs. This can lead to a significant portion of your income going toward taxes, leaving you with less take-home pay than you anticipated. This tax burden can be even further intensified depending on the state that you reside in with California and Hawaii leading the way.

In contrast, independent contractor income (1099) through your micro-business offers more control over your earnings and the potential to utilize deductions that are unavailable to W-2 employees. However, not all employers or clients are keen to provide a 1099 option—often because they’re unaware of the benefits or accustomed to viewing physicians solely as employees.

This is why it’s important for you to actively have a mindset that you are a business, and that you have the right and the power request (demand) that your side job income be organized as 1099 compensation rather than W-2. Mindset matters here, and if you don’t understand this, when it comes time for you to fill out W-9 form for the employer, your

Side Gigs and Micro-Corporations: The Basics

A micro-corporation is a small business entity you own, typically structured as a Professional Limited Liability Company (PLLC) or S-Corp, allowing you to take on side work as an independent contractor. By forming this type of business, you create a financial and legal distinction between yourself and your income-earning activities.

As the owner of your own micro-corporation, you can:

Decide how you want to classify your side income (1099 income vs. W-2).
Deduct business expenses, including educational materials, travel, home office costs, and more.
Access tax-sheltered retirement savings options, such as SEP IRAs or solo 401(k)s.
Maintain greater control over your income through strategies like tax deferrals and income shifting.

How Micro-Corporations Help You Take Advantage of 1099 Income

Having a micro-corporation allows you to accept side gigs on your terms. Instead of simply receiving a paycheck, you’re building a business-to-business (B2B) relationship with those hiring you for your expertise. By arranging to receive this income as a 1099 contractor through your micro-corporation, you sidestep the limitations of W-2 classifications and open the door to valuable tax strategies.

Consider this scenario: Suppose your primary job is as an employed physician, but you receive an offer to consult for a startup or provide oversight on telehealth services. If they pay you as a 1099 independent contractor, you can benefit by:

Deducting expenses: Business expenses like medical association dues, professional development, travel, and a portion of your home office can be tax-deductible.
Maximizing retirement contributions: Self-employed retirement accounts have higher contribution limits than traditional employer-sponsored plans.
Controlling your tax rate: 1099 income offers flexibility in managing your tax burden, including the potential for deferral or adjusting your tax rate through deductible expenses.

Ready to maximize your side gig income? For a limited time, SimpliMD is offering a personalized micro-business consult for just $99. This includes a one-year SimpliMD membership worth $2500 in business resources, providing the guidance you need to optimize your side gig income.

How a Micro-Corporation Lowers Your Tax Burden

As a 1099 independent contractor operating through a micro-corporation, you can lower your taxable income through allowable deductions. Here are a few examples of deductions that can significantly reduce your taxable income:

Home Office Deductions: Even if you have a dedicated workspace for your W-2 job, any home office you maintain for your micro-corporation work is tax-deductible.
Travel and Vehicle Expenses: Travel for business, whether to conferences, client meetings, or industry events, is deductible. Similarly, vehicle expenses used for business-related travel can be deducted, either through standard mileage or actual expense calculation.
Professional Development: Costs associated with conferences, courses, and certifications to maintain or enhance your professional knowledge qualify as business expenses.
Retirement Contributions: As a small business owner, you can maximize retirement contributions to self-employed retirement accounts such as a solo 401(k).

Beyond Tax Savings: Professional Autonomy and Flexibility

Owning a micro-corporation isn’t just about tax benefits. It’s about establishing yourself as a self-directed professional in the healthcare marketplace. As a micro-corporation, you are building the foundation of your own business, giving you more say over your income sources, workload, and schedule.

In addition to tax advantages, micro-corporations offer physicians a pathway to:

Greater autonomy: Free yourself from some of the constraints and bureaucracy of traditional W-2 employment.
Increased marketplace options: Opportunities for telehealth, consulting, and remote work are all more accessible when you’re not tied to a W-2 structure.
Building an enduring business asset: By investing time and energy into your micro-corporation, you create a scalable business that can continue to benefit you well into the future.

Take the next step toward building your professional autonomy. Enroll in my “Creating A Practice Without Walls” course and gain the insights you need to structure a micro-corporation that provides you with control and agency in the marketplace.

Business Tools to Simplify Your Path to Micro-Corporation Success

Getting started with a micro-corporation doesn’t have to be complicated. SimpliMD offers tailored business tools to streamline the process:

Business Plan Template: A customizable template designed for self-employed doctors, guiding you through structuring your business plan for success.
Micro-Corporation Budget Template: Save hours by using a budgeting tool that allows you to track your income, expenses, and tax-deductible expenses easily.
SWOT Analysis Template: Assess the strengths, weaknesses, opportunities, and threats of your micro-corporation to make informed decisions that optimize your business.

Optimize your business planning with SimpliMD’s Business Plan Bundle. Gain access to a Business Plan Template, Budget Template, and SWOT Analysis Template designed for doctors navigating the self-employed landscape.

Conclusion: Setting Yourself Up for Financial Success

Embracing a micro-corporation can be transformative for doctors with side gigs. From tax savings to professional autonomy, the benefits are clear. When structured as a micro-corporation, your side gig income becomes an asset that works for you, offering freedom, control, and increased financial rewards.

Don’t wait until your next opportunity arises to think about forming a micro-corporation. Prepare now, and you’ll be ready to receive income on your terms when new offers come your way.