Taxes, Taxes, Taxes! Why the Locum Tenens Physician Comes out on Top!
/Well, its Tax Time again. For most physicians, this is a complicated and often confusing subject. Employed? Then perhaps your W2 income is taxed and you don’t worry as much. Private practice? The sky is the limit for how complicated your tax structure may be. Locum Tenens? Well, locums work has its pros and cons, and taxes can be put in both these categories. There are huge tax benefits to for an independent contractor and there are also some huge pitfalls. Let’s slow it down a step and go through the issues a locum tenens doctor will face with taxes starting with the basics.
The most important difference between locum tenens and an employed doctor is that a locums doctor is an independent contractor. That means an employer is not responsible for taking taxes out of your paycheck, and the locums doctor will be responsible for keeping track of all that is owed. When working a permanent position as an employed doctor, you will be asked to complete a W-4 form that determines how much taxes to take out of your paycheck. This amount stays constant unless you change it. Assuming no unforeseen errors or issues, when April comes around you should be close to where you need to be with taxes. We understand this is an oversimplification, but the vast majority of the tax burden has been handled with each paycheck and the nuances of accounting will depend on your individual situation. As a locum tenens doctor, you will instead be filling out an IRS 1099-MISC form, meaning you owe taxes on all that you were payed over the prior year, since your locums assignments/ staffing agencies did NOT take the taxes out at the time of each paycheck. We are going to take a deeper dive into the details of this.
Let’ start with the mandatory taxes. A locum tenens doctor will have to prepare to pay their federal income tax. The rate at which you pay will depend on your total salary for the year. There are seven federal tax brackets for the 2019 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status. These are the rates for taxes due in April 2020. Assuming you are single or married, making roughly between $200,000 to $500,000, you should expect to pay 35% of your paycheck to federal taxes. The second largest tax burden you will have to prepare for is your state income tax. If you are lucky enough to work in Florida, Texas, Nevada, Washington, Alaska, Wyoming or South Dakota you will not have to pay any state income tax. Not that lucky? Well, plan on paying between 1 and 13%, with Californian doctors paying around 12-13%. Keep in mind, you will be required to pay taxes for each state you work, so if you have 3 assignments in 3 different states, you will owe the state income taxes for each assignment to that state. These taxes are unavoidable and set each year by the federal and state governments. This is where the top is, meaning if you have no other items to deduct, you will pay these in full. That said, most employed and locums doctors will have numerous deduction that can lower these taxes when it comes time to file your taxes.
After mandatory federal and state taxes, there are several other tax implications for a locum tenens doctor. Some good and some bad. Let’s start with the bad. First, FICA, or the Federal Insurance Contribution Act, is a law that mandates an additional tax on the paycheck of all employees to fund social security and Medicare. These taxes are mandatory and the amount you pay depends on the size of your paycheck. If you are a W2 employed doctor, these taxes come out of your gross paycheck. Part is payed by you and part is payed by your employer. Here is the kicker, locum tenens doctors are independent contractors and therefore are responsible to pay both the employee AND the employer portion. A large negative of locum tenens work is that you have to pay both these taxes. This means you will pay double the FICA tax of your employed colleagues. How much of a difference is this? We encourage you to use Mailchimp’s FICA Calculator , but as an example an employed physician making $250,000 will pay $11,865 in FICA taxes as an employed doctor. The same locum tenens physician will pay $23,175. That means an extra 4-5% of your salary would go to taxes if you were a locum tenens doctor! Ouch! There is a catch, for locum tenens doctor paying the extra 4-5%, a large portion becomes tax deductible. In our example, $11,587 would actually be available for a tax deduction, so the actual increase tax burden for a locum tenens doctor would be around 2%. Not good but not as bad.
Also, in a limited number of locum tenens assignments, a county or city tax may apply. While impossible to break these all down, we have been surprised by these forms when they arrived. Luckily, they are rare and mostly very small amounts. Another tax issue is California assignments. Good old California wouldn’t be the same without imposing some complicated tax issue or burden. We all love the golden state, but she has teeth. California mandates all staffing agencies to withhold 7% of any gross payments to locum tenens doctors who are non-residents. While this seems unfair, when tax time comes around, this withholding often completely offsets the tax liability you may have from your assignment there. They just hold your money which we typically do not prefer.
Ok, so now that we have explained why locum tenens doctors are independent contractors and have to pay more in FICA taxes, let’s see if we can offset these loses with some advantages in the world of taxes that might not apply to employed doctors. The biggest one is deductions. As an individual contractor, there are a lot of work-related tax deductions that a locum tenens doctor can claim. As an independent contractor, you will file a schedule C when you do your taxes. This is necessary for anyone who operates a business as a sole proprietor. Using the schedule C, a locum tenens doctor can report any business expenses and this is where many locum tenens doctors win big. Any work-related expenses, not covered by the staffing agencies, can be claimed here. This can dramatically reduce your overall tax burden and quickly erase that 2% loss associated with FICA. First, it is important to point out that to claim travel expenses, a locum tenens doctor must maintain a permanent residence where they reside when not on assignment. This is important as it serves to justify the need for travel away from your home and not pay duplicate costs. It also helps with the travel and mela aspect of your tax deductions. In addition, the assignment cannot last longer than a year and must require you to stay away from your permanent residence based on a reasonable travel distance. If these criteria are met, then you can start to accumulate numerous large deductions.
First, and the largest is lodging. The vast majority of lodging will be provided by the staffing agency. The reasons we prefer this relate to liability if an assignment cancels or ends prematurely, as we explain in our recent article on housing. That said, some locum tenens doctors prefer to arrange their own housing for tax reasons. A locum tenens doctor on assignment can deduct the cost of this housing which essentially means you live for free (aside from whatever you pay for your “permanent residence”. This can be a huge cost savings, assuming you don’t have a mansion back home, and also a huge tax deduction.
Second, travel expenses can add up. All transportation costs, not covered by the staffing agency, can be deducted. This includes airplane flights and travel to the assignment site, but also includes daily commutes to the work site from your temporary housing. Assuming a 3 month assignment in Hawaii, a locum tenens doctor may deduct the roundtrip flights to get there and a per mile daily commute including tolls and parking. Now it’s starting to all add up!
We all have to eat, and meal deductions add up, point blank. While on assignment, locum tenens doctors can deduct from their taxes reasonable out of pocket meal costs. The amount you may deduct is set by the deferral government based on the location of the assignment. The government has a website that allows you to look at reasonable deduction rates for meals and travel base on location. Use THIS TOOL to look at all locations for meal deduction rates by meal or daily total. Lest assume you are taking a ER assignment in Los Angelos in 2020- you can deduct $61 a day for all meals ($16 for breakfast, $17 for lunch, $28 for dinner, and $5 for incidentals). Assuming you are working 365 days away from home- that’s $22,265 dollar deduction. This can easily wipe out the FICA loss!
The last major tax advantage relates to retirement accounts. While the entire subject of retirement accounts requires its own post, we want to point out some advantages. Locum tenens independent contractors can take advantage of many different retirement plans. A defined benefit plan, or a Keogh retirement plan, is arguably the most common among self-employed or Locum Tenens physicians because it is designed for individuals with higher incomes. This plan works much the same as a regular pension, however, physicians must fund the account themselves. Though there is a maximum cap for $200,000 and lifetime holdings in these plans, it is typically set very high. As an added bonus, any contributions to this fund are tax deductible. This can really add up for the locum tenens doctor. Other retirement options include SEP IRA and Individual/Solo 401k plans. These typically have lower ceilings for contributions and therefore less tax advantages. Stay tunes for a full article on retirement planning for the locum tenens doctor.
Some other tax advantages relate to deductions for home office, health insurance premiums, advertising, phone and internet services, equipment, supplies, scrubs, lab coats, licenses, and business expenses in defining your independent contractor. All these can continue to add to the tax benefits of a locum tenens doctor and are unique to the individual.
Lastly, we want to talk about the recent tax code changes that was signed by President Trump and went into effect starting in January 2018. The new act introduces extensive changes to the U.S tax law and can affect both employed and locum tenens doctors. The major advantage for locum tenens relates to what is known as “pass through income”. Pass-through income is sent from a business to its owners. The income is not taxed at the corporate level -- it is only taxed at the individual owners' level. For a locum tenens doctor, this “Pass through income” is only 80 percent taxable. This means all locum tenens doctors operating under an LLC or business structure will generally deduct 20 percent of their qualified business income, leaving 80 percent of income to be taxed. That’s a big savings!! That said, income limits were placed on this that can affect physicians. If you earn less than $157,000 as a single filer or $315,000 as married, no limitations apply. I as a locum tenens doctor you earn more than this, the deduction phases out until your income reaches $207,500 for singles and $415,000 for married couples, and the deduction no longer applies.
We know we covered a lot, and there are still many more levels to the tax options and advantages for locum tenens doctors. That said, the tax deductions available to locum tenens doctors outweigh those available to employed doctors. Overtime, free housing, meals, travel and transportation can save you tens if not hundreds of thousands. Layer on additional tax benefits with retirement and being an independent contractor, and your locum tenens salary just got much bigger!
~The Locums life
1) Why do locum tenens taxes feel so much harder than W-2 taxes?
Because nobody is withholding for you. As a W-2 employee, taxes are largely “pre-paid” through payroll withholding, and your return is mostly reconciliation. As a 1099 independent contractor, you’re running a small business: you receive gross income, then you’re responsible for setting aside money for federal, state, and self-employment taxes—and proving deductions with documentation.
2) What’s the single biggest mistake first-year locums physicians make?
Spending “gross” money like it’s net. The first few checks feel huge, so people upgrade lifestyle before setting aside taxes. Then April (and quarterly estimates) arrive like a freight train. If you do nothing else, build a rule: every deposit gets split immediately into tax, operating, and savings/retirement buckets.
3) What exactly is a 1099 form, and what does it mean for me?
A 1099 (often 1099-NEC in many arrangements; historically 1099-MISC in some contexts) is an information return showing what you were paid. It does not mean taxes were paid. It means the IRS knows you got paid. You must report that income and pay taxes, including self-employment tax, unless another structure changes how you’re paid.
4) Do I pay “double taxes” as a locums doctor?
Not double income tax—but you do pay both sides of Social Security and Medicare taxes (self-employment tax) that are split between employer and employee in W-2 jobs. That said, part of the self-employment tax is deductible in your return, which reduces the sting.
5) What is self-employment tax in plain English?
It’s essentially the “payroll tax” you’re responsible for as the business owner and worker. It funds Social Security and Medicare. In a W-2 job, your employer pays part. In 1099 work, you pay both parts.
6) How much should I set aside from each paycheck for taxes?
There isn’t one perfect number because state taxes, income level, filing status, deductions, and other income vary. But a practical starting point many locums physicians use is:
30–40% set aside for taxes if you’re in a moderate-to-high bracket and live/work in states with income tax
More if you’re working in high-tax states or have minimal deductions
Less if you’re in no-income-tax states and have strong deductions/retirement contributions
The safest move is to start higher, then adjust downward after you see real numbers with a CPA.
7) What are quarterly estimated taxes, and do I have to pay them?
Often, yes. If you expect to owe a meaningful amount at filing, the IRS generally expects you to pay throughout the year via estimated quarterly payments. If you wait until April, you may owe penalties/interest. A CPA can help you calculate estimates based on projected income.
8) What happens if I don’t pay quarterly taxes?
You might face underpayment penalties and interest—especially if you consistently owe large balances at filing. The bigger issue is cash flow: if you don’t pre-pay, you can accidentally spend what belongs to the IRS.
9) How do I avoid underpayment penalties?
Common strategies include:
Pay quarterly estimates based on prior-year tax (safe-harbor rules may apply depending on income)
Increase spouse withholding if your spouse has W-2 income
Overfund your tax bucket early in the year, then true-up later
The goal is boring consistency.
10) I work in multiple states—do I file taxes in every state?
Often, yes. Many states tax income earned within their borders (even if you’re not a resident). You may need nonresident returns in states where you worked, plus a resident return in your home state. The details depend on each state’s rules, reciprocity agreements, and your “tax home.”
11) What is a “tax home,” and why does it matter so much for locums?
Your tax home is generally your primary place of business or the area where you regularly live and incur ongoing living expenses. It matters because travel deductions often rely on you traveling “away from home” for temporary work. Without a legitimate tax home, travel and housing benefits can become taxable and deductions can be denied.
12) Do I need a permanent residence to claim travel deductions?
Usually, to claim you’re traveling “away from home,” you need a true home base with ongoing expenses and a pattern of returning there. This is a high-stakes area. If you’re going to lean on travel/housing deductions, it’s worth getting professional guidance and keeping excellent documentation.
13) What does “temporary assignment” mean for tax purposes?
Generally, work expected to last one year or less may qualify as temporary; beyond that, it can become indefinite and change the deductibility of travel expenses. If an assignment extends, your tax treatment might change midstream.
14) If the staffing agency pays for my hotel, can I still deduct lodging?
If the agency pays directly and you don’t include it as income, you generally don’t deduct what you didn’t pay. The deduction is typically for out-of-pocket business expenses. If you pay and get reimbursed, the structure (accountable plan vs not) matters. Keep it simple: avoid trying to “double-dip.”
15) Should I take a housing stipend instead of agency-paid housing?
Sometimes it can be advantageous, sometimes not. Agency-paid housing reduces your hassle and your financial risk if the assignment changes. A stipend can give flexibility and possibly better living arrangements, but you must be careful about tax treatment, documentation, and cancellation risk. Many experienced locums choose agency-paid housing for simplicity and protection.
16) Can I deduct meals while on assignment?
Meal deductions exist, but they’re nuanced (and rules change over time). In general, there are IRS rules about when meals are deductible, how much is deductible, and what documentation is required. If you plan to deduct meals, keep receipts or a compliant log, understand the percentage limitations, and make sure you’re truly traveling away from your tax home for temporary work.
17) What about “per diem” rates—can I just use those instead of receipts?
Per diem can simplify recordkeeping, but it must be used correctly and eligibility matters. The rules vary depending on whether you’re reimbursed, whether it’s an accountable plan, and what substantiation is required. A CPA can set you up with a clean system that won’t collapse under audit.
18) Can I deduct flights to and from the assignment?
If it’s legitimate business travel away from your tax home for temporary work, travel costs may be deductible if not reimbursed. But if the agency pays, you typically don’t deduct. Keep all travel confirmations and note the business purpose.
19) Can I deduct my daily commute?
Your commute between your temporary lodging and the work site may be deductible in some circumstances if you’re “away from home” and it’s part of business travel (again: nuanced). Your normal commute from home to your regular workplace is generally not deductible. This is a common confusion point—document everything and get guidance.
20) What mileage tracking system should I use?
Anything consistent and audit-friendly: an app, spreadsheet, or mileage log—ideally with date, start/end location, miles, and purpose. “I drove a lot” doesn’t survive scrutiny. A simple habit (log weekly) is better than trying to reconstruct a year later.
21) What business expenses can a locums doctor typically deduct?
Common categories (if they’re ordinary/necessary and properly substantiated) include:
Licensing fees, DEA fees
Credentialing costs
CME expenses (often, depending on structure)
Scrubs/lab coats (in some circumstances)
Medical equipment/supplies you buy
Professional dues
Business phone/internet portion
Home office (only if you meet strict criteria)
Accounting, legal fees, tax prep
Advertising/website if you market your services
The key is documentation and a clear business purpose.
22) Can I deduct board review courses, conferences, and CME?
Often yes if they maintain or improve skills in your existing profession, but not if they qualify you for a new trade/business. CME deductions can be powerful for locums, but recordkeeping matters: receipts, agendas, proof of attendance, and business justification.
23) What’s the deal with home office deductions?
Home office deductions are legitimate but high-risk if abused. To qualify, the space must typically be used regularly and exclusively for business. A corner of your kitchen table isn’t ideal. If your locums work truly involves business admin at home (scheduling, billing, documentation, compliance), it may qualify—but do it carefully and document square footage and expenses.
24) Do I need an LLC to take deductions?
No. You can deduct eligible business expenses as a sole proprietor. An LLC can help with organization and liability separation (depending on state and specifics), but deductions are about business purpose and substantiation—not the letters after your name.
25) Should I create an S-corp?
Sometimes it can reduce self-employment tax by splitting income into salary + distributions, but it adds complexity: payroll, compliance, reasonable compensation requirements, and more accounting overhead. It’s not a default move. The right answer depends on your income level, stability, expenses, and long-term plan. Talk to a CPA who understands physician locums.
26) What bookkeeping system should I use?
Use something you’ll actually maintain:
Separate business bank account (strongly recommended)
A simple accounting tool (or spreadsheet if you’re disciplined)
Monthly reconciliation
A “receipt capture” method (folder, app, scanning)
The goal isn’t perfection—it’s clean records and easy tax prep.
27) Do I need a separate business bank account?
It’s not always legally required, but it’s one of the best practical moves you can make. Mixing personal and business expenses creates chaos, makes deductions harder to prove, and can create problems if you ever get audited.
28) What records should I keep in case of an audit?
At minimum:
1099s, bank deposits, contract agreements
Receipts for deductible expenses
Mileage logs
Travel confirmations
A calendar showing where/when you worked
Proof of your permanent residence costs (if claiming travel away from home)
Notes about assignment duration and expectations
If your system is organized, audits are annoying but manageable.
29) How long should I keep tax documents?
Many people keep supporting documents for at least 3–7 years, but situations vary (especially with state returns, complex deductions, or carryforwards). Your CPA can advise based on your profile. When in doubt, keep digital copies—storage is cheap, stress is expensive.
30) What’s the best way to handle California withholding as a nonresident?
If a state requires withholding, think of it as a pre-payment, not a penalty. It can reduce what you owe at filing (or even lead to a refund) depending on your overall situation. The key is cash flow planning: withheld funds are money you don’t control until filing time, so don’t rely on it to pay your bills.
31) Can I deduct health insurance premiums as a locums doctor?
In many cases, self-employed individuals can deduct health insurance premiums under specific rules (often tied to having net business income and not being eligible for an employer plan). This can be a meaningful benefit—but the details matter, especially if a spouse has employer coverage available.
32) What about disability insurance—deductible or not?
Disability insurance tax treatment depends on who pays and how it’s structured. Some setups make premiums deductible but benefits taxable; others do the reverse. It’s worth discussing with a CPA so you don’t accidentally create an unfavorable outcome.
33) Should I use a CPA or can I do taxes myself with software?
If you’re doing multi-state locums work with travel deductions and self-employment considerations, a CPA is usually worth it. The tax savings from correct structure and proper deductions often exceeds the fee, and it reduces the chance of costly mistakes.
34) How do I choose a CPA for locums work?
Ask:
How many 1099 physicians do you work with?
How do you handle multi-state returns?
What’s your approach to tax home and travel deductions?
Will you help me plan quarterly estimates?
Can you advise on entity choice and retirement plans?
You want proactive planning, not just filing.
35) What retirement accounts can locums physicians use to reduce taxes?
Common options include:
Solo 401(k)
SEP IRA
Defined benefit / cash balance plans (for very high earners who want large deductions)
Retirement planning is one of the most powerful “legal tax strategies” for independent contractors—because contributions can reduce taxable income while building wealth.
36) Should I prioritize paying loans or maxing retirement contributions?
It’s a personal math and psychology decision. If you’re in a high bracket, retirement contributions can provide immediate tax relief and long-term compounding. But if high-interest loans are crushing you, paying them down can be a guaranteed return. Many physicians do a hybrid: baseline retirement + aggressive debt payoff.
37) What is the “20% pass-through deduction,” and do locums physicians get it?
Some independent contractors may qualify for a qualified business income (QBI) deduction—often described as up to 20% of qualified income—depending on income, filing status, and whether the business is a “specified service trade or business” and other limitations. Physicians can be affected by phaseouts and restrictions at higher incomes. This is a high-value planning area for a CPA.
38) Are staffing agency reimbursements taxable income?
It depends on how reimbursements are structured (accountable plan vs non-accountable). If reimbursements are properly substantiated and handled correctly, they may not be taxable. If they’re treated like extra pay, they might be taxable. Don’t assume—review your pay stubs and contract terms.
39) What if I get multiple 1099s from multiple agencies?
That’s common. Make sure:
All 1099 income is included in your gross receipts
Your bookkeeping matches deposits to each payer
You don’t “miss” a 1099 or underreport income
A reconciliation spreadsheet is simple and lifesaving.
40) I worked locums for only a few months—do I still need quarterly payments?
Possibly. If the income was meaningful and you didn’t have withholding elsewhere, you may still owe and may still benefit from estimated payments. Even one big quarter can create underpayment risk. Ask your CPA, or run projections early.
41) What’s the best way to avoid a surprise tax bill in April?
Three steps:
Set aside taxes automatically with every deposit
Pay quarterly estimates on schedule
Have a mid-year check-in with your CPA to adjust for real income
Most “surprises” are just unplanned cash flow.
42) If I’m audited, what expenses get questioned first?
Often:
Meals and travel
Home office
Vehicle/mileage
“Personal” items disguised as business expenses
If you’re conservative, consistent, and documented, you’re in a much better position.
43) Can I deduct scrubs, lab coats, and shoes?
Sometimes, but it depends on whether the clothing is required for work and not suitable for everyday wear (rules can be strict). Scrubs are sometimes defensible; “nice business attire” usually isn’t. Keep receipts and don’t stretch categories.
44) What about my phone and internet?
If you use them for business, you may be able to deduct the business-use portion. Don’t claim 100% unless it’s truly business-only. A reasonable percentage with a consistent method is safer.
45) What’s the simplest “plug-and-play” tax system for locums?
A practical system:
Separate business checking + business credit card
Every deposit split: X% tax, Y% operating, Z% savings/retirement
Monthly bookkeeping day (30 minutes)
Quarterly estimated tax reminders
One clean folder for receipts (digital)
A CPA who reviews mid-year
Simple beats complex.
46) Any final rule-of-thumb for locums physicians and taxes?
Treat taxes like a bill you pay as you earn, not as a bill you panic-pay later. When you run locums like a business—with clean accounts, clean records, and consistent estimates—you unlock the real upside: deductions, retirement leverage, and control.