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Author: xraymd Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121175  
Subject: Independent Contractor status/taxes Date: 1/1/2002 6:59 PM
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Greetings, I am a medical resident who moonlighted for some shifts in the ER over a 4 month period this past fall. This increased my wages by $2920 and no withholding of any kind was taken out of my moonlighting paychecks. I was informed that my paychecks were being processed with my employment status as an independent contractor and I am responsible for paying the required federal and state taxes out of pocket.

Being too poor to pay to have my taxes done, I tried to figure them out myself. What I came up with was to prepare schedule C-EZ and schedule SE for that $2920 (reduced by $52.44 for commuting expenses = $2867.56 net). My base resident's salary in 2001 was around $37,000 and I had interest earned of around $370. I also had to pay taxes on the 4th of 4 ratable portions of a Roth conversion I did in 1998, amounting to $19522 this year. I had already determined how much to have withheld from each biweekly paycheck to cover the expected federal and state taxes on the base salary and Roth conversion. My employer also automatically deducted for social security and FHI. Only the moonlighting earnings fell under the independent contractor status and will be reported on schedules C-EZ and SE.

I am trying to figure out several things:
1) Did I choose the right schedules for the moonlighting earnings? Is there any chance that my medical license fee can be considered a deductible expense? (I assumed not, but if it COULD be, there is another potential $550 I could take off my earnings.)

2) What is the ACTUAL rate of tax I am paying on this $2867.56? I am somewhat confused by how this balance has taxes figured on it to the tune of (0.9235 * 0.153 * $2867.56 = $405.17) which gets added in to the taxes I owe on the other net income mentioned above, yet HALF of this tax ($202.59) gets subtracted off of total income while $2867.56 gets added into total income. Thus my AGI is ($37,000 + $370 + $19,522 + $2867.56 - $202.59) and ultimate taxes owed are figured on this aggregate balance less standard deduction and exemption (for a single person, no dependents, under 65 and not blind this amounts to another $4550 + $2900 taken off my AGI) - and THEN $405.17 gets added to the tax on top of that. Huh??

Can anyone help explain to me how to figure out just what this means in terms of the true tax rate owed on the moonlighting money? If I am doing something wrong in the calculation or have chosen the wrong schedules, please advise. If I moonlight again in 2002, I will need to save the taxes out of any moonlighing wages paid and I want to be sure I am setting aside the right amount. The state amounts owed follow from the federal amounts owed, so if I am getting the federal figures down correctly, I can determine what I will owe to the state. THANKS IN ADVANCE for any available insight or help!

xraymd
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56585 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 7:25 PM
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I haven't checked your computations, but it appears as if you're handling everything correctly.

The extra tax $405.17 represents both halves of the FICA and Medicare tax that would be paid if you were an employee. You get to deduct the "employer" portion on the front of Form 1040 as an adjustment to your income. As a result, the true tax rate on the moonlighting money isn't significantly different from what it would be if it were salary. In other words, your net earnings after taxes are the same. What appears different is that the $405.17 is on your Form 1040 and not on a W-2. Most people "forget" about the portion of their taxes which are withheld for FICA/Medicare. Self-employed individuals don't have that "luxury."

As to the deductibility of your medical license fee -- if it is an annual fee for the right to practice medicine, it is deductible, but the fee should be allocated between unreimbursed employee expense and self-employed business expense on the basis of the relative contributions to your income. Since you don't itemize, the employee expense portion is included as part of your standard deduction. If the license is for more than one year, you will have to amortize the cost over the life of the license.

Ira

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Author: xraymd Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56587 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 7:31 PM
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Wow, what an incredibly HELPFUL answer! I am now clear on all of my questions - and thank you so much for your reply.

This is why I love The Motley Fool. Hope I can return the kind of superior and timely answer on a subject I could help with as you have offered to me.

xraymd

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56588 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 7:37 PM
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I assume your hospital does not pay for your medical license. If that assumption is correct, it is deductible as an employee expense on schedule A even if you did not have any part of your income as an independent contractor. If you subscribe to NEJM or other journals those can also go on Schedule A.
Schedule C or C-EZ for independent contractor income is the correct form. To proportion your medical license expense between employee income from the hospital where you regularly work and your independent contracting income would be more difficult but you can do it that way also. To moonlight you HAD to have a full license; as a resident you might in my state function on a training license. When I was a resident some of my fellow residents had not yet passed licensing exams and therefore functioned on the hospital license rather than having their own. If this is the case in your state you might take the total license expense on Schedule C (more advantageous to you) and if challenged make the point that you did not NEED that license for your residency position, but you did have to have it for the moonlighting. Your DEA license would be treated similarly. A resident may prescribe on the hospital's license, but working in the ER you had to have your own.
Your Schedule C independent contractor earnings will be also subject to Social Security and Medicare tax. You don't have an employer paying half, so the Social Security rate is 15.3% and Medicare if I remember correctly 3.1%.
Because you had self-employment income, you would be entitled to a SEP IRA, (or some more complicated plans) to which you may contribute about 14.3% of earnings after commuting and any other expenses, such as license (if you didn't need the license for residency work). This would reduce your taxable income.
To work full time as a resident and thus be covered under the hospital's health insurance program and maybe being allowed to eat for free in the cafeteria, and then also have self-employment income is a good deal. Having done this this year will increase your income for 2001 of course, and raise the threshold for "safe harbor". However, for 2002 you won't have taxes to pay on the Roth installment, so there may be no need for quarterly estimated taxes.
By all means, learn to deal with Schedule C yourself. Even if when you finish residency and are hopefully making gobs of money, and have someone prepare your taxes for you, you will still need to give the tax preparer the figures, so you really need to know how to do it yourself!
Best wishes, Chris


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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56589 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 7:39 PM
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1) Did I choose the right schedules for the moonlighting earnings?

Yes. Good work.

Is there any chance that my medical license fee can be considered a deductible expense? (I assumed not, but if it COULD be, there is another potential $550 I could take off my earnings.)

Yes, your periodic license fee is deductible. But I would say that you need to prorate it between the moonlighting and your employee job. I'd suggest that your income from the two jobs would be a good basis for proration. The amount attributible to your residency job is an employee business expense - a miscellaneous itemized deduction subject to the 2% of AGI floor. The amount attributable to the ER work is a business expense deducted on schedule C (C-EZ in your case).

Can anyone help explain to me how to figure out just what this means in terms of the true tax rate owed on the moonlighting money?

It's confusing because you are paying two different taxes on these earnings. The social security taxes are 15.3% of your net earnings (technically 15.3% times 92.35% or about 14.1%). But that is only because your W2 wages when added to your self-employment income are less than the maximum social security taxable income.

If your W2 wages were over the SS max ($80,400 for 2001) then you'd only pay the medicare portion of the tax - 2.9%. As your combined W2/self-employment income goes above the limit, the effective rate goes from 14.1% to 2.9%. Confused yet?

Now there's income taxes. If you consider your moonlighting income as the last dollars you earn, then they are taxed at your marginal rate (technically your marginal rate times .9235 again - to reflect the deduction for 1/2 of the social security taxes). So if you're in the 27.5% bracket, that makes your income tax on this money effectively 25.4%.

Of course, I haven't taken the deduction for your state income taxes into account yet. And I'm not going to - partly because things will get relly messy and partly because I don't know what state you're in.

So we get to your other main question:
2) What is the ACTUAL rate of tax I am paying on this $2867.56?

The quick and dirty answer (because it uses numbers most people have heard and it also slightly overestimates the tax - avoiding nasty surprises on April 15) is that it's Social Security, plus Income, plus your state tax rates. Assuming a 10% state rate, that's 15.3 + 27.5 + 10 or about 53%.

Which gets me to the top-of-my-head number I usually tell my clients who are already working a regular job. Put aside about 1/2 of your net income from independent contractor work for taxes.

--Peter

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Author: xraymd Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56590 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 7:53 PM
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To moonlight you HAD to have a full license; as a resident you might in my state function on a training license. When I was a resident some of my fellow residents had not yet passed licensing exams and therefore functioned on the hospital license rather than having their own. If this is the case in your state you might take the total license expense on Schedule C (more advantageous to you) and if challenged make the point that you did not NEED that license for your residency position, but you did have to have it for the moonlighting.

Greetings, Chris, this is exactly the case for me. Between your answer and irasmilo's answer, I am already 400% smarter tax-wise than I was only 1/2 hour ago, plus I may now be saved some taxes on expenses I didn't realize I could legitimately deduct. Thank you for your fantastic reply! I did okay this year in avoiding having to file for quarterly estimated taxes (I will owe $866 but have already saved it out of earnings) and I have figured out that to be liable for $1000 extra in taxes owed I would have to earn in the neighborhood of $7000 as an independent contractor. T'aint gonna happen, though - call is just too brutal to try to stuff in ER shifts on top of. I would be happy with making just enough extra to try to cover the accrued interest on my giant student loan to at least tread water before entering repayment.

I know from the Credit Card board that you are working for the state - I assume you decided against medical practice? There are times I feel like seeing what I could do with a non-clinical career because the practice of medicine today is frankly very tough. Even many of my attendings still put in 80(plus)-hour weeks and must finance the expenses of a practice. Rather a scary prospect. But I digress, so let me thank you again for your great help - another chunk knocked off the student debt ball-and-chain :-)

xraymd

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Author: xraymd Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56591 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 7:57 PM
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Greetings, ptheland, I am in Arizona but with the info you've given I am able to figure out the set-aside. THANKS for the great info; I deeply appreciate the education and am now informed and confident of my own estimates and calculations.

What a fantastic community! Hope to be able to return the help.

xraymd

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56592 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 8:45 PM
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I decided against running a private medical office, but practice full time in a state hospital for the mentally ill. I did independant contracting work for a bunch of years but as DH and I get older, the expense of getting medical insurance outside a group effectively chased me back to employee status. Best wishes, Chris

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Author: xraymd Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 56595 of 121175
Subject: Re: Independent Contractor status/taxes Date: 1/1/2002 9:34 PM
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Greetings, Chris, forgive me my lapse but somehow I had you confused with another Credit Card board poster criscarson who DOES work for the state (of Alabama) so if my original out-of-curiosity inquiry about a nonclinical career didn't exactly make sense, perhaps that is why :-) But thanks for your kind reply in any case. I am paying attention.

xraymd

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