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Greetings, I am turning to the board again for help. I am a 2002 graduate of an internal medicine residency (despite my screen name!). Since October I have been moonlighting in Urgent Care but it looks like I am going to accept a poition as an associate in a group practice come March. I will continue moonlighting through February as an independent contractor but when I sign the contract I won't be able to do this anymore.

Nonetheless, my new income will be a base salary of around $120K per annum plus bonuses if certain productivity targets are met. To me, this is a pretty big number, especially as I have just done a rough computation of my 2002 taxes and my 2002 taxable income is under $18K!

So now I am coming here to ask several questions about filling out my W-4 withholdings, plus to request information on how to handle quarterly estimated payments if I must make them to cover for the taxes owed on the income generated by my independent contractor moonlighting. Some facts: I am single and I don't expect this status to change in 2003 (my fiance and I have not yet set a date). I have no dependents. I can claim "1" for exemptions - not blind, not over 65. I do not anticipate any deduction for retirement contributions in 2003 nor will I be eligible for any credit towards student loan interest payment. The only other increase in my income from the base salary will be any interest and dividends I earn (which I expect won't exceed, say, $600 - my so-called savings is going straight to the student loan debt), plus my moonlighting which by the end of February will total something like $6000 gross year to date. I've set aside about 60% of these proceeds in anticipation of the federal (including SSI/Medicare) and Arizona state taxes owed on it but have not distributed these proceeds yet in the form of quarterly payments. I'm told I will be paid biweekly.

My questions:
1) What should I request in withholding allowance in order to cover all my expected taxes? Zero "0" or one "1" or some other number? I would like to owe the IRS no more than $100 at tax time in 2004 and would like to owe Arizona no more than that, either. Arizona deductions are pegged as a percentage of federal deductions so I have to kind of back-calculate once I have settled on my federal deduction to see if my proposed selected Arizona percentage will cover the necessary withholding or whether I have to bump to the next higher selectable percentage bracket to meet my targets.
2) If I can jigger my withholding plus request an extra amount taken out per biweekly paycheck so that even my moonlighting income gets covered for taxes owed, do I really need to make quarterly payments? Or should I leave my pending paychecks alone and make those payments anyway out of the money I've already set aside? (I guess I am asking whether I am always obligated to make quarterly payments in future tax years if I have done so in 2003).
3) What happens to any deduction for social security when my actual earnings hit $84,900 (or whatever number it is in 2003 that hits the SSN maximum for deduction)? Do I see a sudden increase in my paycheck or is it somehow averaged out over the year's anticipated pay?
4) Is there anything else I should be thinking about? I understand that my premium deductions for health (medical/dental) and life insurance (should I choose to take it) are supposed to be taken from pre-tax monies which lowers the gross income threshold a bit, but I will still be in the 35% bracket, it appears.

Granted, the numbers are bigger than what I have been used to working with but I don't want to misunderstand if there are any other adjustments to taxes that go along with exceeding income thresholds for certain required deductions. My primary objective is to ascertain that I am not going to have any nasty tax obligation surprises. But my other objective is to see whether I can come up with a close estimate for my net paycheck amount. I want to start planning my budget to include substantial payments towards my hefty student loans (while still covering for ongoing household expenses and irregular payments for insurance, etc.). Thanks for any assistance you can offer!

xraymd
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My answers:

1) If I were you, I would leave exemptions at 1 (or even 0) for now. Don't try to get it right based on what you think you'll earn; I would say that it's impossible just now to fix it so that, with no other changes, you'll be within $100 next year! (I diligently work at figuring out my withholding, but due to the vagaries of capital gains, I'm never within $100, or even $300, of my final liability.) I figure the main thing is to avoid a huge bill, and especially to avoid a penalty. Anyway, leave it for now. After you join group practice and start with a fairly stable, predictable, salary, you can do a better estimate of your yearly income, project withholding, and make adjustments.

2) You don't need to make quarterly payments. It sounds like you'll have to stop with the moonlighting when you sign with group. So at some point you'll have a good number on the extra income, and you'll be able to predict pretty accurately how that will add to your liability. You can then bump up withholding somewhat to cover that. One nice thing about withholding is that it is treated (by the IRS) as having been done uniformly throughout the year. So if you have a look in Sept-Oct and find that you're going to come up short, you can increase withholding significantly in last few months, and all will be fine - well, except that you'll have rather less disposable income late in the year! You'll be ok next year in any case, with regard to penalties, even if you do nothing because of moonlighting income. That's because one of the so-called safe harbors, when penalties don't apply, is to have your withholding exceed the previous year's actual tax. It sounds like this year (that is, the 2002 tax year) you have small income and will pay very little in taxes. As long as you have at least that much withheld in 2003, no penalties. And re quarterly payments, no, you don't have to keep doing them once you start. If you do them one year the IRS will send you vouchers for the following year, but you can toss them if you don't need them. (Sometimes I do quarterly payments, mostly I don't...)

3) Yes, when you pass the SS threshhold, you will see your net pay increase, and stay that way to the end of the year. In January, you start again with SS payments.

4) Hey, you don't have to anticipate everything months in advance - it's ok to go with the flow, and adjust on the fly! (I would think that doctors would be used to doing just that...)

In short, adjust things when you have a better handle on projected income/withholding, and be sure to take a closer look in early fall.

Lorenzo

P.S. I thought residents worked a gazillion hours a week, and slept the rest of the time. How to you find time to make such a lengthy post? (I'm retired, so I have nothing but time on my hands, there's my excuse...)
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2) You don't need to make quarterly payments. ...one of the so-called safe harbors, when penalties don't apply, is to have your withholding exceed the previous year's actual tax.

Lorenzo is correct. In fact, I would recommend that you calculate a worst-case scenario of what the most your tax liability could be. Then set your witholdings at whatever you feel comfortable with so long as they total more than 2002's tax liability. Finally, set aside enough of your earnings throughout the year in a money market fund earmarked for taxes to cover the worst-case scenario (less your withholdings). Come next April (2004), withdraw whatever you need to pay your tax bill and use the extra interest for a gift for yourself (and your fiancee). Why give the government all that money interest free?

Ira
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Wow, thanks for the great help, guys - I feel like I now have a far better handle on expected tax obligations. In response to Lorenzo's post - I am DONE with residency! (Though I was known to make lengthy posts even while still in training.) What you say about the hours is ALL TRUE and despite the government crackdown on residents' hours, I will believe in the compliance by the training programs only when I see it. In fact, the reason I am moonlighting as I have been is that I have not been in any huge hurry to get back into the schedule of a practicing physician. Graduated June 30, 2002, spent the next 7 weeks studying fiendishly for my boards (and passed, HOORAY!), took a month off then started moonlighting October 1, 2002 in earnest.

Only now am I ready to resume full speed ahead. It's been nice, though, finally working fewer than 100 hours a week...

Thanks again for your superb and immediately useful assistance. It is immensely appreciated!

xraymd
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3) What happens to any deduction for social security when my actual earnings hit $84,900 (or whatever number it is in 2003 that hits the SSN maximum for deduction)? Do I see a sudden increase in my paycheck or is it somehow averaged out over the year's anticipated pay?

As someone already pointed out, you get a nice "raise" when you've hit the maximum FICA contribution for the year. I know that we always look forward to it for fall expenses. :-)

Another thing to take into account (as though you didn't have enough already)
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3) What happens to any deduction for social security when my actual earnings hit $84,900 (or whatever number it is in 2003 that hits the SSN maximum for deduction)? Do I see a sudden increase in my paycheck or is it somehow averaged out over the year's anticipated pay?

As someone already pointed out, you get a nice "raise" when you've hit the maximum FICA contribution for the year. I know that we always look forward to it for fall expenses. :-)

Another thing to take into account (as though you didn't have enough already)


If my son submits one more post before I finish it, I'm gonna scream!!

Anyway, xraymd, it sounds like you'll hit the maximum just in the group practice, but you'll also have FICA withheld from your urgent care moonlighting. Since the maximum is per person per year, not per job per year, all of the withholding over and above the limit will be returned to you, or applied to your federal tax liability.

-- Laura
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...it sounds like you'll hit the maximum just in the group practice, but you'll also have FICA withheld from your urgent care moonlighting. Since the maximum is per person per year, not per job per year, all of the withholding over and above the limit will be returned to you, or applied to your federal tax liability.

Greetings, Laura, I've been reading up a bit on this. Do you (or does anyone) have an explanation for under which circumstances I am considered to be "overwithheld" on FICA so that I can re-claim it on my 1040? It looks like if I have FICA withheld from multiple pay sources and exceed the threshold then I am eligible for this recapture - but if I am understanding correctly, if any SINGLE employer overwithholds FICA then I must ask that employer to refund the difference to me directly.

So complicated! Does anyone here still do his or her own taxes once in the 30% or 35% bracket? I ask this in earnest - I am beginning to wonder whether there are things I could be missing that go along with entering a higher bracket which could be costly.

In any case, it appears that the FICA question for 2003 as regards moonlighting could be moot because my checks as an independent contractor have NOTHING deducted and it is on my own shoulders to set aside the appropriate amount for taxes (federal, FICA, medicare, state; I have no local taxes in Tucson, AZ!). So I am trying to get smart in a hurry but wonder whether I could be missing anything important. Still taking the standard deduction but at some (more distant) point when I buy a house, that will likely change everything all over again.

xraymd

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Re going over the FICA max, this mainly happens when you have multiple employers, either several jobs at once or you change jobs in the middle of the year. In that case, one employer doesn't know about the other ones, and the sum of all the FICA withholding exceeds the annual max. And you're right, it's moot if your moonlighting has been as an independent contractor, in which case there will have been no FICA paid at all. Indeed, as you also note, there's nothing else withheld either, so be aware of the need to allow for extra federal/state because of that income.

Does anyone here still do his or her own taxes once in the 30% or 35% bracket?

I've been in upper brackets for quite a few years, and every year it seems I run into something new. I've always done my own return, and intend to continue, but then I'm cheap. Taxes can be complicated, but they're not that difficult, especially if you're willing and able to plow through the IRS forms and publications, paying attention and reading very carefully. There are a few situations in which I think engaging a paid preparer is wise - if you run a small business, have complicated real estate transactions, and certainly for an estate return. In your case, as a doctor, I suppose it depends. If you're set up as an employee of an established group practice, where you get W-2s and so on from an employer, then you can probably manage on your own. If and when you set up your own practice, hire staff, run an office, and have equipment to depreciate, then you're effectively running a small business and you'd probably be much better off with an accountant. You might ask your colleagues what they do.

Lorenzo
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Greetings, Lorenzo, thanks for your inestimable help and opinion. You are confirming for me what I've suspected - that as an employee, even in a higher bracket, my taxes don't have to end up having some secret trap door, and that's comforting to know. I am also cheap, plus I am very comfortable with math and tax instructions (probably shoulda been an accountant) so I see no reason not to continue doing my own taxes as an associate. I completely agree that as a PARTNER or as a solo practitioner it would be a horse of a different color and that I would be potentially foolish not to avail myself of some excellent tax preparation assistance that could save me significantly more than the prepared return would cost me. If I were to ask around, I think I would find that most physicians turn their taxes over to an accountant, not necessarily because their taxes are so hard to do but more because they are super-busy, perhaps don't understand their returns and possibly have capital gains issues (or take itemized deductions) which complicate matters. But for me, for now, I definitely feel that I have the requisite information to prepare my own return correctly, and to my advantage. For this help, I thank you.

xraymd
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possibly have capital gains issues (or take itemized deductions) which complicate matters

Capital gains and itemized deductions are not inherently complicated; if you have good records and pay attention to what you're doing, they don't present a problem for the self-preparer. (Mind you, there are some sticky situations you can get into with capital gains and deductions, but you have to really make an effort.)

Above all, I would urge you to keep in touch with investments and tax matters, even if you do eventually turn things over to a financial advisor, accountant, or tax preparer. I'm always reading about people who get in hot water with the IRS because they've invested in some kind of screwy trust or off-shore scheme, and it's surprising how often those people are doctors and dentists. I imagine the problem is that 1) they have wheelbarrows of money to invest, and 2) they are too busy to pay close attention to financial details.

In any event, good luck.

Lorenzo
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I'm always reading about people who get in hot water with the IRS because they've invested in some kind of screwy trust or off-shore scheme, and it's surprising how often those people are doctors and dentists. I imagine the problem is that 1) they have wheelbarrows of money to invest, and 2) they are too busy to pay close attention to financial details.

No worries here. Despite a base of $120K, my student loan debt is $110K (and that's AVERAGE or BELOW the usual indebtedness of today's graduating medical student!) so investments will be some ways off. Plus I hope never to be an idiot about them and I hope that the Fool, this board and its excellent help and my own common sense will be available to utilize once I enter the Nirvana of out-of-debtedness.

xraymd

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I've been reading up a bit on this. Do you (or does anyone) have an explanation for under which circumstances I am considered to be "overwithheld" on FICA so that I can re-claim it on my 1040? It looks like if I have FICA withheld from multiple pay sources and exceed the threshold then I am eligible for this recapture - but if I am understanding correctly, if any SINGLE employer overwithholds FICA then I must ask that employer to refund the difference to me directly.

You are correct and can be overwithheld in several ways and you can't ignore this problem for several reasons. You owe Medicare tax on all your wages, but FICA tax stops in the $80Ks. If you'r overwithheld by multiple employers you get a refund on line 65 of 1040. There's a worksheet for figuring it in Pub 505. If you moonlight as a 1099 contractor you're responsible for SE taxes and when paying them you keep from double paying by form SE. The SE is paid with your 1040 so there's no withholding problem if you follow the SE calculations correctly. If you are overwithheld by a single employer you ask him for the refund as he has overpaid HIS portion also so must correct his records. The IRS keeps the overpayment of the employer's part when it's due to multiple employers, so it's just you that gets the overpaynment back on line 65.

Money runs an annual competition (or did several years ago, I don't follow it now) to see how correctly the competitors can do a sample tax problem. Historically they get answers ranging over $5,000 different from CPAs, ERs, H&R Block, etc. The CPAs generally don't do as well as others. I personally think any intellegent person who cares can do better, or just as good as, a preparer. You may opt for a preparer due to time restraints, but you should have a grasp of the basics enough to check his work. It's your money, not his. ed


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