Tax Help for Physicians and Healthcare Professionals

Physicians and other clinicians often earn high incomes late in their careers, after years of training and student debt. That mix of high income, loans, licenses in more than one state and sometimes a practice of their own makes the tax picture different from that of most professionals. Doctors, dentists, nurse practitioners, physician assistants and pharmacists in Naperville and the western suburbs, and in other states, tend to ask the same questions: should I be W-2 or 1099, how do I shelter income, and what can I deduct.

W-2, 1099 and your own practice

An employed physician receives a W-2, and the employer pays half of Social Security and Medicare tax. A locum tenens physician is usually paid on a Form 1099, reports income on Schedule C, and owes self-employment tax on net earnings. A practice owner may operate through a professional corporation or LLC taxed as an S corporation, where the owner must be paid reasonable wages before taking distributions. State laws limit who can own a professional entity, so involve your attorney. See S corporation taxes and business formation.

Hybrid income is common: a W-2 salary plus 1099 moonlighting, expert witness fees or a medical director stipend. Each stream has different deductions, and estimated tax payments may be needed on the 1099 part.

Income thresholds that change your plan

Several rules switch on at the same place for most high earners. Employers must withhold Additional Medicare Tax on wages above $200,000. Net investment income tax can apply to interest, dividends, rent and gains once modified adjusted gross income passes $200,000 ($250,000 joint). The QBI deduction for a medical practice is phased out over $50,000 ($100,000 joint) of income above its threshold for 2025, and over $75,000 ($150,000 joint) for 2026, so a physician above the range gets no deduction from practice income. That makes the retirement and charity planning below more valuable. See the Additional Medicare Tax and net investment income tax guides.

Retirement plans

• Employer plans. The 401(k) and 403(b) employee limit is $23,500 for 2025 and $24,500 for 2026. A governmental or nonprofit 457(b) plan has its own separate limit, so some hospital employees can defer into both.
• Your own practice. The overall defined contribution limit is $70,000 for 2025 and $72,000 for 2026. A defined benefit or cash balance plan can allow larger deductible contributions, with an annual benefit limit of $280,000 for 2025 and $290,000 for 2026, but it needs actuarial work and usually covers your staff.
• Backdoor Roth. High earners cannot contribute directly to a Roth IRA once income passes the phase-out; for 2025 it ends at $165,000 (single) and $246,000 (joint). A nondeductible IRA contribution followed by a conversion is one approach, but other pre-tax IRA balances affect the result. See Roth conversions.

Student loans and loan forgiveness

The student loan interest deduction is up to $2,500, but it phases out between $85,000 and $100,000 of modified AGI for single filers in 2025, and between $170,000 and $200,000 for joint filers, so most physicians lose it. Loan cancellation tied to certain work requirements, such as some public service programs, may be excluded from income, but the special exclusion for many other forgiven student loans applied only through 2025, so confirm the tax treatment before assuming any forgiveness is tax free (Publication 4681).

Deductions for self-employed clinicians

• Malpractice insurance that covers your personal liability for professional negligence.
• State licenses, DEA registration, board certification and dues.
• Continuing education that maintains or improves skills in your present work, including courses, travel and materials. Education that qualifies you for a new trade or business, or that meets minimum requirements, is not deductible.
• Equipment, EHR software, scrubs and instruments for a practice, with Section 179 expensing of up to $2,500,000 for 2025 and 100 percent bonus depreciation on qualifying property acquired after January 19, 2025.
• Travel for locum assignments, but only if you have a tax home and the assignment is not expected to last more than a year. Travel nurses face the same tax home test. See accountable plans for employee reimbursements.

An employed physician generally cannot deduct these items on a federal return, so ask for an allowance in your contract, paid under an accountable plan.

Buying into or selling a practice

When you buy into a practice or acquire one, the price is divided among equipment, supplies, covenants and goodwill. Goodwill is amortized over 15 years. A written allocation and a valuation help avoid disputes with the IRS.

States and visas

If you work in more than one state, you may owe nonresident returns and receive a credit from Illinois for tax paid elsewhere on Schedule CR. Telemedicine adds complexity. International medical graduates on J-1 or H-1B visas have residency tests that determine whether they report worldwide income; see H-1B and visa holders.

How we can help

We prepare physician and practice returns, review W-2 versus 1099 offers, model retirement plan options and manage estimated payments. See tax planning and business tax preparation. This page is general information, not advice for your situation.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.