Locum tax planning for emergency physicians: 1099 structure that actually works

EM has the most 1099 income in medicine and the worst tax planning to match. Here’s the entity, deduction, and retirement playbook for shift-based EM docs.

Most of us became doctors to practice medicine, not to run a business. Yet, the rise of contract management groups (CMGs) and locum tenens work has turned a huge swath of emergency physicians into de facto small business owners. We get a 1099-NEC at the end of the year, a shrug from the staffing company, and a massive, unexpected tax bill. The default path—filing as a sole proprietor—is a financial disaster, leaving tens of thousands of dollars on the table every single year.

The good news is that our flexible, shift-based work creates powerful financial planning opportunities that most other specialties can only dream of. It allows for sophisticated entity structuring, geographic tax arbitrage, and aggressive retirement planning. This isn’t about sketchy loopholes; it’s about using the tax code as it’s written for business owners—which is what you are. For more specialty-specific resources, you can also check out the emergency medicine free tools hub for calculators and guides.

The S-Corp Playbook: Slashing Your Self-Employment Tax

If you earn 1099 income and don’t have an S-corporation, you are overpaying in taxes. It’s that simple. Most of us learned this the hard way after the first year of independent contracting, staring at a tax bill that included a brutal 15.3% self-employment (SE) tax on every single dollar earned, on top of federal and state income tax.

Here’s how it works. As a sole proprietor (the default for 1099 work), your net business income is subject to both regular income tax and that 15.3% SE tax, which covers both the employee and employer portions of Social Security (12.4% up to the annual limit, which is $180,300 for 2026) and Medicare (2.9% on everything).

The S-corp strategy splits your income into two types:

1. W-2 Salary: You pay yourself a “reasonable salary” from your corporation. This salary is subject to the standard FICA taxes (the 15.3% SE tax, essentially).
2. Owner’s Distribution: Any profit left in the corporation after paying your salary and other business expenses can be paid to you as a distribution. This distribution is not subject to the 15.3% SE tax.

Let’s run a simple example. An EM doc earns $400,000 in 1099 income.

• As a Sole Proprietor: The entire $400,000 is subject to SE tax. That’s a tax of ($180,300 * 12.4%) + ($400,000 * 2.9%) = $22,357 + $11,600 = $33,957 in SE tax alone.
• With an S-Corp: The doc sets a “reasonable salary” of $200,000. The remaining $200,000 is taken as a distribution.
  • SE Tax on Salary: ($180,300 * 12.4%) + ($200,000 * 2.9%) = $22,357 + $5,800 = $28,157.
  • SE Tax on Distribution: $0.

The tax savings in this scenario is $5,800, year after year. The higher your income and the more you can justify as a distribution, the greater the savings.

The Trap: “Reasonable Compensation.” The key to this strategy is defending your W-2 salary as “reasonable” to the IRS. If you pay yourself a $50,000 salary on $500,000 of income, the IRS will reclassify your distributions as wages and hit you with back taxes and penalties. “Reasonable” isn’t explicitly defined, but it’s typically benchmarked against what a similar W-2 employee would earn for the same work. Using MGMA or other industry salary data for a non-partner EM physician in your region is a common and defensible starting point. This is a complex area where you need professional guidance from a physician CPA who handles 1099 mix to set a defensible salary and keep proper corporate records.

The Locum Tenens Tax-Home Trap That Costs Docs $30k a Year

The allure of locum tenens work is freedom and travel. The tax benefit is the ability to deduct business-related travel expenses: flights, rental cars, lodging, and 50% of meals while you’re away from home for work. For a full-time locums doc, these deductions can easily top $50,000-$70,000 per year, saving $20k-$30k in taxes.

But there’s a massive, costly trap baked into the IRS rules: the “tax home” requirement.

To deduct travel expenses, you must be traveling away from your tax home. The IRS defines your tax home as your regular place of business or post of duty, regardless of where you maintain your family home. It is the entire city or general area where your main place of business is located.

Here’s the trap: If you don’t have a regular or main place of business, you might be considered an “itinerant” worker. An itinerant’s tax home is wherever they happen to be working. And if your tax home is wherever you are working, you are never “away from home” for business. The result? Zero travel deductions.

I’ve seen physicians lose years of deductions because they gave up their apartment, put their stuff in storage, and traveled the country from assignment to assignment. They thought they were being clever, but they were accidentally classifying themselves as itinerants and forfeiting the single biggest tax advantage of locums work.

How to Establish a Tax Home:

• Maintain a Primary Work Location: The cleanest way is to have a consistent part-time or PRN gig in one city that generates a meaningful portion of your income, and you treat all other locums assignments as temporary (defined as realistically expected to last, and actually lasting, for one year or less).
• Demonstrate Business Ties: If you don’t have a single anchor gig, you must show that you have a “regular place of abode” in a real and substantial sense and that you have business activities centered there (e.g., you return there between assignments, maintain a home office for your S-corp, have local business bank accounts, etc.).
• Avoid Indefinite Assignments: If you take an assignment that is expected to last for more than one year, that location becomes your new tax home, and you can no longer deduct travel expenses to it.

This is a high-stakes area. Messing it up means not just losing deductions but facing an audit with significant back taxes and penalties. Document everything and get professional advice.

Geographic Arbitrage: Live in Florida, Work in California

Because EM work is shift-based and not tied to a long-term patient panel, we have a unique ability to separate where we live from where we work. This opens the door to “geographic arbitrage”—legally minimizing or eliminating state income tax.

The strategy is simple: establish legal domicile in one of the nine states with no state income tax (Florida, Texas, Tennessee, Nevada, Washington, Wyoming, South Dakota, Alaska, or New Hampshire) and commute to shifts in higher-tax states like California, New York, or Oregon.

You will still owe state income tax to the state where you physically perform the work (your “source income”). However, by living in a no-tax state, you avoid state income tax on:

• All income earned from shifts worked in your home state or any other no-tax state.
• All investment income (capital gains, dividends, interest).
• Your spouse’s income, if they work from home or in a no-tax state.

For a physician with a high income and significant investment portfolio, this can easily translate into savings of $20,000 to $100,000+ per year.

The Trap: Fake Domicile. You can’t just get a P.O. box in Reno and continue living in San Francisco. You must actually move and establish a new “domicile,” which is your true, fixed, and permanent home. States like California are notoriously aggressive in auditing former residents. To prove a change of domicile, you need to build a clear case file:

• Physical Presence: Spend more than half the year (183+ days) in your new home state.
• Official Ties: Get a new driver’s license, register to vote, and register your vehicles in the new state.
• Financial Ties: Open bank accounts, move your primary financial relationships, and update the billing address on all your accounts to the new state.
• Personal Ties: Move your family, enroll kids in local schools, join a local gym or place of worship, and sell your old primary residence (or convert it to a pure rental property).

Failing to sever ties with your old high-tax state can result in them continuing to claim you as a resident, leading to a massive tax bill for income you thought was protected.

FIRE for High-Burnout Specialties: The Withdrawal Plan Is the Hard Part

Burnout in emergency medicine is real. The demanding hours and high-stress environment lead many of us to pursue Financial Independence, Retire Early (FIRE). While accumulating assets is the focus of most financial advice, for physicians aiming to retire in their 40s or 50s, the withdrawal strategy is far more critical and complex.

The challenge is accessing your retirement funds before age 59.5 without incurring a 10% early withdrawal penalty. This requires a multi-pronged approach and careful sequencing.

The Bridge Account: Your primary tool for funding early retirement (e.g., from age 50 to 59.5) is a standard taxable brokerage account. You need to fund this account aggressively during your peak earning years. Gains are taxed at lower long-term capital gains rates (typically 15% or 20%) if held for more than a year, making it a relatively efficient source of income.

Accessing Pre-Tax Funds Early: Two key IRS provisions allow penalty-free access to accounts like your 401(k) or traditional IRA before 59.5.

1. The Roth Conversion Ladder: You convert a portion of your pre-tax 401(k)/IRA to a Roth IRA each year. You pay income tax on the amount converted in that year. After a five-year waiting period for each conversion, you can withdraw the converted principal (not the earnings) tax-free and penalty-free. By “laddering” conversions annually, you create a rolling pipeline of accessible funds that starts five years after your first conversion.
2. Rule 72(t) – Substantially Equal Periodic Payments (SEPP): This allows you to take a series of calculated annual withdrawals from your IRA without penalty. The catch is that you must take these payments for at least five years or until you reach age 59.5, whichever is longer. The calculation methods are rigid, and once you start, you cannot modify the plan. This is less flexible than a Roth ladder but can be a useful tool.

The Trap: Pro-Rata Rule Poisoning Your Backdoor Roth. Many high-income physicians use the “backdoor Roth IRA” strategy. However, if you have existing pre-tax funds in any traditional, SEP, or SIMPLE IRA (often from rolling over an old 401(k)), the IRS pro-rata rule will make a portion of your Roth conversion taxable. To fix this, you can often perform a “reverse rollover,” moving those pre-tax IRA funds into your current Solo 401(k), clearing the way for clean backdoor Roth conversions. The physician finance hub can help model these scenarios, showing how different withdrawal sequences impact your long-term tax burden and portfolio longevity.

Supercharging Deductions with Cost Segregation Studies

For physicians who invest in real estate—whether it’s the medical office building you practice in or residential rentals—a cost segregation study is one of the most powerful tax strategies available.

Normally, when you buy a commercial property, the building itself is depreciated over 39 years (27.5 for residential). This means you get a small tax deduction spread out over four decades. A cost segregation study is an engineering-based analysis that identifies and reclassifies components of the building into shorter depreciation categories.

Instead of treating the building as one big asset, the study breaks it down:

• 5-Year Property: Carpeting, cabinetry, specialty electrical/plumbing for equipment.
• 7-Year Property: Office furniture and fixtures.
• 15-Year Property: Land improvements like parking lots, landscaping, and sidewalks.
• 27.5/39-Year Property: The structural shell of the building.

By reclassifying, say, 25% of a $1 million building’s cost basis from 39-year property to 5- and 15-year property, you can massively front-load your depreciation deductions. This creates a large “paper loss” in the early years of owning the property, which can be used to offset other passive income.

The Ultimate Play: Cost Segregation + REPS. The real magic happens when these paper losses can offset your active physician income. Under IRS §469, rental real estate losses are generally “passive” and can only offset passive gains. However, if your spouse qualifies for Real Estate Professional Status (REPS), your rental activities are no longer considered passive. This allows you to deduct those massive, depreciation-driven losses directly against your W-2 or 1099 medical income.

To qualify for REPS, a spouse must:

1. Spend more than 750 hours during the tax year on real estate trades or businesses.
2. Spend more than 50% of their total working time on those real estate activities.

There’s no license or exam. It’s purely a time-based test, but you must keep a contemporaneous log to prove the hours in an audit. For an EM doc with a non-working or part-time working spouse, this is a game-changer. A cost segregation study on a new property could generate a $200,000 paper loss in year one, which, with REPS, could wipe out a significant portion of your clinical income tax liability.

The transition from a W-2 employee to a 1099 independent contractor is a shift from being a passenger to being the pilot of your own financial life. It requires a different mindset and a proactive approach to structuring, deductions, and retirement. These strategies—S-corps, tax home planning, geographic arbitrage, and advanced real estate deductions—are the core playbook for turning your 1099 status from a tax burden into a powerful wealth-building engine. If you’re ready to map out a plan tailored to your specific numbers, you can talk to GigHz about your 1099/W-2 mix.

Reviewed by Pouyan Golshani, MD, Interventional Radiologist — May 7, 2026