Moonlighting and locums income: the mistake I see most

Moonlighting income arrives with no withholding on it. Almost everything that goes wrong afterward traces back to that one fact.

A hospital W-2 plus 1099 income from extra shifts, a locums assignment, or an expert witness engagement means you are running a sole proprietorship. Nobody sends you a notice about that. You find out in April, when the return gets assembled and the number at the bottom is bigger than the one you had in your head. The mistake I see most is not a missed deduction. It is that the 1099 stream got treated as extra pay for eleven months, so the tax on it, the timing of that tax, and the retirement account it could have funded were all decided by default.

You are running a business now

No filing makes this true and no filing avoids it. Net earnings of $400 or more from self-employment put you on Schedule C and Schedule SE. You do not need an LLC, an EIN, or a business name. You are a sole proprietor the moment the first 1099-NEC has your name on it.

Whether a payer crosses its own reporting threshold is the payer's problem, not yours. A small engagement may produce no form at all, and the income is still reportable. When a form does get filed, the IRS matching program that generates CP2000 notices compares it against your return whether or not your copy ever reached you.

What the moonlighting dollar actually costs

Self-employment tax is 15.3 percent, applied to 92.35 percent of net profit, and half of it comes back as an above-the-line deduction. That is the version published everywhere, and for a resident or fellow it is roughly right. On $60,000 of net moonlighting profit, that is about $8,500.

For an attending it is usually wrong, and wrong in your favor. The Social Security portion of that 15.3 percent stops at the annual wage base, and your hospital W-2 fills the base first. If your salary already exceeds it, the Social Security piece of your self-employment tax is zero. What is left is 2.9 percent Medicare, plus the 0.9 percent Additional Medicare Tax on earnings above $200,000 single or $250,000 married filing jointly. Same $60,000 of profit, roughly $2,100 instead of $8,500.

Income tax sits on top of that at your marginal rate, which for most attendings is 32 or 35 percent federal before any state tax. So the number I plan against is that a moonlighting dollar keeps about 60 cents, and less in a high-tax state. Set money aside against that, not against a guess.

The timing problem, and the fix almost nobody uses

Paying the tax is one problem. Paying it on schedule is a separate one, and it carries its own penalty. You avoid that penalty by paying in the smaller of 90 percent of this year's tax or 100 percent of last year's, and that second figure becomes 110 percent once prior-year AGI passes $150,000. Every attending is in the 110 percent bucket.

Two rules decide how you should pay. The underpayment penalty is computed period by period, so overpaying in April does not cure a shortfall in September. And money withheld from a W-2 is treated as paid evenly across the year no matter when it actually came out of your check. A December change to your W-4 retroactively repairs quarters that a fourth-quarter estimated payment cannot touch. That second rule is the one physicians almost never hear.

If you do use estimates, the due dates are April 15, June 15, September 15, and the following January 15. The June payment covers only April and May. It is a two-month quarter, which trips up anyone assuming even spacing. For genuinely lumpy income, a locums block in the fall or a case that settles in November, Form 2210 Schedule AI lets you match payments to when the income was actually earned rather than to four equal installments.

The position I will not sign

The request I field most often is to run CME, board recertification, licensure and loupes through a Schedule C that exists because of eight moonlighting shifts. If the expense serves the employed job, it belongs to the employed job, and federally it dies there. Allocating a genuinely dual-purpose expense is defensible. Sweeping the whole professional-expense pile onto a small Schedule C is an audit flag, and it also props up a solo 401(k) contribution the business could not actually support. A colleague telling you it works is not a citation.

The solo 401(k), and why it is smaller than advertised

The best argument for taking 1099 work is the plan it lets you open. A solo 401(k) covers you and a spouse working in the business, has no separate annual filing until plan assets pass $250,000, and can hold a Roth deferral component.

Here is the part that gets oversold. The employee deferral limit is per person, not per plan. If you already max your hospital 403(b) or 401(k), you have no deferral left to make. What remains is the employer contribution, roughly 20 percent of net self-employment earnings, which means profit after the 92.35 percent adjustment and the deduction for half of your self-employment tax. On $60,000 of profit that is about $11,000, real money but nowhere near the headline figure the online calculators show you.

One rule catches physicians specifically. If you control the business sponsoring the solo 401(k), your 403(b) and that plan are aggregated under a single annual additions limit. That aggregation applies to 403(b) plans and not to a hospital 401(k), so which one your employer sponsors changes your answer. Most physicians I ask do not know which they have.

Use a solo 401(k) rather than a SEP-IRA. A SEP is easier to open and it will quietly break your backdoor Roth, because SEP balances count as pre-tax IRA money in the pro-rata calculation and make the conversion mostly taxable. A solo 401(k) balance is invisible to that math.

Locums adds one question: where is your tax home

Travel, lodging and meals on assignment are deductible only if you have a tax home under section 162(a)(2) that the assignment takes you away from. Three things establish one: you do business in the area you claim, you carry duplicated living expenses while away, and you keep real ties there, meaning license, registration, bank, voter roll.

The rule that ends most of these deductions is the one-year rule. If an assignment is realistically expected to run more than twelve months, it is indefinite, your tax home moves to the work site, and the deductions are gone retroactively from day one. Rolling renewals do not reset the clock when the original expectation was open-ended. An agency describing a housing stipend as tax-free is describing what happens if your tax home holds, not guaranteeing that it does. Nominal rent paid to a relative and no trips home for eight months is not a tax home.

If you are going to claim it, build the evidence during the year: a continuous lease or mortgage at home alongside assignment lodging invoices, plus a day-by-day record of where you slept. That calendar carries weight precisely because it cannot be reconstructed afterward. Then there are the state returns. A locums year can produce nonresident filings in five or six states, filing thresholds vary by state with no common standard, and the credit your home state gives for tax paid elsewhere leaves you short whenever the state you worked in taxes at a higher rate than the state you live in.

When I would tell you not to bother

Two things I talk physicians out of regularly. The first is an S election on a modest moonlighting stream. Above the Social Security wage base, the election saves 2.9 percent Medicare plus 0.9 percent, and only on the portion you take as distribution rather than salary. Payroll processing, a separate Form 1120-S, and higher preparation fees eat that quickly. Miss the March deadline for the 1120-S and the late-filing penalty accrues per shareholder per month for up to twelve months, a real cost attached to a structure you may not have needed.

The second is hiring anyone at all. If your moonlighting is one 1099 for a few thousand dollars, no travel, no equipment, no home office, good software handles that Schedule C correctly. I will tell you so on the call rather than take the engagement.

Almost none of this is fixable in April. It is fixable in October, which is why planning and return preparation are the same job for a physician with 1099 income. If you want to talk through a moonlighting or locums year, the first conversation is free, my fee is a flat number quoted before any work starts, and there is more on how I handle physician returns.

Figures on this page come from the IRS and change annually. Nothing here is advice about your return. Your facts decide the answer.