Your first payment looks like a raise. A shift at an hourly rate with no deductions, a locums week paid gross, an independent-contractor clause in a first attending agreement — the deposit arrives whole, and for a moment the gross number feels like the net number. It is not. Nothing was withheld because, in the eyes of the IRS, you are now a business. Businesses handle their own payroll taxes, their own retirement plan, their own insurance, and their own records. Nobody tells you this at credentialing.
The good news: the infrastructure is smaller than it sounds. You do not need an LLC, an S corporation, or an accountant on retainer to take your first 1099 dollar correctly. You need six systems, and this article stands them up in roughly the order they will hurt you if you skip them. If your 1099 income comes from moonlighting alongside a W-2 job, the moonlighting income module covers the shift-level economics; this checklist covers everything around it.
Self-employment tax: you pay both halves now, and the math is smaller than it looks
On W-2 wages, you pay 7.65 percent in FICA taxes and your employer pays a matching 7.65 percent you never see. On 1099 income, both halves are yours. This is self-employment tax, computed on Schedule SE: 15.3 percent total, split between 12.4 percent for Social Security and 2.9 percent for Medicare.
Three features moderate the sticker shock. First, the tax applies to 92.35 percent of your net profit, not the gross — the IRS backs out the employer-equivalent share before computing the tax. Second, half of the self-employment tax you pay is deductible above the line against income tax. Third, and most important for physicians: the 12.4 percent Social Security portion stops at the annual wage base — $184,500 in 2026 — and your W-2 wages fill that base first.
If your W-2 wages already exceed $184,500 in 2026, additional 1099 income owes only the Medicare portion of self-employment tax — 2.9 percent, plus 0.9 percent Additional Medicare Tax above the threshold — not the full 15.3 percent. That single fact reorders the entire analysis for a moonlighting attending, and it is the reason generic contractor-tax advice overstates your bill.
Example calculation
Assumptions, stated explicitly: $300,000 W-2 salary, $60,000 of 1099 moonlighting profit after expenses, single filer, 2026 rules. Net earnings subject to SE tax: $60,000 × 92.35% = $55,410 Social Security portion: $0 — the $184,500 wage base is already filled by W-2 wages Medicare portion: $55,410 × 2.9% = $1,607 Additional Medicare Tax (income is already past the $200,000 single threshold): $55,410 × 0.9% = $499 Total self-employment tax: roughly $2,106 — about 3.5% of the $60,000, not 15.3%
The picture changes for full-time 1099 work with no W-2 underneath it. A locums physician with $300,000 of net 1099 profit has $277,050 of net earnings after the 92.35 percent adjustment, pays 12.4 percent on the first $184,500 (about $22,878), 2.9 percent on all of it (about $8,034), and 0.9 percent Additional Medicare Tax on the portion above the threshold — roughly $31,600 in total, of which about $15,800 comes back as an above-the-line deduction. Either way, self-employment tax sits on top of ordinary income tax, not in place of it. Budget for both.
Quarterly estimated taxes: the IRS assumes you already know the system
No one withholds tax from a 1099 check, and the tax system is pay-as-you-go. The mechanism is quarterly estimated payments on Form 1040-ES, due on four dates that are not actually quarterly: April 15, June 15, and September 15 of 2026, and January 15 of 2027. The June deadline arrives two months after the April one. Physicians miss it constantly.
You avoid an underpayment penalty by hitting a safe harbor: your combined withholding and estimated payments must reach the lesser of 90 percent of this year's total tax or a percentage of last year's total tax — 100 percent if your prior-year adjusted gross income was $150,000 or less, 110 percent if it was higher. The 110 percent figure describes nearly every practicing attending.
| Safe harbor | Who it fits | What you pay |
|---|---|---|
| 110% of prior-year tax | Prior-year AGI above $150,000 | A fixed number, knowable the day you file last year's return |
| 100% of prior-year tax | Prior-year AGI of $150,000 or less | Common in the first attending year, when the prior year was residency |
| 90% of current-year tax | Income fell from last year | Requires projecting the current year accurately |
The prior-year safe harbor is the workhorse because it converts an estimation problem into arithmetic. Take the total-tax line from last year's return, multiply by 1.10, subtract expected W-2 withholding, divide the remainder by four. The first attending year is the standout case: 110 percent of a residency-year tax bill is a small number, which means your first high-income year can legally defer most of its tax to filing day as long as the safe-harbor installments are timely.
One quirk works in your favor: withholding is treated as paid evenly through the year no matter when it actually happens. If you hold a W-2 job alongside the 1099 work, you can raise your W-4 withholding in October and retroactively cure an underpayment from April. A pure-1099 physician has no such lever — estimated payments count only when they are actually made.
Important
The penalty runs quarter by quarter at a floating interest rate. Writing one large check in January does not repair an April shortfall; the interest on that quarter has already accrued. Set the four calendar reminders the same week the first 1099 deposit clears, before the money develops other plans.
The full mechanics, including how to handle lumpy locums income under the annualized method, are in estimated taxes for 1099 physicians.
The 20 percent deduction is now permanent — and you may still qualify for it
Section 199A lets a business owner deduct up to 20 percent of qualified business income, and your 1099 practice is a qualified business. The deduction was scheduled to expire after 2025; Pub. L. 119-21 (the One Big Beautiful Bill Act, signed July 4, 2025) made §199A permanent, expanded the phase-in ranges, and added a $400 minimum deduction for anyone with at least $1,000 of qualified business income.
The catch for physicians: medicine is a specified service trade or business, so the deduction phases out with taxable income. For 2026, per Rev. Proc. 2025-32, the phase-out runs from $201,750 to $276,750 of taxable income for single filers and from $403,500 to $553,500 for joint filers. A full-time attending household usually phases out entirely. But a moonlighting resident, a fellow, a part-time physician, or a married couple whose taxable income lands under the joint threshold can keep some or all of it — and 20 percent of a $60,000 profit is a $12,000 deduction. Pre-tax retirement contributions lower taxable income and can pull a borderline household back under the threshold, one of several coordinated moves covered in the legitimate tax reduction module. Run the number before assuming you are excluded.
Entity choice: a sole proprietorship with an EIN is the correct starting point
You do not need to form anything to start. The moment you accept 1099 income, you are a sole proprietorship by default, reporting on Schedule C. The one upgrade worth making immediately is an Employer Identification Number — free from the IRS website in about ten minutes — so you are not writing your Social Security number on every W-9 a staffing agency sends you.
An LLC is a state-law liability wrapper. By default it changes nothing about your federal taxes, and it does not protect you from your own malpractice — no entity does. It is reasonable to have and inexpensive in most states, but it is not a first-week task.
The S corporation is where physicians overreach. The mechanism is real: the corporation pays you a reasonable W-2 salary subject to payroll tax, and remaining profit flows through as distributions that avoid the Medicare portion. But the S corporation brings payroll filings, a reasonable-compensation requirement the IRS actively polices, a smaller retirement-contribution base (25 percent of W-2 salary rather than 20 percent of full proprietorship earnings), and state-level complications. And recall the arithmetic above: a moonlighting attending whose wage base is already filled pays only about 3.8 percent marginal self-employment tax, so the S corporation has almost nothing to save.
Important
An S corporation adopted at $40,000 of side income routinely costs more in payroll administration and lost retirement space than it saves in tax. The conversation becomes worth having at sustained six-figure 1099 profit with no W-2 wage base underneath it — and only after running your actual numbers. Entity sophistication is a consequence of income scale, not a substitute for it.
The solo 401(k): the structural advantage that makes the paperwork worthwhile
Here is the part that makes 1099 income genuinely different rather than merely taxed differently. Self-employment income lets you open a solo , and a solo 401(k) creates employer-side contribution room that a W-2 physician cannot access.
The limits come from IRS Notice 2025-67. The elective deferral limit — $24,500 for 2026 — is a per-person limit shared across every plan you participate in; if you defer $24,500 at the hospital, you cannot defer again in the solo plan. But the §415(c) limit on total annual additions — $72,000 for 2026 — applies separately to each unrelated employer. Your solo 401(k) carries its own $72,000 §415(c) limit, separate from your hospital plan's, because you and your hospital are unrelated employers — while the $24,500 elective deferral limit is shared across every plan you touch.
As a sole proprietor, the employer contribution is 20 percent of net self-employment earnings, meaning net profit minus the deductible half of self-employment tax.
Example calculation
Assumptions, stated explicitly: $60,000 of 1099 profit, W-2 wages above the $184,500 wage base, elective deferral fully used at the hospital plan, 2026 limits. Net profit: $60,000 Less one-half of self-employment tax: $60,000 − $1,053 = $58,947 Employer contribution: $58,947 × 20% = $11,789 Result: $11,789 of tax-advantaged retirement space that exists only because this income arrived on a 1099
A SEP-IRA produces nearly identical contribution math with less paperwork, but it sits in the IRA universe and triggers the that breaks the — a serious cost for most attendings. The solo 401(k) avoids that problem, accepts employee deferrals if you have any left, and, under some plan documents, supports after-tax contributions up to the 415(c) ceiling. The full comparison is in solo 401(k) versus SEP-IRA, and where this account sits in your overall sequence is mapped in the retirement account map. One timing note: open the plan before December 31 of the year you want to count, even though employer contributions can be made up to your filing deadline.
Benefits replacement: nobody is buying your disability coverage anymore
A W-2 employer quietly pays for things you will now pay for yourself: group disability coverage, subsidized health insurance, malpractice premiums, CME funds, retirement matching. When you price a 1099 engagement, those costs belong in the comparison, because the hourly rate has to cover them.
The one that cannot wait is . Your earning power is the asset everything else in this article depends on, and an individual policy is priced by your age and health at purchase — it only gets more expensive, and one abnormal finding can make it unavailable at any price. Premiums paid personally with after-tax dollars produce a tax-free benefit if you ever claim. If a group policy at a W-2 job was your only coverage, moving income toward 1099 work shrinks the covered share of your earnings; an individual policy follows you.
Health coverage is the second gap for physicians going fully independent. Premiums you pay as a self-employed physician are generally deductible above the line for months in which you have no access to an employer-subsidized plan, including a spouse's. Note the 2026 landscape: the enhanced marketplace subsidies expired December 31, 2025, and the subsidy cliff at 400 percent of the federal poverty level is back — largely academic at attending income, but relevant in a lean transition year.
Malpractice: confirm in writing who covers the claim before the first shift
Moonlighting outside your employer or residency almost never falls under the institutional policy; assume external work is uncovered until someone shows you otherwise in writing. For locums, the agency typically supplies coverage — read whether it is occurrence-based (covers any incident during the policy period, forever) or claims-made (covers only claims filed while the policy is active). Claims-made coverage requires a tail when it ends, and tail premiums commonly run one and a half to two times the annual premium. The two questions to settle before the first shift: what type of policy, and who pays the tail. How coverage terms interact with day rates is covered in locum tenens compensation.
Bookkeeping: the minimum that survives both April and an audit
Open a separate checking account and run every 1099 dollar through it — income in, expenses out, estimated taxes out, retirement contributions out. This one habit converts your year-end tax preparation from archaeology into a bank statement, and it is the record an auditor asks for first. Log business mileage contemporaneously (a dated note beats a December reconstruction), keep receipts for licensing, DEA registration, CME, equipment, and any home office that genuinely qualifies. A spreadsheet is enough at this scale.
Then reserve for taxes with each deposit. The right percentage is your marginal income tax rate plus your marginal self-employment tax rate — for the moonlighting attending in the example above, roughly 35 to 40 percent of each check; higher for pure 1099 income before deductions. Transfer it the day the deposit lands and the quarterly payments stop feeling like events.
Quick takeaway
The order of operations: EIN and separate account this week; four estimated-tax reminders and a safe-harbor number today; malpractice and disability confirmed in writing before the first shift; solo 401(k) opened before December 31; the S corporation conversation deferred until a full year of real numbers exists.
Common questions
Do I owe self-employment tax if I only moonlight occasionally?
Yes. Net self-employment earnings of $400 or more in a year trigger Schedule SE. There is no exception for occasional or incidental work, and the staffing agency reports the payment to the IRS whether or not you do.
My hospital already withholds a lot. Do I really need quarterly payments?
Possibly not. Withholding counts toward the safe harbor, so if your W-2 withholding alone reaches 110 percent of last year's total tax, no estimated payments are required regardless of how much 1099 income you add. This is common in the first attending year, when last year's total tax was a residency-sized number. Check the actual figure on last year's return rather than assuming.
Do I need an LLC to deduct expenses or open a solo 401(k)?
No. A sole proprietor deducts exactly the same business expenses on Schedule C and can open a solo 401(k) with nothing more than an EIN. The LLC is about state-law liability separation, not tax capability.
When does an S corporation actually start saving money?
When the self-employment tax avoided on distributions exceeds the cost of payroll administration, the reasonable-salary requirement, and the reduced retirement-contribution base. For an attending whose W-2 wages already fill the Social Security wage base, the marginal self-employment tax is only about 3.8 percent, so the break-even sits far higher than generic advice suggests. Sustained six-figure 1099 profit with no W-2 base underneath is the point at which running the numbers is worth an accountant's hour.
What to do next
- Pull last year's return, find the total-tax line, and multiply by 1.10 — that is your safe-harbor target, and it takes two minutes.
- Apply for an EIN on the IRS website and open a separate checking account for all 1099 activity.
- Put April 15, June 15, and September 15, 2026, and January 15, 2027 in your calendar with the per-quarter payment amount attached.
- Get written confirmation of malpractice coverage — policy type and tail responsibility — for every 1099 engagement before working it.
- Price an own-occupation disability policy now if you do not own one; the quote is free and the price only rises.
- Open a solo 401(k) before December 31 and compute your employer-side space at 20 percent of net earnings.
The 1099 systems are deliberately boring: an account, four reminders, two insurance confirmations, one retirement plan. Set them up once and independent income becomes an asset instead of an ambush — and the protocol above works with or without us. This is education, not individualized financial advice.