A hospitalist earning $260,000 as a W-2 employee sees a locum tenens listing at $135 per hour and does fast math: $135 × 2,000 hours = $270,000, plus freedom. The fast math is wrong in both directions. That $270,000 is , which means it arrives without the employer half of payroll taxes paid, without health insurance, without a retirement , without paid time off, and without qualification — but also with deductions, retirement-plan space, and schedule control that W-2 employment cannot match. Translated honestly, $135/hour of locum income and $130/hour of W-2 income are different currencies, and the exchange rate is the entire decision.
This article does the conversion. The goal is not to talk you into or out of locum work — for some physicians it is the best financial and lifestyle structure available — but to make sure you compare the two numbers after putting them in the same units.
You are a business now: what 1099 actually means
Locum physicians almost always work as independent contractors, paid on a 1099 by the staffing agency or facility. No taxes are withheld from your checks. You are, for tax purposes, a one-person business: you invoice, you receive gross pay, and you are responsible for income tax, self-employment tax, and quarterly estimated payments to the IRS (and your state) four times a year. Miss the estimates and you meet underpayment penalties at filing time.
The business framing is not just a burden — it is also where the advantages live. A business deducts its legitimate expenses before tax: licensure and DEA fees, CME, board exams, malpractice premiums you pay yourself, professional travel that the agency does not reimburse, a compliant home office, health insurance premiums (via the self-employed health insurance deduction), and — the big one — retirement plan contributions far beyond what most employees can reach. Locum economics reward physicians who run the business deliberately and punish those who treat the gross deposit as take-home pay.
Self-employment tax: the first haircut on the headline rate
As a W-2 employee, you pay 6.2% Social Security tax on wages up to the annual wage base and 1.45% Medicare tax on everything, and your employer pays a matching amount. As a 1099 physician, both halves are yours: 12.4% Social Security on net self-employment earnings up to the 2026 wage base of $184,500, plus 2.9% Medicare on all of it, plus the 0.9% Additional Medicare Tax above $200,000 ($250,000 married filing jointly). Two softeners: only 92.35% of net profit is subject to SE tax, and half of the SE tax is deductible against income tax.
Example calculation
Worked example — stated assumptions. A locum hospitalist bills $135/hour for 1,800 hours: $243,000 gross, with $8,000 of deductible business expenses, single filer.
Net profit: $235,000. SE earnings base: $235,000 × 0.9235 ≈ $217,000. Social Security: 12.4% × $184,500 (capped) ≈ $22,878. Medicare: 2.9% × $217,000 ≈ $6,293. Additional Medicare: 0.9% × ($217,000 − $200,000) ≈ $153. Total SE tax ≈ $29,300, of which half (≈ $14,650) is deductible against income tax.
A W-2 employee at the same earnings would have paid roughly $14,600 in payroll taxes with the employer covering the rest. The locum physician's extra payroll-tax cost, net of the deduction benefit, is roughly $9,000–$10,000 per year. That is the first conversion factor: about $5 per hour of the headline rate, at these assumptions, before benefits enter the picture.
Income tax itself works the same as for anyone else — 2026 brackets applied to taxable income after deductions — but with no withholding, you must send it in yourself. A reasonable starting discipline for a six-figure locum income is setting aside 35–40% of every check in a separate tax account and refining the number with a CPA after your first quarter.
Benefits: pricing what the W-2 job was quietly paying you
The employer-paid benefits stack is the invisible 15–30% of a W-2 package. Going locum means buying or forgoing each line yourself. Price them explicitly:
| Benefit | W-2 employment | Locum (1099) reality |
|---|---|---|
| Health insurance | Employer-subsidized | Self-purchased: commonly $9,000–$25,000+/yr for a family, deductible if self-employed |
| Retirement match/contribution | Often 4–10% of salary | None — but see solo below |
| Paid time off + holidays | Typically 4–7 weeks all-in | Every week off is unpaid |
| Group LTD provided | Buy individual own-occupation coverage yourself | |
| CME allowance | Commonly $3,000–$5,000 + days | Self-funded (deductible) |
| Licensure/DEA/boards | Often reimbursed | Self-funded (deductible) |
| Payroll tax | Employer pays half | You pay both halves |
The single largest line is usually time. A W-2 salary pays through vacation; a locum's income is zero in any unworked week. If you plan to work 44 weeks instead of 48, your effective annual hours drop accordingly — and the honest comparison divides expected annual locum net income by the W-2 net at your intended work volume, not at a recruiter's 2,000-hour hypothetical.
Important
Recruiters quote hourly rates because hourly rates flatter the comparison. Always convert both offers to expected annual after-tax, after-benefits income at the schedule you actually intend to work — including unpaid gaps between assignments, which are real and common in locum work.
The solo 401(k): the locum physician's structural advantage
Here is the other side of the ledger, and it is substantial. A self-employed physician with no employees can open a solo 401(k) and contribute in two capacities. As the employee: the full 2026 elective deferral of $24,500 (if not already used at another employer's plan). As the employer: roughly 20% of net self-employment earnings (net profit minus half of SE tax), up to a combined cap of $72,000 — the 2026 §415(c) limit.
Example calculation
Continuing the example. Net profit $235,000, minus half SE tax (≈ $14,650) → ≈ $220,350 of adjusted earnings. Employer contribution: ≈ 20% × $220,350 ≈ $44,000. Add the $24,500 employee deferral: ≈ $68,500 of total solo 401(k) space — nearly the full $72,000 cap, versus the $24,500-plus-match an employed physician typically reaches. At a 35% marginal rate, sheltering an extra ~$35,000 per year saves roughly $12,000 in current federal tax — which claws back most of the SE-tax disadvantage on its own.
Most solo 401(k) providers also support Roth deferrals, and the structure preserves eligibility because solo 401(k) balances do not count in the calculation (unlike SEP-IRA balances — one of several reasons the solo 401(k) usually beats the SEP for locum physicians). Set the plan up before year-end of the year you want to make employee deferrals for; do not leave it for tax season.
Malpractice: usually covered, never assume
Most locum agencies provide malpractice coverage for the work you do through them, and the standard arrangement covers tail exposure as well — but the details are contractual, not universal. Before any assignment, confirm in writing: occurrence or claims-made; if claims-made, who buys the tail and what happens if the agency relationship ends; policy limits and whether they meet the standards of the states you will work in; and whether coverage extends to every facility on the assignment or only the primary site. The agreement, not the recruiter's summary, is what governs — read the coverage section for carve-outs before your first shift.
Direct-contract locum work (no agency) flips the default: you typically buy your own policy, which is a real cost — several thousand to tens of thousands per year by specialty — but also a deductible business expense and a portable asset across assignments.
PSLF: the cost no recruiter mentions
Locum income essentially never qualifies for Public Service Loan Forgiveness. PSLF requires being an employee of a qualifying nonprofit or government employer; a 1099 contractor is not an employee, and the staffing agency in the middle is a for-profit company even when the facility you staff is a nonprofit hospital. The narrow exception: federal PSLF rules accommodate physicians in California and Texas, where corporate-practice-of-medicine laws bar nonprofit hospitals from employing physicians directly — contracted physicians providing care at qualifying nonprofit facilities in those states can count the work. That carve-out is tied to those state-law prohibitions; it is not a general locum pathway, and PSLF employer rules were revised again effective July 2026, so certify your specific arrangement through the federal PSLF tool before counting on it.
For a physician deep into a PSLF timeline, this can be the decisive line item. Someone with $250,000 of federal loans and 70 of 120 qualifying payments who switches to full-time locums does not pause the clock — they stop accruing payments entirely, and the balance keeps growing. The expected forgiveness forfeited can exceed every other number in this article combined. If you carry meaningful federal loans on a PSLF track, model the forgiveness you would walk away from before comparing hourly rates; a hybrid structure (qualifying W-2 employment plus locum on the side) often dominates a full switch.
Putting it together: the honest conversion
Same hospitalist, two structures, stated assumptions: W-2 at $260,000 with a 6% retirement match, subsidized family health insurance worth $12,000, five weeks PTO; locum at $135/hour, 1,800 hours, $8,000 expenses, self-funded family coverage at $18,000, no PSLF considerations.
- Locum: $243,000 gross → $235,000 net profit → minus ≈ $29,300 SE tax → minus self-funded health coverage ($18,000, partially recovered via deduction) → offset by up to ≈ $68,500 of pre-tax retirement space and full schedule control.
- W-2: $260,000 salary → minus ≈ $14,600 employee payroll tax → plus ≈ $15,600 match → plus ≈ $12,000 of subsidized coverage → plus paid time off already inside the salary — with $24,500 of deferral space and the schedule the employer gives you.
On these numbers the two land closer than the headline rate suggests: the locum's SE tax and self-funded benefits consume most of the gross premium, and the recovery comes through deductions and the solo 401(k) — which only pays off if you actually use it. The structural conclusion generalizes: locum work at a modest rate premium over W-2 is usually a pay cut; locum work pays when the rate premium is large (often 30%+ over the equivalent W-2 hourly), when you actually harvest the tax structure, and when PSLF is not in play.
Common questions
How much higher does a locum rate need to be to match my W-2 job?
A defensible rule of thumb is 25–40% above your W-2 effective hourly rate (salary plus retirement contributions plus insurance value, divided by actual annual hours), with the exact threshold depending on your health-insurance cost, intended weeks worked, and whether you will fully fund a solo 401(k). Compute your W-2 effective hourly first — most physicians have never done it and it is higher than they think.
Do I need an LLC or S corporation for locum work?
Not to start — sole proprietorship on Schedule C works, and an LLC adds little tax benefit by itself. An S corporation election can reduce SE/payroll tax at higher incomes by splitting salary and distributions, but it adds payroll, filing, and reasonable-compensation requirements, and it can complicate retirement contribution math. This is a genuine consult-your-CPA decision once locum profit is sustained and substantial, not a box to check before your first assignment.
What expenses can I actually deduct?
Legitimate business expenses: licenses, DEA, board fees, CME, malpractice premiums you pay, assignment travel and lodging the agency does not cover (agency-reimbursed travel is typically not income to you in the first place), professional supplies, a compliant home office, health insurance premiums, and retirement plan contributions. Keep records contemporaneously; a separate business checking account makes both deductions and quarterly estimates dramatically easier.
How do quarterly estimated taxes work?
Four payments a year to the IRS (and most states) against your expected liability. The practical approach in year one: set aside 35–40% of each deposit, pay quarterly using IRS Form 1040-ES safe-harbor rules based on your prior-year liability, and true up with a CPA. Underpaying triggers penalties; the discipline of a separate tax account prevents the classic first-year locum disaster of an unfundable April bill.
Is part-time locum work on top of a W-2 job worth it?
Often, yes — it is the most favorable structure available. The W-2 job carries benefits and (if qualifying) PSLF; the 1099 income arrives at your top but opens employer-side solo 401(k) space on the side income and deductible expenses. The main cautions: confirm your employment contract permits outside work, and watch the Social Security wage base — if your W-2 wages already exceed $184,500, your locum income owes no 12.4% Social Security portion, only Medicare taxes, which materially improves the side-income math.
What to do next
- Compute your current W-2 effective hourly rate: (salary + employer retirement contributions + insurance value) ÷ actual annual hours.
- Model the locum offer at your intended weeks, not 48–50, and subtract SE tax, health coverage, and disability premiums.
- If you carry federal loans on a PSLF track, calculate the forgiveness at stake before anything else.
- Open a separate business checking account and a tax-set-aside account before your first assignment.
- Set up a solo 401(k) before year-end and decide employee vs employer contribution amounts with your CPA.
- Get every assignment's malpractice terms — form of coverage, limits, tail responsibility — in writing.
If you take the leap, the paycheck decoder works for 1099 deposits too: it will show you, deposit by deposit, what is actually yours after tax set-asides — the discipline that separates locum physicians who build wealth from those who meet an April surprise.