Locum Tenens Taxes and Finances: A Physician's Complete Guide

Locum tenens work gives physicians something employment rarely does: control over schedule, location, and pay rate, plus the option to step away between assignments. It also removes the infrastructure that employed physicians never think about. No one withholds taxes. No one funds a retirement plan. No one provides health insurance or worries about malpractice tail. The physician does all of it, and those who handle locum tenens taxes and finances well often come out ahead of their employed peers.

The financial side of locums is not difficult, but it is unfamiliar, and the first year is where most mistakes happen: an underpaid estimated tax bill, a missed retirement contribution deadline, a gap in disability coverage. The rules are those of any self-employed professional, applied to a physician's income.

This guide covers how locums income is taxed, how to handle quarterly payments, which deductions apply, how to build a retirement plan as a contractor, what insurance you need to arrange, and when an S corporation makes sense.

How Locum Tenens Income Is Taxed

Most locums assignments are structured through a staffing agency that pays the physician as an independent contractor. At year end you receive a Form 1099-NEC showing gross payments with no tax withheld. Some assignments, particularly direct arrangements with hospitals, are W-2 employment. Confirm the structure before you sign each contract because it changes everything that follows.

As a 1099 contractor, you report income and expenses on Schedule C, and the net profit is subject to both income tax and self-employment tax. Self-employment tax covers Social Security and Medicare and is 15.3 percent on net earnings up to the Social Security wage base, then 2.9 percent above it, plus an additional 0.9 percent Medicare tax at higher incomes. You can deduct half of the self-employment tax as an adjustment to income. The IRS self-employment tax page has current rates and the wage base.

Georgia taxes locums income as ordinary income at the state rate, and if you work assignments in other states, you may owe tax in those states as well. Most states tax nonresidents on income earned within the state, and Georgia provides a credit for taxes paid elsewhere. Log days worked in each state.

Locum Tenens Taxes: Quarterly Estimated Payments

Because nothing is withheld, the IRS expects you to pay tax as you earn it through quarterly estimated payments due in April, June, September, and January. Underpayment produces a penalty, calculated as interest on the shortfall.

Safe harbor rules

You avoid the underpayment penalty if your total payments during the year equal at least 100 percent of last year's tax liability (110 percent if your prior-year adjusted gross income exceeded $150,000), or at least 90 percent of the current year's tax. For a physician transitioning from a W-2 job to locums, the prior-year safe harbor is often the simplest target because it is a known number. The IRS explains the rules in Publication 505.

Georgia has its own estimated tax requirement with similar timing. Check the Georgia Department of Revenue for the current thresholds and payment methods. Our quarterly estimated taxes guide walks through the full calendar.

A practical system

A simple approach that works for most locums physicians in their first year.

• Open a separate business checking account and route all 1099 payments through it.
• On each deposit, move 30 to 40 percent to a dedicated tax savings account. Adjust once you have a year of data.
• Pay quarterly estimates from the tax account on the due dates, using IRS Direct Pay and the Georgia Tax Center.
• Reconcile with your tax preparer each fall so the January payment reflects actual income rather than a guess.

Deductions Locums Physicians Can Take

Independent contractor status allows ordinary and necessary business expenses to be deducted on Schedule C, reducing both income tax and self-employment tax. Employed physicians lost most of these deductions under the 2017 tax law, so this is a meaningful advantage.

• Malpractice premiums, including tail coverage, if not paid by the agency.
• Licensing fees, DEA registration, board certification, and CME, including travel to conferences.
• Travel and lodging for assignments away from your tax home, when the agency does not reimburse them. Reimbursed travel is not deductible, and reimbursements are generally not income.
• Health insurance premiums for you and your family, taken as a self-employed health insurance deduction rather than on Schedule C.
• Retirement plan contributions to a solo 401(k), SEP IRA, or defined benefit plan.
• Home office, if a portion of your home is used regularly and exclusively for administrative work.
• Professional dues, subscriptions, scrubs, equipment, and the business portion of phone and internet.
• The qualified business income (QBI) deduction may apply, but physicians are a specified service trade or business, and the deduction phases out above income thresholds the IRS adjusts annually. See our QBI deduction explainer.

The tax home question

Travel expenses are deductible only when you are away from your tax home, which the IRS defines as your regular place of business. A locums physician with no fixed practice location can be treated as an itinerant with no tax home, which eliminates travel deductions entirely. Maintaining a genuine home base, with real living expenses and some professional activity there, preserves the deduction. This area is technical enough that a tax professional familiar with locums is worth the fee.

Retirement Plans for Locum Tenens Physicians

This is where locums status pays off. As a self-employed physician, you can establish a retirement plan and contribute far more than most employed physicians can through a 403(b) alone.

Solo 401(k)

A solo 401(k) allows two contribution layers: an employee deferral up to the annual 401(k) limit, and an employer profit-sharing contribution of up to 20 percent of net self-employment income, together capped at the overall annual limit the IRS sets each year. Both limits adjust annually, and catch-up contributions apply after 50; see the IRS 401(k) limits page. Many solo 401(k) plans also allow Roth deferrals and after-tax contributions. If you also have a W-2 job with a 401(k), the employee deferral limit is shared across all plans, but the employer contribution to the solo plan is separate.

SEP IRA

A SEP IRA is simpler to set up and allows an employer-only contribution of up to 20 percent of net self-employment income, up to the same overall cap. It has no employee deferral layer, so the maximum is lower than a solo 401(k) at the same income. A SEP balance also complicates backdoor Roth contributions because of the pro-rata rule. For most locums physicians who intend to use the backdoor Roth, the solo 401(k) is the better choice. Our solo 401(k) vs SEP IRA comparison covers the details.

Defined benefit and cash balance plans

A locums physician earning $400,000 or more with consistent income and a desire to shelter six figures a year can add a defined benefit or cash balance plan on top of the solo 401(k). These plans require an actuary and annual funding commitments, so they suit physicians with predictable income and a multi-year horizon. See our cash balance plan guide.

Insurance Every Locums Physician Must Arrange

Employment bundles insurance into the job. Locums unbundles it, and each policy needs a decision.

Malpractice and tail

Most agencies provide malpractice coverage for the assignment, but the type matters. If the policy is claims-made, you need tail coverage after the assignment ends. Confirm in writing whether the agency provides tail or whether you must buy it. Coverage limits and whether the policy is occurrence-based should be in the assignment contract. Our guide on malpractice tail coverage explains the terms.

Health insurance

Options include a spouse's employer plan, a marketplace plan through healthcare.gov, COBRA from a prior employer for up to 18 months, or a professional association plan. High-deductible marketplace plans pair with an HSA, which adds another tax-advantaged account. Premiums for self-employed physicians are deductible. Our health insurance between jobs article covers the transition.

Disability and life insurance

No employer group coverage means an individual own-occupation disability policy is essential rather than supplemental. Insurers will ask for proof of income, which for a new locums physician may be a contract or prior W-2s. Read our own-occupation disability guide. Term life insurance should be sized to your household's needs without relying on any group policy. Attend advisers may earn commissions on insurance products; advisory services are held to a fiduciary standard, and we disclose compensation before any recommendation.

Should a Locums Physician Form an S Corporation?

An S corporation can reduce self-employment tax. The physician becomes an employee of their own corporation, pays themselves a reasonable salary subject to payroll taxes, and takes the remaining profit as a distribution not subject to Social Security and Medicare tax. At income well above the Social Security wage base, the savings are limited to the 2.9 percent Medicare portion plus the 0.9 percent additional tax on the distribution portion, because Social Security tax already stops at the wage base under either structure.

The S corporation adds costs: a separate tax return, payroll processing, state filing fees, and the need to set a defensible salary. The IRS scrutinizes unreasonably low salaries, and for physicians, the reasonable compensation figure is typically high. The savings are often a few thousand dollars a year at $300,000 to $400,000 of income and grow from there. Some agencies will not contract with a corporation, so confirm before forming one. Our guides on entity choice and S corp reasonable compensation go deeper.

Cash Flow, Gaps, and the Long Game

Locums income is lumpy. Assignments end, new ones start later, and payments can lag 30 to 60 days. A larger cash reserve than an employed physician needs, often six months of expenses plus the tax account, smooths the gaps.

A locums physician who funds the solo 401(k) every year and treats the tax account as untouchable builds wealth faster than most employed peers. One who treats every deposit as spendable will have a tax problem by the second year. Our tax planning service and physician planning page describe how Attend coordinates these pieces with your CPA.

Locum tenens taxes and finances reward organization. Route income through a business account, set aside a fixed percentage for taxes, pay quarterly, open a solo 401(k), deduct what the law allows, and arrange your own malpractice tail, health, disability, and life coverage before the first assignment. Consider an S corporation only once income is high enough for the savings to clearly exceed the cost. This article is educational and not individualized tax or financial advice. To build a plan around locums work, contact Attend Wealth.

Tony Colunga · Founder, Attend Wealth

Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, physicians, and business owners. Advisory services are held to a fiduciary standard. More about Attend