Relief and emergency work is becoming an increasingly popular career path for veterinarians and it’s easy to see why. Flexibility to make your own schedule, setting your own compensation rate, and the variation of roles and duties are all potential benefits of relief work. But another less glamorous benefit of relief and emergency work is the abundance of tax strategies available to help reduce tax liability and increase savings.
With an ever-rising demand for veterinary services and a projected vet shortage in the coming years, utilizing relief veterinarians to assist with busy work loads and reducing burnout amongst employees will become more prevalent.
Relief veterinarians can be classified as either an independent contractor or an employee. The practice who hires you is responsible for ensuring this classification is accurate and it is important to make sure it is done right. Failure to properly classify a relief veterinarian can result in the practice having to pay back many years of payroll taxes and workers compensation, and may cause the relief veterinarian to lose out on tax benefits and deductions taken in previous years.
It can be advantageous for veterinary practices to hire relief vets as independent contractors, as it is less expensive than hiring an employee. An employee is subject to employment taxes and required to be covered by the practice’s workers compensation policy, which can be costly. By hiring relief vets as independent contractors, the relief vet is responsible for paying their own employment taxes and insurance which saves the practice money and allows for the veterinarians to deduct the expenses on their taxes.
It is highly advisable to speak with a qualified tax professional when classifying your employment status, but generally a worker’s status is defined by how much control the worker has over their duties and schedule. For example, relief vets who perform the same duties each week for 3 days a week, even if the schedule hours vary, could very well be considered an employee, as the practice is controlling the schedule and the employment is regular.
For relief veterinarians who are classified as independent contractors, it can be beneficial to follow some guidelines to document the reasoning behind the classification choice. This may include:
- Have an agreement, in writing, documenting the scope of services, fees, length of engagement, and payment terms.
- Ensure you are operating your services through a separate legal entity such as a limited liability company (LLC), not personally.
- Make sure you receive a form 1099 each year from each practice for which you provide services, and that payment is made payable to the entity providing services, not to you personally.
- If your employment is regular and not due to covering vacations, medical absence, maternity/paternity leave, for example, you should consult a qualified tax professional who can advise on employment status.
As an independent contractor, there are a few ways you can set up your business from a tax classification standpoint. The two most popular are sole-proprietorship and limited liability company (LLC).
A business set up as a sole proprietorship is the easiest to establish and requires no legal paperwork or formal organization articles.
While sole-proprietorships are simple to set up, because the taxpayer and the business are one and the same, it exposes you to significant risk. There is no separation between personal and business debts and you may be liable for any company debts or professional mishaps or liability.
A limited liability company (LLC) creates a separate legal entity that helps with asset protection. Owners of an LLC are not typically personally liable for any debts or professional mishaps incurred by the business.
If you are working on your own as a relief vet, you can form a single-member LLC, which is considered a pass-through entity. This means the LLC will pay taxes based on the individual income tax code as opposed to a corporate tax code.
Be sure to speak with a qualified attorney to determine the business structure that best suits you. Regardless of which entity you use, I highly recommend keeping personal and business expenses separate for record-keeping purposes. You should also carry professional liability insurance, as this will be your main line of protection against professional accidents.
Tax Advantages for Relief Veterinarians
If you are classified as an independent contractor you are eligible for many tax advantages, from retirement savings plans to expense deductions.
Schedule C Deductions
For pass-through entities such as a sole-proprietorship or LLC, you are able to deduct ordinary business expenses directly from your income using Schedule C. These expenses can include:
- Business formation & organization fees
- Legal fees
- Professional dues and subscriptions
- Business Liability insurance
- Disability insurance
- Equipment (stethoscopes, lab coats, etc.)
- Marketing materials (business cards, letterhead)
- Continuing Education (books, conferences)
- Travel (meals, mileage, lodging)
- Home Office Deduction (be sure to follow the IRS guidelines carefully)
These deductions help reduce your income, thus saving you in taxes. For example, assume a relief veterinarian who files as single earns $120,000 from their relief vet work. This puts them in the 24% marginal tax bracket in 2021.
During the year, they incur the following eligible deductible expenses:
|Car & Truck Expenses (Mileage @.56/mile)||$1,100|
|Business Liability & Disability Insurance||$3,800|
|Legal and Professional Expenses||$4,000|
|Equipment & Supplies||$1,700|
|Taxes & Licenses||$450|
|Travel (air, lodging, meals)||$2850|
|Home Office Deduction||$1,250|
These deductions reduce their net profit to $102,750, saving them $4,140 in taxes for the year ($17,250 x 24%)!
Schedule 1 Deductions
What About Self-Employment Tax?
As a traditional employee, you are only responsible for half of the Social Security and Medicare taxes (FICA) and your employer is responsible for the other half. As an independent contractor, you are considered both the employee and the employer, so you are responsible for the entire 15.3% FICA taxes up to $142,800 in wages and net earnings for 2021. Using our example above and shown on line 12 of the schedule SE below, this relief vet will owe $14,518 in self-employment taxes.
Self employment tax= (Net Profit x .9235) x 15.3%
The IRS does allow you to deduct the employer’s portion of self-employment taxes. The deduction is 50% of self-employment taxes paid, or $7,259 in this example and this is reported on line 14 of Schedule 1.
Self-employed relief veterinarians need to ensure that they are paying taxes. You do this through making estimated tax payments.
Essentially, with estimated tax payments, you are paying tax on income that is not subject to withholding as you would as a traditional employee. To avoid owing penalties when you file your taxes, you should aim to pay at least 90% of your total taxes on the current year return, or 100% of the total tax due on the previous year’s return (or 110% for those earning greater than $150,000 if married filing jointly, or $75,000 for single filers).
Estimated taxes primarily fall into two categories:
- Self-employment tax
- Self-employment taxes are due on the first $142,800 on net income in 2021. This is broken down to 12.4% for Social Security and 2.9% Medicare tax. As your income increases past this amount, you will still owe Medicare tax but the Social Security portion stops. Single filers with income above $200k and married filers with income above $250k are subject to an additional 0.9% Medicare tax.
2. Income tax on profits and other income
- In addition to self-employment tax, you will also owe tax on any profits received from the business and any other income, much like how you would pay federal income tax on your earned income as a traditional employee. This TurboTax article provides some good information in helping you calculate your estimated taxes if you have a good idea of what your revenue and expenses will be. This also highlights the need for a qualified tax or financial professional who can ensure you are paying your taxes correctly.
Retirement Plan and IRA Contributions
In addition to being able to deduct ordinary business expenses from your income as an independent relief veterinarian, you are also eligible to set up your own retirement plan. Pre-tax contributions made to a retirement plan reduce your taxable income and can save thousands in taxes annually.
Using the same example above, an individual in the 24% marginal tax bracket who contributes $10,000 annually to a pre-tax retirement plan would save $2,400 in taxes every year.
Also, because you are considered both the employee and the employer, this can help supercharge your savings by possibly being able to contribute more to your plan than you would as an employee.
Some of the more popular retirement plan options for independent relief veterinarians are:
- Solo 401k
- SIMPLE IRA
Solo 401(k) plans are designed for the self employed. If you have full-time employees, you can’t utilize this type of account. However, your spouse is not subject to this rule and if they are employed in and earn money from this business, they can be a participant in this plan as well.
With a Solo 401(k), because you are both the employee and the employer, you can contribute the maximum amount of $58,000 for tax year 2021 (plus an additional $6,500 if age 50 or over).
As the employee, you contribute the maximum of $19,500 (plus $6,500 catch up if over age 50), just like a traditional or Roth 401(k). However, because you are also the employer you are able to contribute up to 25% of your compensation* up to $285,000, up to the maximum of $58,000 (or $64,500 for those age 50 or over).
Solo 401(k) plans can be made with either pre-tax or Roth deferrals, and are a fantastic option for self-employed veterinarians and relief vets. There are additional administrative and compliance requirements associated with solo 401(k) plans than with other plans, but the ability for higher contributions and Roth options will usually outweigh those burdens.
Most non-corporate owned veterinary practices use a SIMPLE IRA plan. SIMPLE IRA’s, as the name implies, are easy to set up and administer and require much less administrative and compliance follow up than solo 401(k) plans.
Contribution limits differ for SIMPLE IRA’s as well. The maximum employee contribution is $13,500 in 2021 (with a $3,000 catch for those age 50 and over), limited to 100% of your net earnings from self-employment. As the employer, you will have 2 options when it comes to matching, elective or non-elective. Non-elective contributions means the employer will contribute 2% of every eligible employee’s salary, regardless if they contribute or not. Employers can also use elective contributions, meaning they will contribute up to 3% of an employee’s salary deferrals, but only for those who make contributions. If you anticipate remaining self-employed with no employees, non-elective contributions most likely make more sense.
SIMPLE IRA plans currently only offer pre-tax contributions, so no Roth option. SIMPLE IRA’s, while available to small business owners and relief vets, are many times a better option for those practices and businesses with employees.
SEP-IRA (Simplified Employee Pension)
SEP-IRA’s are also very easy to set up and administer. SEP-IRA’s are fully and solely funded by the employer, employees are unable to make deferral contributions into a SEP-IRA.
Employer contributions are made on the same percentage of compensation for every eligible employee, and contributions are limited to the smaller of $58,000 (for tax year 2021) or 25% of employee compensation.
SEP-IRA’s are popular due to their flexibility of when contributions need to be made, and for how much. Popular with real estate agents, SEP-IRA’s can also be a great retirement tool for self-employed veterinarians and relief vets.
Similar to SIMPLE IRA’s, there are many rules regarding SEP-IRA’s and it is encouraged to understand the IRS guidelines when contributing to or implementing this plan.
If you work as both an employee of a practice and also as a relief vet, you may be eligible to contribute to both your own retirement plan as well as the retirement plan for which you are an employee. There are multiple factors to consider here and you should speak with a qualified financial professional for any questions.
Individual Retirement Accounts
In addition to opening and funding your own retirement plan, you are also eligible to make IRA or Roth IRA contributions on top of these contributions, depending on your income.
Traditional/Rollover IRA’s are pre-tax retirement savings plans, much like a traditional 401(k). Every dollar contributed reduces your taxable income, thus saving you in tax liability. The funds grow tax-deferred but because you have yet to pay any tax on this money, when you begin withdrawing in retirement the full amount distributed will be taxed as ordinary income. In theory when you retire your income will be less so depending on your expected income in retirement you could save more in tax today than you would pay in the future.
Deductible contributions to IRA’s are subject to income limitations, however. For married couples who file jointly, if your adjusted gross income is over $125,000 in 2021 you are unable to make a deductible contribution to an IRA if you are both covered by a retirement plan at work. If, however, one or both of you is not covered by a retirement plan at work, these income limits increase. Please visit the IRS website for more information on determining the deductibility of IRA contributions. Any individual who has earned income can make an IRA contribution, including spousal IRA contributions in situations where only one spouse has earned income.
Roth IRA’s have become a very popular retirement account due to their tax-free growth and withdrawals. You receive no tax deduction today for any contributions made, but the funds in the Roth IRA continue to grow tax-free and distributions can be made tax-free in retirement.
Roth IRA’s are also not subject to required minimum distributions (RMD). RMD’s require that holders of pre-tax accounts, such as 401(k), 403(b), or IRA’s begin withdrawing a minimum distribution from these accounts beginning at age 72. These distributions are required whether you need the funds or not. Because Roth IRA’s are not subject to RMD’s these accounts can continue to grow and be a great estate planning tool to pass tax-free assets to heirs.
Roth IRA’s are also subject to income limitations. For married couples if your adjusted gross income is below $208,000 in 2021 you can make a contribution to a Roth IRA, or under $140,000 for single filers. An individual must have earned income to be able to contribute to a Roth IRA. Please visit the IRS website for more information on Roth IRA contributions & distributions.
For those with income exceeding the limits to be able to contribute to a deductible IRA or Roth IRA, a non-deductible IRA is an option. There are no income limitations to be able to contribute, though you still need to have earned income.
Non-deductible IRA’s are contributed with after-tax funds, like a Roth IRA, but earnings are considered pre-tax and thus subject to taxation when withdrawn.
Backdoor Roth IRA
Non-deductible IRA’s are popular for their ability to make backdoor Roth IRA contributions. Essentially for those with incomes too high to make traditional Roth contributions, making a contribution to a non-deductible IRA and converting to a Roth IRA allows for the funds to grow tax-free and be distributed tax-free as they are now housed in a Roth IRA account.
Because contributions to a non-deductible IRA are made with after-tax funds, converting to a Roth IRA should not trigger any additional tax when done correctly.
When you begin the process of filing your taxes, the last thing you want to do is categorize and separate 12 months’ worth of income and expenses. Maintaining separate records between your personal expenses and business expenses is a best practice you should adopt.
If you operate under an LLC, open a bank account in the name of the business using the Employer Identification Number (EIN) given. Also, regardless of your business structure, if you use a credit card for business expenses, have a card that is specifically designated for this purpose and do not use this card for personal expenses. This will help prevent commingling of funds and expenses and will create a lot fewer headaches when you file your taxes.
Consider an accounting software, such as Wave Accounting or Quickbooks, which allow you to link your business bank and credit card accounts, categorize expenses, and create necessary reports such as profit and loss statements, balance sheets, and much more.
I’ve worked with individuals who keep receipts of every expense, and when tax filing time comes, they pull out their envelope full of receipts and a calculator and begin adding up expenses. This can be avoided by using technology to your advantage.
Finding the Right Professional to Help
Relief work provides an entrepreneurial opportunity for veterinarians who enjoy flexibility, variation, and more control over their work. But this work also adds additional complexity to your personal finances. Consider working with a fiduciary, fee-only financial planner who specializes in the veterinary community to ensure you are taking advantage of all the resources and benefits available.
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.