Locum Tenens Tax Planning and Financial Strategy

Locum tenens physicians typically receive 1099-NEC income as independent contractors rather than W-2 wages. There is no tax withholding from these payments, so the physician is responsible for setting aside funds and paying taxes directly rather than having an employer handle it through payroll.

Self-employment tax replaces FICA in this arrangement: the physician pays both the employee and employer halves of Social Security and Medicare, which works out to 15.3% on net self-employment earnings up to the 2026 Social Security wage base of $184,500, then 2.9% Medicare on all earnings above that amount, since Medicare has no wage cap. Half of the self-employment tax is deductible above the line, which partially offsets the additional cost, and an Additional Medicare Tax of 0.9% applies on earnings above $200,000 for single filers or $250,000 for married couples filing jointly (see the SDO CPA locum tenens tax guide, Taxstra's locum tenens tax guide, and the Social Security Administration's contribution and benefit base).

A solo 401(k) allows a locum physician to contribute in both the employee and employer capacity. For 2026, the employee deferral is $24,500 ($32,500 at age 50 or older, $35,750 for ages 60-63), and the employer profit-sharing contribution can add up to 25% of net self-employment earnings, for a combined total of up to $72,000 ($80,000 with the age 50+ catch-up, up to $83,250 for ages 60-63).

A solo 401(k) generally allows higher total contributions than a SEP IRA at the same income level, because the employee deferral portion reaches the combined cap at a lower income threshold than employer contributions alone would. The plan generally needs to be established by December 31 of the tax year for the employee deferral to apply, though employer contributions can typically be made up to the filing deadline. Depending on the plan, a solo 401(k) may also allow Roth employee contributions and, where the plan permits, after-tax contributions with an in-plan Roth conversion (a mega backdoor Roth).

For physicians who hold both W-2 and 1099 income in the same year, the $24,500 employee deferral limit is shared across all 401(k) plans combined, but the employer profit-sharing contribution applies separately to the solo 401(k) based on net self-employment earnings. Our guide to savings options after maxing out a 401(k) covers this contribution stacking in more detail (see Ava Health's 2026 locum tenens tax basics, Locums One's locum tenens tax guide, and the SDO CPA locum tenens tax guide).

A locum physician operating as a sole proprietorship or LLC may elect S-corp taxation, splitting income into a W-2 salary and a separate distribution. The salary remains subject to payroll tax, while the distribution is not subject to Social Security or Medicare tax, which is the basis for the potential savings. The salary set must be "reasonable" under IRS guidelines for the physician's work and specialty; setting it artificially low to reduce payroll tax is a well-documented audit risk.

As an illustration, a locum physician earning $400,000 who elects S-corp treatment with a $180,000 salary and $220,000 distribution would generally owe payroll tax only on the $180,000 salary, which could save roughly $7,000 to $8,000 in combined payroll and self-employment tax compared to paying self-employment tax on the full amount. The S-corp structure also changes how the employer profit-sharing contribution to a solo 401(k) is calculated, since it is then based on W-2 salary rather than net self-employment earnings, which interacts with the contribution math described earlier.

An S-corp adds administrative costs that need to be weighed against the potential savings: payroll processing, a separate business tax return (Form 1120-S), and typically higher accounting fees. Not every locum physician earns enough to justify this overhead; the break-even income is typically in the $200,000 to $250,000 range, though this varies by state and individual circumstances, and the net benefit is worth modeling with a tax advisor before electing (see Locums One's guide to tax moves locum physicians miss, MedMoneyGuide's overview of locum tenens salary structures, and Taxstra's locum tenens tax guide).

Locum tenens physicians who work in multiple states may have tax filing obligations in each state where they earned income. State rules vary considerably: some states have reciprocity agreements, some tax based on days worked within the state, and some states have no income tax at all. A physician may need to file nonresident returns in states where assignments were worked temporarily, in addition to a resident return in their home state.

Some states offer credits for taxes paid to other states, though the credit may not fully offset the liability, particularly when the home state has higher rates than the states where assignments occurred. Multi-state filing adds real complexity and cost to tax preparation, and working with a CPA experienced in locum tenens physician taxes can help identify which states actually require filings for a given year's assignments (see the SDO CPA locum tenens tax guide and Taxstra's locum tenens tax guide).

Physicians with federal student loans pursuing Public Service Loan Forgiveness (PSLF) should understand how locum 1099 income interacts with eligibility before accepting assignments. PSLF generally requires 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer, typically a 501(c)(3) nonprofit or a government entity.

Whether a specific locum assignment counts toward PSLF depends on the employer's qualifying status, not on the physician's tax classification as W-2 or 1099. Some locum agencies or the facilities they staff may be qualifying employers; others may not, so this needs to be confirmed for each assignment rather than assumed. Income-driven repayment plan payments are based on adjusted gross income, which may itself be affected by the business deductions and retirement contributions available to 1099 physicians, adding another layer of interaction to plan around.

This is a complex area where the interaction between self-employment status, repayment plan selection, and PSLF eligibility should generally be reviewed with a specialist before accepting locum assignments, rather than assumed based on how a W-2 employed physician's PSLF path typically works (see MedMoneyGuide's overview of locum tenens salary structures). Our guide to financial planning for physicians and our guide to tax planning for high-income earners look at how student loan strategy and tax planning connect across a physician's career.