Run the 1099 Side of Medicine: Entity, Taxes, Solo 401k

Who this is for: You are a physician picking up locums shifts, moonlighting, or contract work paid on a Form 1099, and nobody withheld a dollar of tax for you. Or you are leaving a W2 job for full time contract work and becoming your own payroll department. This guide builds the machine that keeps that income safe: the entity, the tax rhythm, and the solo 401(k).

The one line version: Default to simple. Run the income through a clean structure, reserve for taxes every time you get paid, pay the IRS four times a year, and use a solo 401(k) to shelter far more than a W2 plan alone allows. Add an S corporation only when the profit is large enough to pay for its own complexity.

Table of contents

1. What changes when the income is 1099
2. The entity question, in the right order
3. When the S corporation pays
4. The quarterly tax rhythm
5. The solo 401(k)
6. Reserves: the 1099 finish line is longer
7. Mistakes that cost real money

1. What changes when the income is 1099

A W2 paycheck arrives with the hard parts already done. Tax is withheld, the employer pays half of Social Security and Medicare, and the retirement plan runs itself. A 1099 payment arrives whole, and every one of those jobs moves to you.

The biggest line is self employment tax. You owe 15.3 percent on your net earnings, made of 12.4 percent for Social Security and 2.9 percent for Medicare, per IRS Topic 554. The Social Security part stops at the 2026 wage base of $184,500, and W2 wages from a hospital job fill that same wage base first. The Medicare part has no cap, and an added 0.9 percent can apply at higher income. The tax is figured on 92.35 percent of net earnings, and you deduct one half of it on your return. That is separate from income tax, which you also owe. A physician who budgets only for income tax and forgets this line starts the year behind by roughly fourteen cents per dollar up to the wage base and about three cents above it.

The second change is timing. There is no withholding, so the IRS expects you to pay as you go, four times a year. The third change is opportunity. As your own employer, you control the retirement plan, and the plan you can build for one person is larger than most hospital plans.

2. The entity question, in the right order

Most physicians ask about an LLC first. For income from medical care, state law gets the first vote. It decides whether an entity may deliver that care at all. Federal tax law goes second. It decides how an eligible entity is taxed.

Sole proprietor is the default. When a contract pays you in your own name, there is no entity to form or feed. You report the income on Schedule C, pay self employment tax on the net profit, and you are done. For a resident moonlighting a few shifts a year, this is usually the right answer. Simple is a feature.

A professional entity is the usual entity route. In most states, an entity formed to provide medical care cannot be an ordinary LLC or an ordinary corporation. The vehicle is usually a professional corporation or a professional limited liability company (PLLC). Some states use a professional association instead. Ownership and control stay with licensed physicians under state rules on the corporate practice of medicine, per Blue Cloud CPA. Start with the vehicle your state allows. Then apply the tax rules that fit that vehicle.

Where a professional LLC is allowed, the LLC tax point still holds. For federal tax, a professional LLC with one member is treated as an entity disregarded as separate from its owner unless it elects corporate treatment. You file the same Schedule C and pay the same self employment tax as a sole proprietor, per the IRS page on single member LLCs. That tax treatment does not create permission to practice medicine through an LLC in a state that bars it.

California is stricter. The Medical Board of California lists a physician operating a medical practice as a limited liability company among prohibited structures. Its fictitious name guidance accepts only professional medical corporations for physicians. California Corporations Code section 17701.04(e) also says the LLC statute does not permit an LLC to render professional services in California. A California physician who wants an entity for clinical income uses a professional medical corporation. A California physician who works in their own name stays on the sole proprietor path.

No entity shields your own malpractice. A professional entity may separate you from some ordinary business obligations under state law. It does not shield you from liability for care you personally provide. Your malpractice exposure follows your work, not the name on the contract. Choose the vehicle for legal validity first, administration second, and tax third.

The S corporation election is the tax move. It is not a state filing and it is not a vehicle by itself. An eligible professional corporation or professional LLC elects S corporation treatment for federal tax. Your income then splits in two. One part is a reasonable salary, which carries payroll tax. The rest can flow as distributions, which do not carry self employment tax. That split is the entire mechanism, per the IRS page on S corporations.

3. When the S corporation pays, and when it does not

The election is not free. It brings payroll processing, a separate corporate return, possible state fees, and a salary that must be reasonable for a physician doing physician work. Set the salary too low and the IRS can reclassify distributions as wages.

Practitioner guidance puts the crossover at roughly $50,000 to $80,000 of annual net profit, per Owen CPA. Below that zone, the payroll and accounting costs usually eat the saving. Well above it, the saving is real but usually a few thousand to around ten thousand dollars a year, depending on how much profit sits above a defensible salary.

Run the decision in this order. First, estimate a full year of 1099 net profit, not one good month. Second, ask a CPA to model both paths with a defensible physician salary, your state costs included. Third, elect only if the modeled saving clears the added cost by a wide margin, because the election also interacts with your retirement plan math and with the qualified business income rules. On that last point, be careful: medicine is a specified service trade or business under Section 199A, so the 20 percent qualified business income deduction phases out above the 2026 taxable income threshold, which most single attendings clear. A married couple may still sit under it, per SDO CPA. Do not let anyone sell you an entity on the strength of a deduction you may not get.

4. The quarterly tax rhythm

The system that works is boring on purpose. Open a separate business account. Route every 1099 payment into it. The day a payment lands, move a fixed share into a tax reserve account and do not touch it for any other purpose. Start near 30 percent when 1099 income is your only income, and 40 percent or more when it stacks on top of an attending salary, then true it up with your CPA.

Federal estimated payments on Form 1040 ES fall due April 15, June 15, September 15, and January 15 of the following year. Most states with an income tax run a matching quarterly rhythm. Paying on the safe harbor rules, generally 100 to 110 percent of the prior year tax depending on income, protects you from underpayment penalties while your income finds its level. The failure mode this prevents is the April surprise: a full year of attending level 1099 income, no payments made, and a five figure bill plus penalties arriving at once.

One rhythm shortcut for moonlighters: instead of paying quarterlies, you can raise the withholding on your W2 paycheck. The IRS counts withholding as paid evenly across the year, even when the extra amount comes out of late year paychecks, so a W2 job can cover the 1099 tax bill without four separate payments.

Confused about the 1099 side of medicine, then ask me a question!

If you have a question about a decision you are about to make, ask it here

Ask your question

5. The solo 401(k): the largest shelter most physicians can build

A one participant 401(k), called a solo 401(k), covers a business owner with no employees other than a spouse. You contribute in two roles, per the IRS page on one participant 401(k) plans.

As employee: elective deferrals up to $24,500 for 2026, per the Internal Revenue Service. This limit is yours as a person, not per plan. If you also have a hospital 401(k) or 403(b) from a W2 job, every dollar deferred there counts against the same $24,500. Double deferring is a common moonlighter mistake. Keep one running total across both plans.

As employer: a profit sharing contribution of up to 25 percent of compensation if the business is a corporation, or an effective 20 percent of net earnings if you are a sole proprietor, after the adjustments the IRS requires.

Combined: total annual additions are capped at $72,000 for 2026 under Section 415(c), per IRS 2026 Amounts Notice. Catch up contributions for age 50 and over sit outside that cap. Unlike the deferral limit, the $72,000 cap applies per unrelated employer. If your hospital plan is a 401(k), each plan gets its own $72,000 cap. If it is a 403(b), the 403(b) and your solo 401(k) share one $72,000 cap, because a 403(b) aggregates with a business you control. That is what makes the combination so powerful for a moonlighting attending: one shared deferral limit, two employer buckets.

Two setup notes. First, timing. A sole proprietor opening a new plan can still make first year elective deferrals up to the tax filing deadline under SECURE 2.0, but an S corporation's deferrals have to come out of salary paid by December 31, so open the plan early in the year rather than in December. Second, a solo 401(k) that accepts rollovers gives you a place to park old pre tax IRA money, which keeps the backdoor Roth clean. That pairing has its own guide in this series.

A SEP IRA is the simpler rival, and for most physicians it loses. It has only the employer side, so at the same income the solo 401(k) shelters more, especially at moderate profit where the $24,500 deferral does the heavy lifting. There is a second reason it loses: a SEP IRA balance counts under the pro rata rule and breaks a backdoor Roth, and a solo 401(k) does not.

6. Reserves: the 1099 finish line is longer

Contract income stops when you stop, and it arrives unevenly while it runs. That is why the Financial Fellowship waterfall sets the finished reserve by employment type. A W2 physician finishes the reserve at six months of expenses. A physician on 1099 or sporadic income finishes at twelve months of expenses. The endpoint depends on the income pattern, never on the specialty. Build toward that twelve month finish line at the end of the waterfall, after step 9 in the playbook order, once the earlier steps are in place and debt above 7 percent is extinguished. A contractor who holds three months and calls it done is holding a waypoint, not a finish.

7. Mistakes that cost real money

Spending the tax share. The payment that lands is gross, not yours. Reserve first, every time, before any other use.

Missing a quarter. Four due dates, on the calendar, with the reserve already funded. A missed quarter is a penalty for a problem you already solved.

Double deferring. One $24,500 limit across the hospital plan and the solo plan. Track the combined total.

Electing the S corporation too early. Below the crossover zone, the election is a cost with a costume on. Model it first.

Setting a token salary. The salary must fit physician work. A salary set only to dodge payroll tax invites reclassification, back tax, and penalties.

Skipping coverage because the income feels extra. Moonlighting income still needs disability coverage that counts it and liability lines in place. Coverage sits early in the waterfall for a reason.

The last word

This guide is education, not financial advice and not tax advice. Entity election, salary setting, and estimated payments turn on your state, your contracts, and your full return, so run those decisions with a CPA who works with physicians. The structure itself is simple: reserve for taxes the day you are paid, pay four times a year, shelter what you can in a solo 401(k), and add the S corporation only when the profit pays for it. Build that machine once, and the 1099 side of medicine becomes what it should be: the flexible, well paid part of your career, not the part that surprises you in April.

Sources

• Internal Revenue Service: 2026 limits announcement ($24,500 elective deferral, $7,500 IRA limit)
• IRS 2026 Amounts Notice: 2026 amounts for retirement plans and IRAs (Section 415(c) limit $72,000, compensation cap $360,000)
• IRS Topic 554: self employment tax (15.3 percent rate, 92.35 percent of net earnings, one half deduction, Social Security wage base)
• IRS, Single Member Limited Liability Companies: disregarded entity default for a single member LLC
• IRS, S Corporations: S corporation basics (reasonable salary, distributions, separate return)
• Blue Cloud CPA: medical practice entity structure (professional corporation and PLLC requirements, corporate practice of medicine ownership limits, and personal liability for a physician's own malpractice)
• Medical Board of California: physician practice information (California prohibits a physician operating a medical practice as a limited liability company, a limited liability partnership, or a general corporation)
• Medical Board of California: fictitious name permit questions (only professional medical corporations accepted for physicians; physicians cannot practice medicine as LLPs or LLCs)
• California Legislative Information: Corporations Code section 17701.04 (subsection (e) bars an LLC from rendering professional services in California)
• IRS, One Participant 401(k) Plans: solo 401(k) structure (two role contributions, per employer cap)
• IRS Form 1040 ES: estimated tax for individuals (quarterly due dates)
• Owen CPA: tax strategies for 1099 contractors (S corporation crossover zone, quarterly payment habits)
• SDO CPA: self employed tax deductions for 2026 (deductible half of self employment tax, Section 199A thresholds and limits)