Everyone knows the saying, “The only thing certain is death and taxes,” but as a medical professional, you likely know more about the former than the latter.  However, paying taxes will be the single largest expense of your entire career, more than malpractice insurance, student loans, your house, or your children’s private school education.  In some states, you will pay over 50% of your income in taxes, yet most medical professionals have only a rudimentary understanding of how they work.  This article will examine the US tax system, how it is stacked against you as a high-income earner, and how things change if you are an independent contractor.  Finally, I will discuss a few ways to get the tax system working for you.  

**Please note that any examples given are simplified to illustrate the topics discussed.  I am not a tax professional.  I recommend all medical professionals work with a qualified tax professional to help you plan and file your taxes. **

How US Taxes Work

Taxes Uncle Sam

     If you have a job, taxes must be paid.  The federal government levies tax on all forms of income, including salary/wages, bonuses, non-qualified dividends, interest income, and short-term capital gains.  Some states also tax income.  There are many other federal, state, and local taxes, including FICA, sales tax, property tax, taxes on specific items (gasoline, alcohol, and tobacco), and taxes on investment income, dividends, and long-term capital gains.  

     The US has a graduated income tax, meaning as you earn more money, you pay a higher percentage of your income in taxes.  This contrasts with a flat tax where you pay the same percentage despite how much you earn.  Let’s assume a flat tax system where everyone pays 10%.  Someone making $30,000 would pay $3,000 in taxes, while someone making $300,000 would pay $30,000.  A graduated tax system is more complex, with different income levels divided into tax brackets, each with a different tax rate.  The tax brackets depend on your filing status, of which there are 5: single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child.

Marginal Tax Rate                                                      

     Your marginal tax rate is the percentage of your income you will pay on your next dollar earned.  Your marginal rate is important as it will tell you how much you will pay if you work any overtime/extra shifts/second job/etc.  It will also tell you how much you will save if you get a tax deduction (assuming you itemize your expenses and have more than the standard deduction).  You need to know your taxable income to calculate your marginal tax rate.  Your taxable income is your adjusted gross income minus any deductions (the higher of your standard deduction or itemized deductions).  

Adjusted Gross Income 

     AGI is your total gross income minus any specific adjustments.  For most medical professionals, their only adjustment will be their contribution to a retirement account (employer-sponsored 401k, 403b, or SEP IRA/401k) and HSA (if eligible).  Other adjustments can include educator expenses, student loan interest payments (which we will discuss), and alimony payments.   

How to Calculate Your Marginal Tax Bracket

     Everyone filing as Single pays 10% of the first $11,000 of taxable income they earn.  They pay 12% of any taxable income between $11,001 and $44,725 and 22% of any taxable income over $44,725 until $95,375.  And so on.  If you are in the 35% tax bracket, your taxable income is between $231,500 and $578,125.  This does not mean you pay 35% of all your income in federal taxes.  The numbers change if you are married and file jointly, but the pattern remains the same.  

Marginal Tax BracketSingleMarried Filing Jointly
37%> 578,125> 693,750
35%> 231,500> 462,500
32%> 182,100> 364,200
24%> 95,375> 190,750
22%      > 44,725> 89,450
12%> 11,000> 22,000
10%≤ 11,000≤ 22,000
                  Tax brackets and percentages can and do change regularly.  These are accurate for 2023.           

Effective Tax Rate

     Your Effective Tax Rate is the average amount of taxes you paid on your taxable income.  Your marginal and effective rates will differ unless your taxable income is below $11,000.  Your effective tax rate is important as it allows you to predict how much money in federal income taxes you should save if you are an Independent Contractor.  

How to Calculate Your Effective Tax Rate

     Example 1:  You are single, live in Illinois, have no children, and make $250,000 a year at your W2 job.  You do not itemize your deductions and contribute $20,000 to your 401k plan.  Your AGI is $250,000 (total gross income) – $20,000 (pre-tax retirement contribution) = $230,000.  Your taxable income is your AGI – $12,950 (standard deduction) = $217,050.  Your federal marginal tax bracket is 32%.  Your effective tax rate is 22.7%.  You will pay (11,000 x 10%) + ((44,725-11,000) x 12%) + ((95,375-44,725) x 22.71%) + ((182,100 – 95,375) x 0.24) + ((217,050 – 182,100) x 0.32) = $49,301.  You calculate your effective tax rate by dividing the total tax you paid, $49,301, by your taxable income, $217,050, and multiplying by 100.  

Federal Insurance Contributions Act (FICA) 

     FICA taxes are calculated based on earned income, including wages, salary, and bonuses.  You do not pay FICA taxes on dividends, interest income, or capital gains.   This money goes to Social Security and Medicare and you must pay these taxes even if you never use these programs.  If you are a W2 employee, you will pay half of the FICA taxes while your employer is responsible for paying the other half.  If you are a 1099 worker, you will pay the entire amount yourself.  

     FICA combines taxes for Social Security and Medicare.  The Social Security portion has a wage cap, which means you pay a fixed percentage of your income only up to that cap.  The Medicare portion does not have a cap and adds an additional surcharge for higher-income earners.  For 2023, FICA taxes are calculated as follows:  

FICARateWage CapWage Threshold* 
Social Security12.4%$160,200NA
Additional Medicare Tax0.9%*$200,000 (single)$250,000 (married filing jointly)
*The employee pays 100% of the additional Medicare tax. 

     The best way to think about FICA is to break it into its component parts.  For Social Security, no matter how much earned income you make, the government will only collect up to $19,864.80 ($160,200 cap x 12.4%).  If you are a W2 employee, your employer must pay for half of that amount while you are responsible for the rest.  Your employer will withhold your wages and pay this tax for you before you receive your paycheck.  Next, the Medicare portion breaks down as follows:  For single W2 employees, the government will collect 2.9% of any earned income you make without limit.  Your employer will pay half, while you will pay half.  Again, your portion will be withheld from your paycheck.  If you have over $200,000 of earned income, you will have to pay an additional 0.9% tax on any amount over that threshold without limit.  This is only a tax on the employee; the employer doesn’t pay any of this but will withhold it.  

     If you are a 1099 worker, you pay all the FICA taxes yourself.  For Social Security, you will pay 12.4% of your earned income up to the cap of $160,200.  For Medicare, you will pay 2.9% of your earned income up to $200,000 and 3.8% of any earned income above that threshold.  This is not withheld from your paycheck; you are responsible for paying it.  

     Example 2:  We assume the same numbers as Example 1, where your earned income is $250,000.  Since this is more than $160,200, you will owe the maximum Social Security tax of $19,864.80.  You will pay ½ of this, or $9,932.40.  For Medicare, the government will collect 2.9% of $250,000, or $7,250, half of which the employer pays.  You will pay $3,625.  Finally, for the additional Medicare tax, you alone will pay 0.9% of your earned income over $200,000 ($50,000 x 0.9%), or $450.  The total FICA tax paid to the government is $27,564.80, with you contributing $14,007.40. 

     You must add this to the $49,301 in Federal Income Tax to get your total Federal Tax Burden of $63,308.40, which is 29.2% of your taxable income (your effective tax rate) or 25.3% of your salary of $250,000.  

State Income Tax

     Most states have a State Income Tax, but as of 2023, nine do not.  Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington*, and Wyoming have no income tax. In contrast, New Hampshire doesn’t tax earned wages (but does tax interest income and dividends).  11 Other states have a flat tax, including Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania, and Utah.  All the other states have a graduated tax system, similar to the federal system.  Since most state income taxes are graduated, you will have to look up your state’s tax brackets and calculate your tax burden based on your AGI.  State taxes peak at 13.3%, the top bracket in California for 2023.  You can currently only deduct your State Income Tax burden from your Federal Income Taxes up to $10,000 (the “SALT (State And Local Tax) deduction).”  There are some workarounds to this, and it gets complicated and is beyond the scope of this article.  The cap on SALT deductions is currently scheduled to end after 2025.  *Technically, Washington does tax capital gains income.   

     Example 3:  To continue our examples above, let’s assume you live in Illinois, where there is a flat tax of 4.95% on your federal AGI.  This is 4.95% x $230,000, or $11,385.  We calculate this first, as the SALT deduction applies to your federal income tax.  One way to do it is to take the maximum SALT deduction of $10,000 and multiply it by your marginal tax rate.  You will save this amount on your Federal Income Taxes after you pay your State Income Tax burden.  Note this only works if deducting SALT doesn’t drop you to a lower marginal bracket.  It is $10,000 x 32%, or $3,200 in this case.  Your total tax burden now becomes $63,308.40 + $11,385 – $3,200 = $71,493.40.  This is 32.9% of your taxable income (your effective tax rate) or 28.6% of your salary.       

The NIIT Tax

     The NIIT tax, ObamaCare Tax, or Medicare Surcharge Tax is a tax on “unearned”/investment income for high-income earners, such as physicians.  You are only subject to this tax if your AGI is over $200,000 per year (single) or $250,000 (married filing jointly).  The Medicare Surcharge Tax is 3.8% on the lesser of (1) your net investment income or (2) the amount that your AGI exceeds the $200,000/$250,000 limit.  When you start out, this won’t affect you much, but as you accumulate passive investment income, you’ll have to consider it.  

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How To Pay Taxes


     How you pay taxes depends on your Employment Status.  As a “W2” employee, your employer withholds payroll taxes and reports your income to the government.  The employer withholds money from your paycheck based on the information you provide and uses that money to (1) pay your income taxes and (2) pay your 50% of FICA taxes.  They are paying these taxes for you out of your own money.  Additionally, your employer is responsible for paying the other 50% of the FICA taxes out of their money.  

     This is how most people pay taxes and how you paid as a medical resident.  You can adjust your withholding so more (or less) money is held for taxes from your paycheck each period.  Other amounts may be withheld from your paycheck, such as any employee health insurance or a retirement plan.  The paycheck you finally receive is net of all those withholdings.  

     In this manner, your taxes are paid at the same regular intervals as your paychecks.  The government gets its money in “real-time,” which is how they like it.  The employer is also constantly updating the government on how much money you are making.  When you file your tax return, you are responsible for ensuring you have paid all the taxes you owe.  If you paid too much, you will get a refund.  This “refund” is simply the amount you overpaid, which you can think of as a 0% loan you provided to the government.  If you have paid too little, you will owe the difference and must pay it all at once.  The goal is to be as close to correct as possible.  


     A “1099” worker is not an employee but an Independent Contractor (IC).  The employer will not withhold any money, and the IC is responsible for paying their own Federal and State taxes.  Additionally, the IC pays 100% of FICA taxes.  No taxes are withheld, so the check you receive is the gross amount.  It is essential to understand that as an IC, the money you receive is not all yours!

     If you are a 1099 employee and do not have a legal entity (PA, LLC, PLLC), you will pay the required taxes directly to the government.  Unfortunately, you can’t just wait until the end of the year, see how much money you made, then pay what you owe.  It isn’t quite so simple.  As I said earlier, the government wants their money in real-time.  Therefore, four times a year, you must pay quarterly estimated taxes.  This is exactly what it sounds like.  You must calculate how much money you have made, estimate how much you owe, and pay it every three months.  Quarterly estimated taxes are due April 15 (Q1), June 15 (Q2), September 15 (Q3), and January 15 (Q4).  Since you are dealing with the government, penalties will be assessed if you do not accurately pay these taxes.  If your income is steady from paycheck to paycheck, it is easy to determine and pay what you owe.  However, if your income is variable, quarterly taxes can be tricky to pay accurately in real-time.  Fortunately, the government has a “safe harbor” option.  You won’t be assessed an underpayment penalty if you pay 90% of the taxes you owe for the current year or 110% of your total taxes paid the prior year.  You can divide these payments up into four quarterly installments.  Not surprisingly, I suggest you work with an accountant if you are receiving substantial 1099 income.  

     If you form a legal business entity and are a 1099 worker, the flow of cash can be complicated.  Money flows from your employer to your business.  From there, the money can go to your retirement account, to your payroll administrator, who will send money to you as an employee of your business, or directly to you as distributions.  Finally, you are responsible for paying quarterly estimated taxes.  Read this article if you want examples of how money flows when you are a 1099 worker with a legal business entity.  

High-Income Earners

     I’m sure you have heard it said that ‘the rich don’t pay any taxes’ or ‘they don’t pay their fair share.’  Some of you may even believe this to be true.  If you are a new medical professional, you’re about to find out.  Don’t get me wrong, there are plenty of problems with the US tax system, but doctors and dentists not paying enough isn’t one of them.  These misleading statements do not consider the definition of “rich” nor how you earn money. 

     The US tax code does not favor earned income.  Period.  Due to our graduated tax system, high-income earners pay the highest tax rates.  Medical professionals make a lot of earned income and pay a lot of taxes.  What about all the loopholes for the rich?  I heard that Warren Buffett pays less in taxes than his secretary.  While it may be true that he pays a lower percentage of his income than his secretary, that is because his secretary makes earned income while he does not.  She is taxed at the rates noted above, just like a high-income earning medical professional.  Meanwhile, Mr. Buffett draws little to no salary, has significant write-offs from traveling around the world on business, earns income off long-term capital gains (taxed at a lower rate), and has most of his wealth tied up in unrealized capital gains (which aren’t taxed until they are realized).  This is great for people like Mr. Buffett but bad for you and his secretary.  

     What about tax “write-offs” for rich doctors?  Unless you own your practice, most medical professionals have few job-related expenses.  We work in the service industry.  We aren’t buying large mechanical equipment that depreciates.  We aren’t flying around the world on business.  We aren’t entertaining clients.  Unless there are exceptional circumstances, most medical professionals will take the standard deduction just like everyone else.  

     What about loopholes?  I heard rich people have lots of them.  The typical medical professional makes too little income (or the wrong kind) to take advantage of “loopholes” and too much for many common tax deductions or credits.  For example, the interest portion of your student loan payment is deductible up to $2,500 per year.  Medical professionals have lots of student loans, so this should be good for them.  Unfortunately, this deduction goes away once you make over $85,000 (single) or $175,000 (married).  That is not the only tax deduction or credit that phases out with increasing income.  The Earned Income Tax Credit, the Child Tax Credit, The American Opportunity Tax Credit, and the Retirement Savings Contribution Credit all go away with a typical medical professional’s income.  

     The bottom line is that most high-earning medical professionals will benefit from far fewer tax benefits than the average American simply because they make too much money.  That’s a good problem to have, but it’s still a problem.  If you are a 1099 Physician, expect to pay approximately 30% of your adjusted gross income in federal taxes.  This will be 2-3% lower if you are a W2 employee.   

If You Can’t Beat ‘Em

     While certain loopholes, such as carried interest, may be abused by a small percentage of the ultra-wealthy, they aren’t applicable to the typical medical professional.  So, how do you lower your tax burden?  It can be challenging since the tax system doesn’t favor high-income earners.  The first and most obvious thing to do is max out your pre-tax retirement accounts yearly.  However, there are a few other things that you can do as well.

Work With a Good Accountant 

      You need more than TurboTax or H&R Block once you reach this income level.  Those are tax preparers.  You supply information, and they fill out the paperwork correctly.  You need a tax advisor who can help you plan your tax strategy and guide you throughout the year and over the course of your career.  Only some accountants fit this bill, so choose wisely. 

business accontant

Move to a No Tax State

     There is a wide variation in state income tax, from 0% – 13.3%.  By my estimation, the average medical professional would pay at least 5% in 24 states.  In a few states, it would be closer to 10%.  For instance, if you are single in California, you pay 9.3% on income $66,295 -$338,639.  In Hawaii, it’s 9.0% over $150,000 and 11% over $200,000, while in Minnesota, you pay 9.85% on income over $183,340.  A physician making $500,000 in California would pay an estimated $45,246 in state taxes, while the same physician in Texas would pay $0.  Over a 25-year career, this adds up to over $1.1 million in tax savings, which could turn into $2.2 – $3.8 million over 25 years if invested!  

     A word of caution here.  States that don’t have an income tax still need revenue to function and will attempt to make up for those taxes elsewhere.  This can be through higher sales tax, property tax, or others.  However, I would rather pay on what I spend than on what I earn, especially when trying to build wealth.  I can choose to buy a smaller house and less stuff.  I can’t choose to pay less taxes if I live in California.  

Work as a 1099 and Form a Business

     This may seem counterintuitive as we just discussed how Independent Contractors are responsible for 100% of FICA taxes.  They also don’t get benefits like health insurance, overtime, paid time off, and retirement plans.  Why would anyone want to work as a 1099?  There are several reasons, including that they usually are paid more than their W2 counterparts as compensation for the above issues.  An IC can also deduct 50% of FICA taxes as a business expense since they pay the employer portion.  Additionally, you can often put more money into a retirement account than a W2 employee.  The maximum you can contribute to an employer-sponsored 401k in 2023 is $22,500.  Your employer may also contribute, with the total amount for employee/employer not to exceed $66,000.  However, how many Health Care employers contribute $43,500 annually to their employee’s retirement fund?  Not many that I know of.  Even if they did, only the amount you contributed would be pre-tax to you.  Conversely, as an IC, you are self-employed and thus both the employer and the employee.   You can now contribute $66,000 per year into your SEP, all of which is pre-tax.  If your income is high enough to max out your SEP, the marginal tax savings of this additional $43,500 contribution should be higher than the FICA tax that the employer would have paid.  However, you’ll have to do some math to ensure this is correct for your situation.  

     You can potentially save on FICA taxes if you are an Independent Contractor, start a legal business entity like a PLLC, and opt to file taxes as a S-corporation.  Your PLLC functions as a single-employee business that employs only you.  The PLLC must pay you a “reasonable salary” as an employee and will pay out any additional profit to you as a distribution, which are not subject to FICA tax.  Since a reasonable salary for a physician is likely to be above $160,200, this won’t save you anything on Social Security taxes.  However, you can save 2.9% – 3.8% on the Medicare Tax depending on the income of the PLLC.  For very high-income earners, this can be real savings.  With this combination of 1099 income through your own PLLC or other business entity, you will likely experience tax savings in addition to a supercharged retirement account.  

Increase Your Unearned Income 

     If the government levies less tax on unearned income, such as long-term capital gains, then increase your unearned income.  This can be done via the stock market, having a successful business, and through rental real estate.  If you live and work like a student for five years at the start of your career, then spend less than you earn and invest the difference throughout your career, you will eventually get on the right side of this formula.  You will find that your invested capital produces more yearly gains (at a lower tax rate) than you make at your job.  This is (tax-efficient) financial freedom.    

Rental Real Estate 

    Rental real estate can be a very tax-efficient way to grow wealth.  All expenses related to a rental property are deductible.  If levered, the mortgage interest is as well.  If you hold the property for over one year, any price appreciation is considered long-term capital gains with a favorable tax rate.  An investment property may also be sold and exchanged tax-deferred through a 1031 exchange.  Both residential and commercial property can be depreciated, lowering your tax burden on your earned income.  When you sell the property and recapture the depreciation, it is recaptured at the long-term capital gains rate, thus creating a tax-rate arbitrage (as long as your marginal rate is greater than the long-term capital gains rate).  Finally, there are opportunities to accelerate depreciation that can be advantageous.  A complete discussion of the tax benefits of real estate investing is beyond the scope of this article, but there are many educational resources online, such as www.BiggerPockets.com.


     As you can see, US taxes are quite complex and your days of filing with TurboTax are over.  While you will need a tax professional to assist you with the details, you still want to possess a working knowledge of the system.  Working with an accountant to plan your taxes differs from abdicating your responsibility to someone else.  As a doctor, you are ultimately responsible for the care of your patient, regardless of who assists you.  Similarly, you are ultimately responsible for all parts of your financial life, including your taxes.  You don’t have to do it alone, but you need to be driving the ship.  As with medicine, you must learn and train throughout your career and rely on the help of specialists.  Hopefully, this article will be of use to you on your financial journey.  If you’d like to read a cautionary tale of what happens when you don’t pay your taxes, read “The Legend of Doc J” here.