If you are a physician working as an independent contractor and have a legal business entity, the flow of money can be confusing.  Who funds your retirement account?  How and when do you pay taxes?  What about your student loans?  How do you save money to invest outside of your retirement accounts?  How much can you spend each month?  Hopefully, this post will answer these questions and more.  

     For this example, Mary Smith is a new emergency physician who wants to start her career off right.  Dr. Smith read the post 12 Money Tips for New Residency Graduates And 1 To Avoid and has taken action.  She would like clarification on how much money she should spend and save as she transitions from a resident to an attending.  Mary Smith, MD is single, working as an Independent Contractor via her legal entity, Mary Smith PLLC.  Mary receives a monthly paycheck with a salary of $40,000 per month, has a SEP 401k, has student loans, and wants to strive for a 50% total savings rate.  Mary lives in Texas, which has no state income tax.

     In real life, it is unlikely that Mary will have such a steady income.  She may work on an RVU basis, work a few extra shifts now and again, or work part-time through a different employer.  For this reason, I do not include a breakdown of Mary’s tax burden in this post.  For most physicians in this income range, saving 30% of your salary for taxes, as illustrated in this method, will get you close to the total amount of federal (income & FICA) tax that you owe.  If you make substantially more or less money or live in a state with state income tax, you will need to make adjustments accordingly.

Money Flow

  1. The employer pays the legal entity, Mary Smith, PLLC.  

  2. Mary Smith, PLLC pays Mary Smith MD a “reasonable salary” through a payroll company into her PLLC business account.  The payroll company will withhold taxes on the “reasonable salary” and pay the government.  I recommend a 30% withholding rate.  

  3. Mary Smith, MD receives her check into her personal checking account.  Mary Smith, PLLC funds her SEP with $5500 through the PLLC business account. 

  4. Mary Smith now takes a distribution from the PLLC for the remainder of the money and immediately transfers 30% of the distribution to her tax account.  

  5. Mary transfers 25-50% of her total pay into her Brokerage Account.  

  6. Mary can now spend the remainder of the money in her personal checking account however she chooses.