Locum Tenens Tax and Retirement Planning

A fundamentally different tax and benefits structure

Locum tenens work — temporary physician staffing assignments, often filling coverage gaps at hospitals or practices — is typically structured as independent contractor (1099) income rather than employment (W-2) income. This single structural difference changes nearly every aspect of tax and retirement planning compared to employed practice, trading employer- managed withholding and benefits for self-directed responsibility and, in exchange, real tax planning opportunities that employed physicians do not have.

No withholding means quarterly estimated taxes

As a 1099 contractor, a locum physician has no employer withholding taxes on their behalf, and no employer paying the employer half of Social Security and Medicare tax. Instead, the physician owes self-employment tax (covering both halves of Social Security and Medicare) in addition to ordinary income tax, and must make quarterly estimated payments to avoid underpayment penalties — the same mechanical discipline described in our companion piece on partnership K-1 cash-flow planning for attorneys, applied here to 1099 physician income. Physicians new to locum work should set aside a fixed percentage of every payment — commonly in the 25–35 percent range depending on total income and state tax rates — into a dedicated tax reserve account immediately upon receipt.

Business deductions available to 1099 physicians

In exchange for the withholding and benefits responsibility, 1099 status opens up business expense deductions generally unavailable to W-2 employees: travel and lodging directly related to assignments, licensing and credentialing fees, continuing medical education, professional liability insurance premiums if self-purchased, and a portion of home office expenses if a genuine home office is maintained for administrative work between assignments. Physicians should keep organized records and receipts throughout the year — reconstructing a year of travel and expense records at tax time is far harder than tracking contemporaneously.

A simple mileage and expense log app, or even a dedicated spreadsheet updated after each assignment, is enough to capture most of the value here — the failure mode is not lacking a sophisticated system, it is waiting until April to reconstruct a year's worth of travel from memory and credit card statements, at which point many legitimately deductible expenses are simply lost to incomplete records.

Retirement plan options unique to 1099 income

Self-employment income opens access to retirement plan structures not available to W-2 employees, most notably a Solo 401(k) or a SEP IRA. A Solo 401(k) allows both an employee elective deferral (up to the standard annual limit) and an employer profit-sharing contribution (a percentage of net self-employment income, subject to overall combined limits), which for many locum physicians allows sheltering substantially more income than a SEP IRA alone, which only permits the employer-side contribution. Physicians who split time between W-2 employment and 1099 locum work in the same year need to coordinate contribution limits carefully, since elective deferral limits apply across all employers combined, not separately per job.

Health insurance and benefits gaps to plan around

Locum assignments typically do not include employer-sponsored health insurance, retirement matching, or paid time off — all benefits an employed physician receives automatically must be self-funded by a locum physician, either through a marketplace health plan, a spouse's employer coverage, or a professional association plan. Physicians transitioning to locum work, whether full-time or as a supplement to employed practice, should price these benefits explicitly and build them into their effective hourly rate comparison rather than treating the higher headline locum daily or hourly rate as directly comparable to employed compensation.

Locum staffing agencies sometimes offer group health coverage options for physicians between assignments, but coverage quality and cost vary considerably by agency, and physicians should compare these options directly against a marketplace plan or COBRA continuation from a prior employer rather than assuming the agency option is automatically the best or cheapest choice available.

A worked example of the tax reserve mechanics

Consider a physician taking on locum assignments earning $12,000 for a two-week block, paid as a lump sum with no withholding. Setting aside 30 percent immediately — $3,600 — into a dedicated account leaves $8,400 available for living expenses and discretionary saving from that assignment. Multiply this across a year of intermittent locum work totaling $150,000 in gross 1099 income, and the physician has systematically reserved $45,000 toward self- employment tax, federal income tax, and state income tax, paid out across the year's quarterly estimated payment deadlines. A physician who instead spends locum income as though it were a net paycheck — the habit carried over from years of W-2 employment — risks discovering at tax time that a five-figure liability has accumulated with no corresponding reserve to pay it, precisely because there was never any withholding to make the shortfall visible along the way.

A practical checklist

• Set aside 25–35 percent of every 1099 payment into a dedicated tax reserve account immediately.
• Track business expenses contemporaneously, not at tax time.
• Open a Solo 401(k) if maximizing retirement contributions from 1099 income is a priority, and coordinate limits if you also have W-2 income in the same year.
• Price your own health insurance and benefits explicitly before comparing locum rates to an employed offer.

The takeaway

Locum tenens work trades employer-managed simplicity for genuine tax and retirement planning flexibility. Physicians who set up the tax reserve and retirement contribution mechanics deliberately capture real financial advantages that employed practice does not offer; those who treat 1099 income like a bigger paycheck often end up with an unpleasant tax surprise.