Most physicians who transition to locum tenens focus on the income side of the equation. The 1099 pay rates are higher. The assignments are flexible. The math looks favorable.
What catches them off guard is the tax side.
The difference between W-2 employment and 1099 independent contractor status isn't just a paperwork distinction — it's a structural shift in how your income is taxed, what obligations you now carry personally, and what opportunities become available that didn't exist before. Understanding that shift before your first locum contract is signed isn't optional. It's the foundation everything else builds on.
The Self-Employment Tax Reality
As a W-2 employee, your employer pays half of your Social Security and Medicare taxes — the 7.65% you never saw on your paycheck because your hospital absorbed it. As a 1099 contractor, you pay both halves. That's 15.3% on net self-employment income, applied before federal and state income taxes.
For a physician earning $400,000 in locum income, the self-employment tax exposure alone runs well into five figures. This is the number that surprises physicians most in their first year of independent practice — not because it's hidden, but because no one modeled it for them before they signed their first contract.
The structure you put in place before you start earning is what determines how much of that exposure you can legally and strategically reduce.
Entity Structure Is the First Decision
The most consequential tax decision a locum physician makes is not which deductions to claim. It's what entity structure they operate through.
A physician earning 1099 income as a sole proprietor pays self-employment tax on every dollar of net profit. A physician operating through an S-Corporation pays self-employment tax only on the reasonable salary they pay themselves — not on distributions from the entity. At higher income levels, the difference between those two structures can reach $20,000 or more per year in self-employment tax savings alone.
The right entity structure depends on your income level, your state of primary residence, your practice patterns, and how your locum income interacts with any W-2 income you may still be earning. There is no universal answer. There is a right answer for your specific situation — and establishing it before you start earning is significantly more efficient than restructuring after the fact.
Quarterly Estimated Taxes
When you were a W-2 employee, tax withholding happened automatically. Nothing was required of you beyond reviewing your W-4.
As a 1099 contractor, you are now responsible for estimating and paying your own federal and state taxes four times per year. If you underpay those estimates, you'll face underpayment penalties on top of whatever you owe at filing time.
Most physicians who discover this in April of their first year as a locum contractor have one of two reactions: surprise at the size of the bill, or relief that they planned ahead. The difference between those two physicians isn't income. It's whether they had a year-round tax strategy in place or were relying on a once-a-year accountant review.
The Deduction Landscape
The 1099 tax code is both more burdensome and more flexible than W-2 taxation — and most physicians experience only the burden.
Operating as a self-employed physician opens access to a deduction category that simply doesn't exist for employed physicians: legitimate business expenses. Licensing fees, malpractice premiums, continuing medical education, professional memberships, a portion of health insurance premiums, and — depending on how your practice is structured — retirement contributions at a level that employed physicians can't access.
A Solo 401(k) for a high-earning locum physician can accommodate contributions well in excess of what an employer-sponsored plan allows. The combination of pre-tax retirement contributions and S-Corp salary optimization can shift the tax profile of a $400,000 locum income substantially — not through aggressive strategies, but through basic structural planning that most physicians never implement because no one shows them how.
What Multi-State Practice Creates
Locum medicine often means working assignments across multiple states. Each state where you earn income may require a separate tax filing. States have different income tax rates, different reciprocity agreements, and different rules about when a non-resident is required to file.
A locum physician working assignments in four states during a single year may have four separate filing obligations — each with its own rules, deadlines, and compliance requirements. For physicians who have only ever filed in a single state, this complexity is often discovered at tax time rather than planned for in advance.
Multi-state compliance is not inherently expensive to manage. It is expensive to fix retroactively.
The Structural Point
The physicians who retain the most of their locum income aren't the ones who find the most aggressive tax strategies. They're the ones who made the foundational decisions — entity structure, compensation design, retirement account optimization — before they needed them, rather than after they'd already been leaving money behind.
The tax code available to a 1099 physician is, in several important ways, more favorable than the one available to a W-2 employee. Realizing that advantage requires structure. Without it, the same tax code simply creates liability without benefit.