Have a Tax Question? Ask a Tax Expert
** Please take a moment to rate my response as "Excellent" so that I may be compensated for assisting you today. Please let me know if my assistance was anything less than "OK Service", as I am compensated based on whether or not I have assisted you with your issue. If you need further clarifications, PLEASE WAIT TO RATE MY ANSWER UNTIL AFTER RECEIVING FOLLOW UP FROM ME. If I receive anything less than OK Service, I do not get paid. Thank you for your kind understanding in this matter. If you have difficulties rating, then simply respond stating that you are having difficulties rating and thank me for my excellent, good, or ok service and we can get the rating applied by the site**
Another expert here:
If you are being paid as an independent contractor (you will receive a 1099-MISC instead of a W-2) for the locums work, then you will be reporting the income as a sole proprietor and can establish a retirement plan for that business income. Assuming you don't already contribute to a 401(k) through your salary as a resident, then you could establish a solo 401(k) and contribute $17,000 as an elective deferral and another approximately 20% of your net profit on Schedule C as an employer contribution. However, in order to do this the plan document would have to be executed and established by 12/31/12. The entire funding of the plan can be up until your tax return filing deadline plus extension.
If you have already contributed the maximum $17,000 to a 401(k) plan through your resident employer, then you could establish a SEP IRA instead and contribute approximately 20% of your net profit on Schedule C. This plan does not have to be established by 12/31/12. It can be established and funded up until your tax return due date plus extension.
There are 2 types of funding in a 401(k). One is considered an employee elective deferral (up to $17,000 if you are under age 50) and the other is considered an employer contribution. If you are a sole proprietor, then you are considered both an employee and the employer of the sole proprietorship. Hence, you can contribute $17,000 as an employee elective deferral and approximately $11,500 - $12,000 as an employer contribution (based on $60,000 of net profit). So if you contribute the maximum amount, your federal taxable income will drop by about $29,000 saving you approximately $7,250 in federal income taxes. Even though your federal income tax would be decreased by this amount, you will still owe self-employment social security taxes on the $60,000 of locum income so this will be about $6,800.
The 40% tax rate is a rough estimate when you add federal, state, and self-employment social security taxes.