Transcript
YouTube English auto-captions.

========================================================================

Hey guys, welcome to another edition of Bootstrap MD, the podcast for physician and healthcare entrepreneurs. My name is Dr. Mike Wing. I'm a 20 plus year physician entrepreneur.

And I want start off by giving you a confession. So years ago, and I'm not going to give you the exact how many years, it's been a while. I remember getting my first real check as a doctor and I looked at it and I thought somebody made a mistake because the number on the left the gross when I was the number that I've been dreaming of since second year med school and then on the right would actually receive looked like somebody had taken a bite out of it like a huge bite like almost half the sandwich bite and I did what most physicians do. I assumed it was just how it worked.

That's how it worked for me because of the choices I was making or more accurately the choices I wasn't making. Because here's the thing that nobody tells you in medical school and nobody's going to tell you in resency and your hospital HR department is definitely not going to tell you. It's this that the W2 income is the most taxed form of income in the entire US tax code. The tax code was not written for employed physicians.

It was written for business owners, for investors, for people who take risks and build things. And the moment you step even partially into that world, the rules change significantly. So, I want to walk you through what I'm calling the physician tax playbook. These are seven strategies that most doctors don't discover until they're already overpaid for years, some of them for decades.

First off, I'm not a CPA. I'm not a financial adviser. I'm not your attorney. You should definitely have those people in your corner.

But I am a physician who's been on both sides of it. The W2 side where you just take whatever it gives you and then the business owner side where you can actually have options. And the difference is it's real. So let's get into it.

Before I get into these seven strategies, I want to spend a few minutes on the diagnosis because that's what we do, right? Diagnosis before treatment. So here's the presenting complaint. You're a physician.

You're employed, your W2, you're making, let's say, you're 450,000 a year. That sounds amazing. It's incredible. I'm not going to pretend it isn't.

But here's what happens to that 450,000. Federal taxes, you're in the top bracket for a chunk of that. State taxes. If you're in New York or New Jersey or my own beautiful state of California, add another 9 10 12%.

On top of that, you got Medicare payroll tax. 045%. There's no cap. Every single dollar.

Add that up and a physician earning $450,000 as a W2 employee is often taking home somewhere between 230 and 270,000. So think about that. You spent the better part of your years, your 20s in training. You took on six figures in debt.

You delayed everything, the house, the family, the actual life to build this career. and then you handed almost half of it to the government before you've been sought. And that's not an income problem. That's a structure problem.

And the frustrating part is the part I wish someone had grabbed me by the shoulders and explained to me is that the structure can change, but only if you understand what's actually available to you. So, let's get into it. Seven strategies. Let's go through it step by one.

Strategy number one is the escort. And to be honest with you, if you take nothing else from this entire episode, take this one. ESCORP. I talk to physicians all the time who are doing consulting work.

Tele medicine, medical, legal, coaching, speaking, getting paid on a 1099, you're structuring it as a sole proprietorship, meaning you're just a person. You're getting paid. And here's what that means tax- wise. every dollar of profit, every dollar is subject to self-employment tax, which is 15.3% of the first roughly $160,000 and 2.9% above that on top of your income tax.

So, if a physician is netting $300,000 from consulting work as a proprietorship, you could be paying somewhere north of $20,000 in self-employment tax, just that before income tax. So the escorp fixes a big chunk of that. So here's how it works. Inside your escorp, your income is split in two buckets.

Your salary, which you set as a reasonable number for the work you do, and your distributions. The rest of the profits come out as distributions. And distributions are not subject to self-employment tax. So instead of paying self-employment tax on 300,000, you're paying it on, let's say, 140,000.

$150,000 in salary. The rest comes as a distribution. It's clean. It's legal.

It's significantly cheaper. So, we're talking potentially 10 to $15,000 of years in savings, sometimes more. Now, I want to be real with you. ESCORPs cost money to run.

You need payroll. Ideally, you need a CPA who actually understands business taxes instead of personal returns. Budget $2,000 to $5,000 a year in additional overhead. That's real.

But when the gross savings are $10 to $15,000, [clears throat] you do the math. It's not complicated math. Most CPAs will tell you that once you're netting 40 to $50,000 of more in business income, this conversation is worth having. So, if you have any 1099 income right now and you've never had this conversation, that's your homework from this episode.

Find a CPA, call your CPA, ask one specific question. Does an escorp election make sense for my business income? Now, if they can't give you a clear answer to that, you might need to find a different CPA. All right, strategy number two, and this one is going to make some of you frustrated.

Not at me, but at the situation. So, I'm giving you fair warning. When you're a W2 physician, your retirement options are whatever your employer offers you. Your standard 401k, the 2024 limit is 23,000, maybe 30,500 if you're over 50 years old with some catch-up contributions.

But that's it. That's your ceiling. When you have a business, your own business, the ceiling disappears. So, a solo 401k, which is available to self-employed folks with no employees, let you contribute as both the employee and the employer.

So, that pushes the limit up to around $69,000 tax deferred. Then you can add a cash balance plan on top, a defined benefit plan where depending on your age and income, you can shelter another $100,000, $150,000. sometimes more per year. So, I want you to hear that number.

A physician with W2 income plus a business could potentially shelter 170,000 to $270,000 a year from current taxation. That's not investment and hope it grows. Let's remove it from your taxable income this year. Pull it out of reach from the IRS right now.

Let it compound tax deferred for decades. Most of the physicians you work with, your colleagues, your partners, they're all under the same W2 ceiling. Nobody's talking about this at the hospital because nobody at the hospital really knows about it. The physician or the people who know about it are the ones who stepped outside the ceiling and built something.

So action step here is simple. If you have business income and you're not sure whether you're maximizing every retirement vehicle available to you, that's a conversation you need to have. Not eventually, but soon. All right.

Started three. This one's more straightforward, but there's a mind shift that kind of trips people up. When you run a business, a lot of expenses become deductible. And I don't mean you start writing off your family vacation as a quote business trip.

That's not what I'm talking about. I'm talking about things that you are already spending money on for your business that you might not be tracking. Your home office if you use a dedicated space for your business, your business phone, your website, your podcast equipment if you have a show, the mastermind program you join to grow your skills. CME that relates to your business, professional services, your CPA, your attorney, business travel, self-employed, health insurance premiums.

I could keep going, but the list is long. Here's the thing. As an employee, none of that is deductible. You just pay it.

But as a business owner, those are deductible business expenses. They reduce your taxable income at the source. The catch, and there's always a catch, is documentation, receipts, business purpose noted, separate bank account, clean records. That's the actual work.

It's not glamorous, but neither is writing a check to the IRS for the expenses you already paid. So, the physicians who get in trouble with deductions are the ones who kind of blur the line between personal and business. It's important to keep the line clear. Play it straight, and the deductions add up fast.

So, I'm going to give you a quick action step. Look at the last 90 days of your business spending. What were you tracking? What weren't you?

That's where you need to start. All right. Strategy number four. It's short, but it's something W2 employees literally cannot do.

Income timing. When you're employed, your paycheck hits when it hits. You have zero say in that. There's no negotiating.

There's no planning. But when you own a business, you have some control within the rules over when income is recognized and when expenses are taken. So let me give you a simple example. Let's say it's December.

You have a big consulting invoice going out and you've had an unusually high income year. Hospital bonus. Maybe you done some speaking fees. Whatever it is, you're already at the top brackets.

you can send that invoice on January 2nd and instead of December 15th, so that income now lands on next year's return. If that invoice is $30,000 and let's say your marginal rate is 37% plus state, you just deferred between 12 to $15,000 in taxes by 12 months by sending an email on a different date. This is not tax evasion. This is tax planning.

And it's the same logic on the expense side. In a high income year, you might want to accelerate business expenses before December 31st. Buy the equipment you were going to buy in January. Prepaid subscriptions, pull deductions forward.

So, here's important strategy. Every October, you should be sitting with your CPA and asking, "Is there anything we can accelerate or defer before December 31st?" Just that one conversation done every year that is worth real money. Strategy five, real estate. And I want to be careful here because there's a lot of noise around this topic.

A lot of physicians get sold on real estate as a magic bullet and discover the reality is more complicated. Now, let me just explain the tax piece specifically because the tax piece is real. The IRS says real estate wears out over time. So, they let you take a deduction every year for that wear and tear.

It's called depreciation. And here's the part that sounds almost too good for to be true. Your property can be going up in value in the real world and you still get to take the depreciation deduction. So the schedule for residential rental property is 27.5 years.

So a $500,000 rental generates roughly $18,000 a year in depreciation deductions. That can offset $18,000 of your rental income. Meaning you're collecting rent and paying very little tax on it. Then there's something called cost segregation where an engineering firm breaks down the components of your property into short depreciation schedules.

5 years, 7 years, 15 years instead of 27.5. So the result is your frontload a big chunk of those deductions into year 1. So I've seen physicians use this on commercial properties and generate six figure deductions in the year they bought the building. Now I want to give you the honest footnote here.

Under normal rules, passive real estate in real estate losses can only offset passive income, not your W2, not your consulting income. There's a strategy called real estate professional status that opens that door wider or reps. But it requires 750 hours a year in real estate activities and more than 50% of your total professional time, which is not easy for most actively practicing physicians. So bottom line, if you own real estate or you're thinking about it, make sure your CPA understands depreciation and cost aggregations.

Most CPAs will just follow the return, but the right ones will optimize it. All right, we're at 7 D6. And this one, this is about the long game. Here's something that it doesn't get taught anywhere in medical school or medical training.

Not even close to being taught. Not all income is taxed the same. If I earn an extra $200,000 as a physician employee, I'm doing clinical work, W2 income, the federal government takes 37 cents on the dollar, add state taxes, I'm keeping maybe 110, maybe $120,000 of that $200,000. If I invest $200,000, it grows.

I hold it for more than a year and I sell it for a $200,000 gain. The federal capital gains rate is 0, 15, or 20% depending on income levels. So let's say 20%. I get to keep $160,000.

It's the same $200,000. It's just a different structure, but you have 40 to $60,000 difference in taxes. So, the physicians who build real generational wealth, not just high income, I mean actual wealth that outlast their career, they gradually shift their income mix over time. less earned income at the top rate, more investment income, equity, appreciation, things taxed at capital gain rates, things that grow without triggering a tax event until you sell.

So, you do this by building businesses that have equity value, investing in index funds, and holding long-term, owning real estate that appreciates, getting equity states and deals when you can. This isn't a this year strategy. This is a this decade strategy, but you have to start and the earlier you understand that the gold is shifting your income mix, not just the total, the better. All right, down to our last strategy seven, entity structuring.

And this is where the first six strategies that I covered start to stack. Most physicians who start a business begin with one entity, one LLC, one escorp, and that's exactly right. That's where you start. But as you grow, as you add income streams, real estate, a content business, a consulting practice, you'll start to see why sophisticated physician entrepreneurs eventually build what I call a legal architecture.

Multiple entities, each with a purpose. It's a quick sketch of what that might look like. So your medical practice or your clinical entity, which is required in most states for physicians, they hold your clinical revenue. An MSO handles the nonclinical services.

It provides a layer of separation. Real estate holding LLC's, ideally one per property or group by risk. So one lawsuit can't reach all of your properties and your education or content business, your podcast, your course, your coaching as its own separate entity will have its own deductions and structure. So why does this matter?

There are three reasons. Liability protection. One entity's problem doesn't become everyone else's problem. Tax flexibility.

Different entities can hold income differently. Exit planning. You can sell individual entities and that's a capital gains event. It's not ordinary income.

Now, and I want to be honest about the cost here. Each entity needs its own filing, its own bank account, its own accounting. So, we're talking $500 to $2,000 per entity per year in overhead. Bottom line, start simple.

Add entities when the benefit clearly outweighs the overhead. Most physician entrepreneurs need two or three before they need five. All right, I want to step back for a second because I throw seven strategies out you and I don't want you to walk away thinking these are random. They're not.

They follow a sequence, okay? And the sequence maps on what we've talked about before, this physician wealth ladder. Level one, you're an employee physician, W2 only income, very limited tax tools, effective rate 40 to 50%. This is where most physicians spend their entire careers, not because they had to, but because no one listened to my podcast or showed them the next step.

Level two is entrepreneur physician start practicing medicine and this is boring. You don't have to leave but now there's a business alongside it. You got an escort in place a solo 41k funded deductions are tracked. Effective tax rates start dropping.

Level three is the investor position. Business profit is getting deployed into assets. Real estate equity investments. Capital gains income starts replacing some earned income compounding and it's accelerating.

Finally, level four is the asset owner. Income primarily coming from assets, not from just showing up businesses that run. Real estate cash flow portfolio income effective tax rate is optimized by design. You don't skip levels.

You just start to go to the next one. The physicians I watch that reach level three and level four are necessarily the higher earners. They're the ones who started earlier. They had a framework.

They made moves one move at a time. All right, let's kind of wrap this up here. In medicine, we have a concept. The difference between treating the disease and preventing it.

The patient who comes in at 65 with endstage complications after 20 years of uncontrolled chronic disease, we do our best. We generally do, but we can't undo what wasn't addressed. The physicians who comes in at 45 and say, "Hey, tell me what to do now so I don't become that person." That's the conversation that changes outcomes. Financial health works exactly the same way.

The physicians who discovered these strategies at 55 after 25 years of overpaying, I've had those conversations, it's not great feeling on either end. But the physicians who learn this in their 30s, 40s, or even 45, if they make one move, they change their whole trajectory. So here is your prescription. It's not a suggestion.

It's an actual prescription. Step one, figure out where you are on that ladder right now. Honest assessment. Step two, pick one strategy from today that applies to where you are right now.

Just one. Step three is schedule one conversation with a CPA who actually specializes in working with physician entrepreneurs within the next 30 days, not eventually in 30 days. And step four, do the thing this year. Not when you have more time, not when it's more convenient, this year.

All righty. I hope you got a lot out of it. Remember, medicine pays the bills, but you can learn how to build the balance sheet and you can use AI to help you do that as well. And so does your tax strategy on here.

So, hope you get a lot out of it. Let's have a conversation. Remember, with the physician entrepreneurs, you can have your ups and downs. Do a little something each day to get you closer to your goals and keep moving forward.