Congratulations! You’ve made it through residency, and now you’re taking the leap into independent contractor work. It’s an exciting time, but let’s be honest – it can also be overwhelming, especially when it comes to managing your finances.
We understand that having focused almost exclusively on their medical education and training for so long, many new physicians find themselves unprepared for the complexities of managing their finances as an IC. Your first wave of “real doctor money” is going to feel great. But it’s also time to get educated on what to expect, and how to handle your growing wealth.
This guide will help you navigate this transition successfully while avoiding common pitfalls.
Note: if you are an independent contractor physician with questions about navigating the transition out of residency, our trusted partner GenFi specializes in financial planning for independent contractor physicians. Schedule a complimentary consult with founding partner Ben Yin.
Understanding Your New Financial Reality
The financial shift from residency to IC status is dramatic and often overwhelming. While residents typically earn around $65,000-75,000 annually, new IC physicians often see their gross income increase by 5-6 times or more.
That first big paycheck – which might arrive around September 15th if you start working in August after finishing residency in June – can be shocking. Imagine going from a resident’s monthly take-home pay of $4,500 to receiving a $35,000 or $40,000 deposit. However, this higher income comes with new responsibilities and considerations that require careful planning.
Setting Up Your Business Structure
One of the first decisions you’ll need to make is how to structure your practice. For most IC physicians, forming an LLC taxed as an S-Corporation offers significant advantages. The key benefits include:
- Reduced self-employment taxes through optimizing your salary vs. distributions. By paying yourself a reasonable W-2 salary (often around 30% of what is paid to your LLC) and taking the rest as distributions, you can significantly reduce your Medicare and Social Security tax burden.
- The ability to participate in pass-through entity (PTE) tax benefits in many states. This can provide substantial tax savings, particularly in high-tax states, by allowing you to pay some of your state taxes via your LLC and get a federal income deduction.
Managing Your New Income Stream
A common challenge for new IC physicians is adjusting to an irregular payment schedule and managing cash flow. The key is to establish strong systems from the start. This means creating separate business and personal accounts, implementing reliable bookkeeping practices, and developing a clear understanding of your true take-home pay.
Here’s a typical breakdown of a $35,000 monthly payment for an IC physician:
- Approximately 35% needs to be set aside for taxes. This includes federal, state, and local taxes, as well as self-employment taxes if you’re not optimizing your business structure.
- Around 15% should go toward retirement contributions. This allows you to maximize tax-advantaged retirement accounts while building long-term wealth.
- Business expenses typically consume 5-10% of gross income. This includes everything from malpractice insurance to office supplies and professional memberships.
- Health insurance and benefits take another 5%. As an IC, you’re responsible for securing your own benefits package.
This leaves about 35-40% as truly spendable income – a reality that often surprises new ICs who haven’t planned accordingly.
Insurance Considerations
For independent contractor physicians working with Core Clinical Partners, professional liability (medical malpractice) insurance is provided as part of the relationship. However, ICs are still responsible for securing their own comprehensive personal insurance coverage. This requires careful consideration and often significant expense, but it’s crucial for protecting your financial future.
While Core handles your professional liability protection, essential personal coverage you’ll need to secure includes:
- Health insurance: This can be obtained through the marketplace, professional associations, or private insurers. Consider a high-deductible health plan paired with an HSA for tax advantages. Unlike with traditional employment, there’s no employer subsidy, so you’ll need to budget accordingly for full premium costs.
- Disability insurance: Own-occupation coverage is crucial, as it provides protection if you can’t perform your specific medical specialty. This should be secured while still in residency if possible, when you can often lock in better rates and terms sometimes without medical underwriting.
- Life insurance: Term life insurance is usually the most cost-effective option for providing family protection. The amount needed will vary based on your specific situation, but most physicians should consider coverage of at least 10-20 times their annual expenses.
- Umbrella insurance: Consider additional liability coverage beyond standard auto and homeowners policies. This relatively inexpensive coverage can provide crucial protection for your growing assets.
Managing Student Loan Debt as an IC
The substantial income increase when transitioning to IC status often raises questions about student loan management. Many new attending physicians feel pressure to aggressively pay down their student loans as quickly as possible. However, this isn’t always the optimal strategy.
The key is to evaluate your student loans within the context of your overall financial picture. For federal loans, carefully consider the benefits you might be giving up before refinancing to private loans. If you have federal loans above $200,000, you may benefit from income-driven repayment plans, even with a higher IC income. Consider these factors when developing your student loan strategy:
- Interest rates vs. potential investment returns: With rates for many federal student loans currently between 5-7%, and the historical stock market return averaging around 8-10%, aggressive prepayment may not be the best use of extra funds. If your loans are at 4% or less, you might be better off investing additional money rather than making extra loan payments.
- Tax implications: Student loan interest is generally not deductible at physician income levels. However, investing in tax-advantaged retirement accounts can provide immediate tax benefits while building long-term wealth.
- Public Service Loan Forgiveness (PSLF): While most IC positions won’t qualify for PSLF, if you’re considering mixing IC work with qualifying employment, maintaining federal loans could preserve valuable forgiveness options.
A balanced approach often makes the most sense: make your required payments, refinance high-interest private loans when possible, and direct additional funds toward a mix of loan prepayment and investing based on your specific circumstances and risk tolerance. Remember that becoming an IC opens up significant retirement plan contribution opportunities, which shouldn’t be sacrificed solely to accelerate loan repayment.
Balanced Lifestyle Planning
While some financial advisors advocate “living like a resident” for several years after training, Core Clinical Partners believes in a more balanced approach. After years of delayed gratification through medical school and residency, it’s reasonable – and often beneficial for long-term financial success – to enjoy some lifestyle improvements while building wealth.
The key is making informed decisions that allow for both current enjoyment and future security. Rather than completely restricting lifestyle improvements or going to the opposite extreme, consider thoughtful upgrades that align with your long-term goals. This might mean choosing a $800,000 home instead of stretching to $1.5 million, or selecting a Tesla Model Y rather than a G-Wagon.
Looking Ahead
The transition to IC status represents both an opportunity and a responsibility. With proper planning and professional guidance, you can create a strong financial foundation while enjoying the fruits of your training. Consider scheduling a consultation with a financial advisor who specializes in physician finances to create a personalized plan for your transition.
We encourage you to schedule a complimentary consultation with GenFi founding partner Ben Yin to discuss your specific situation and develop a customized strategy for your success as an independent contractor physician.