I have been noticing some confusion around the tax obligations of a nurse practitioner business owner lately, so today’s article is going to clear this up. As a self-employed nurse practitioner entrepreneur or a business owner with employees, YOU as the business owner are responsible for paying ALL of the employment taxes for yourself and HALF of the employment taxes for each employee. Now you are wondering “what are employment taxes?” Well, let’s talk about this bundle of joy (sarcasm)!
Employment taxes are Social Security and Medicare payroll taxes. These are collected together as the Federal Insurance Contributions Act (FICA) tax. Everyone has seen these taxes on their paychecks. As an employed nurse practitioner, you are only responsible for paying 7.65% of your wages towards FICA tax. The employer is responsible for paying another 7.65% of FICA taxes for a grand total of a 15.3% FICA tax. Yes, the government receives 15.3% of everyone’s paycheck in addition to federal income taxes.
As an employed nurse practitioner, the 7.65% isn’t really a huge hit to your overall income, but when you are self-employed, the 15.3% FICA total tax can add up VERY quickly. Additionally, if you have employees the 7.65% that YOU as the nurse practitioner business owner are responsible for paying can add up REAL quick. To sum it up: it sucks!
In terms of the 7.65% FICA tax you are responsible paying for each employee, there is little you can do about it. You just have to suck it up and pay. The only way around this is not to have too many employees. Personally, I say AVOID employees as much as possible until you need them (which you will if you want passive income and to grow your business). I pay tens of thousands of dollars a year in FICA tax for the employees I have. It really eats into my profits, and it will eat into yours as well… In terms of WHEN you need to hire an employee or another nurse practitioner to help, those articles can be found HERE and HERE, respectively.
Now, what about the 15.3% FICA tax that you will ultimately pay on YOUR INCOME from YOUR BUSINESS. Is there anything you can do about this? YES, THERE IS! So, let’s talk about S-CORPs.
An S-Corporation is a type of legal entity where you only pay FICA taxes on the salary you pay yourself. Anything left over at the end of the year is just passed onto the business owner as a distribution which is FREE from FICA taxes, but still subject to normal income taxes. Therefore, functioning under an S-Corp will save yourself 15.3% on taxes! This is HUGE! I talk more about paying yourself from your LLC in THIS article, just FYI.
Well, what if you have an LLC? No worries! You can just elect to be taxed as an S-Corp through your LLC so you can take advantage of this 15.3% tax reduction. Simply talk to your accountant and they can file that paperwork for you. If you are a “do it yourselfer”, then just fill this form out and send it to the IRS (I did it myself, it was super simple).
There is one caveat with this from the IRS though: you must pay yourself a “reasonable” salary from your business. What is considered a “reasonable” salary? Essentially, the average of what your profession is paid. Well fortunately for nurse practitioner entrepreneurs, nurse practitioner salaries have been stagnant or gone down (thanks to market saturation), so you should be paying yourself $50 an hour as a working nurse practitioner in your business. What does this mean? All the profit that is left over at the end of year will be FREE FROM FICA TAXES! 15.3% is a HUGE savings folks… This is NOT to be looked over.
Here is an example:
Let’s say that your LLC that has elected to file taxes as an S-Corp has a gross revenue of $200,000 (totally doable for a niche side practice). Total expenses come out to $80,000. You pay yourself a “reasonable” salary of $50 an hour and work 10 hours a week, therefore you pay yourself approximately $25,000 a year. After expenses and your “reasonable” salary, you have a gross profit of $95,000. Not bad for a side hustle and TOTALLY realistic if you follow the model.
The $25,000 a year you pay yourself as a salary would be subject to FICA taxes (Social Security and Medicare) of $3,825 because you are paying both the employer and employee FICA tax obligations. Now you have a net profit distribution of $95,000 to pay yourself that is FREE from the FICA taxes and ONLY subject to federal and state income taxes (if you have a state income tax). How much does this save you in taxes? $95,000 x 15.3% = $14,535! Damn, that is enough to take the entire family on an AWESOME 10-day 5 star resort vacation to Costa Rica! Personally, I think that is money better spent than the wasteful spending of Uncle Sam, but I digress…
This is why it is important you understand employment taxes as a nurse practitioner entrepreneur. We are talking about A LOT of money. The 7.65% you have to pay for your employees is just an aspect of business you have to accept, but the 15.3% that you would pay on your income CAN and SHOULD be legally reduced by electing as an S-Corp through your LLC. You would be a FOOL not to be doing so. Make sure you have a good accountant who understands small business taxes, it is CRITICAL to your financial health and wellbeing as a nurse practitioner entrepreneur.
So right now as a new business, I am $14000 in the red, do I pay taxes on anything?
Nope, that will be deducted as a loss.
Wow, I can’t thank you enough for this article and right in the nick of time before I start my start my new businesses. I have always been confused on how these aspects of business worked and you have helped clear that up for me immensely. Thank you so much for doing what you do. Keep up the good work!
Always a pleasure and I am happy it helped 🙂 I wish I would have known this stuff when I first started, so just passing along the knowledge to help those that are getting started!
You should do a class in combination with a good accoutant I would SOOO pay for that
That is actually the 2nd course planned for 2022! I am partnering with a CPA and tax attorney on a tax reduction course for everyone 🙂
Great article and explanation Justin! Thank you for all you do to help our profession.