Locum Tenens Tax Guide for Physicians

Why Locum Tenens Tax Is a Different Problem

Most tax guidance written for independent contractors assumes you work in one place for one payer. Locum tenens breaks all three assumptions at once. You may hold six 1099s in a year, perform services in four states, sleep in hotels for eleven weeks, and never set foot in the state where your mail arrives.

That produces four questions a general CPA rarely has to answer for a client: where your income is sourced, whether you have a tax home, which entity structure survives that pattern, and how to fund retirement when your income arrives in uneven blocks. Getting any one of them wrong is expensive. Getting the tax home question wrong is the most expensive, and it is the one most often decided by accident.

The Tax Home Question

Travel expenses are deductible when you are away from home in pursuit of a trade or business, under IRC 162(a)(2). The word doing the work is "home," and for tax purposes it does not mean where your family lives. Your tax home is generally your regular place of business, regardless of where you maintain a residence.

That distinction decides whether your flights, hotels, rental cars, and meals on assignment are deductible business expenses or personal costs you pay with after-tax dollars. For a physician spending forty weeks a year on the road, the gap between those two answers is not marginal.

The itinerant problem

If you have no regular place of business and no regular place you live, the IRS may treat you as an itinerant. An itinerant's tax home travels with them, which means they are never "away from home," which means travel to an assignment is not deductible. A locums physician who gave up a permanent residence and moves continuously between assignments can land in this position without ever making a decision about it.

Avoiding it generally turns on maintaining a real, substantial connection to a specific place: duplicating living costs while away, returning there between assignments, and keeping the ordinary markers of residence. This is a facts-and-circumstances test, not a checklist you can satisfy on paper alone.

Temporary versus indefinite assignments

An assignment realistically expected to last one year or less is temporary, and travel to it can be deductible. An assignment expected to last more than one year is indefinite, and your tax home generally shifts to that location, ending the deduction.

The test runs on expectation, not hindsight. If you accept a nine-month contract expecting it to end and it does, it stays temporary. If you accept a contract expecting it to run two years, it is indefinite from day one even if it ends early. And if expectations change mid-assignment, the character can change from the point the expectation changed forward.

Entity Structure for Locums Work

The S-Corporation question for a locums physician is the same question every 1099 physician faces, with one complication: multi-state work multiplies the compliance surface. An entity operating in four states may face registration, withholding, and filing obligations in four states.

What an S-Corp election actually changes

As a sole proprietor, your entire net business income is subject to self-employment tax: 12.4% for Social Security on earnings up to the wage base, plus 2.9% for Medicare with no ceiling. For 2026, the Social Security wage base is $184,500. Self-employment tax is computed on 92.35% of net earnings.

With an S-Corporation, you pay yourself a wage and payroll taxes apply to that wage rather than to the full profit. The remaining profit passes through as a distribution not subject to payroll tax. That is the entire mechanism. It is not a loophole and it is not unlimited, because the wage has to be defensible.

When the election does not pay

An S-Corporation costs money to run: payroll processing, a separate return, bookkeeping, registered agent fees, and state-level entity taxes where they apply. In states with entity-level taxes or franchise minimums, those costs rise. Below a certain profit level the payroll tax saving does not cover the overhead, and the right answer is to stay a sole proprietor until it does.

The threshold is specific to your income, your states, and your retirement plan, which is exactly why a general rule of thumb tends to produce the wrong answer for locums physicians working across multiple jurisdictions.

Election timing

Form 2553 must generally be filed within two months and fifteen days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year. Missing that window does not always end the matter: relief for a late election may be available under Rev. Proc. 2013-30 if the requirements are met. Relief is not automatic and should not be part of the plan.

Reasonable Compensation

If you elect S-Corporation status, you must pay yourself reasonable compensation for the services you personally perform. This is the single most scrutinized number in a physician S-Corp, and it is where most online guidance is wrong.

A percentage rule fails in both directions. For a physician with high profit and modest clinical hours, a fixed percentage overstates the required wage and throws away the benefit of the election. For a physician with a full clinical schedule and thin margins, the same percentage understates it and creates exposure.

The defensible approach is to document what a comparable physician would be paid for the same work, in the same market, at the same volume, and to keep that documentation with the return. The number should be defensible on its own terms, not as a residual after you decide what distribution you want.

Reasonable compensation also interacts with retirement. Employer contributions to a solo 401(k) are limited by your W-2 wage, so a salary set too low to reduce payroll tax can quietly cap your retirement capacity. The two decisions have to be made together.

Multi-State Income Sourcing

Income from personal services is generally sourced to the state where the services are performed. For a locums physician, that means income follows the assignment, not the mailing address.

The practical consequence is a nonresident return in each state where you worked and had a filing obligation, plus a resident return in your home state reporting worldwide income. Your resident state generally allows a credit for taxes paid to other states, which prevents outright double taxation in most cases.

Where the credit falls short

The credit is typically limited to the lesser of the tax the other state imposed or the tax your resident state would impose on that income. If you live in a high-tax state and work in a lower-tax state, the credit covers the lower amount and your resident state collects the difference. If you live in a state with no income tax and work in a state that has one, there is no resident tax to credit against, so the nonresident tax is simply a cost.

That asymmetry means the tax value of an assignment depends on the pair of states involved, not just the rate you see quoted. Two assignments at identical day rates in different states can produce materially different take-home outcomes.

Residency is not a day count

Physicians often assume residency is settled by counting days. Some states use a day threshold as one factor, but residency generally turns on domicile and the totality of your facts: where your permanent home is, where your family is, where you are registered to vote and licensed to drive, where your professional and financial ties sit. A locums physician who spends most nights out of state has not necessarily changed residency, and states with aggressive audit programs examine exactly this.

Retirement Contributions on Irregular Income

Independent contractor status gives you access to retirement capacity that employed physicians do not have. Using it is the single largest lever most locums physicians have, and it is frequently underused because the income arrives unevenly and the decision gets deferred until it is too late to act.

Solo 401(k) limits for 2026

The employee deferral is available regardless of how much you earn, as long as you have enough compensation to support it. The employer portion is a percentage of your W-2 wage in an S-Corporation, which is the link back to your reasonable compensation decision. Set the wage too low and you cannot reach the total limit no matter how profitable the year was.

One rule that catches high earners: if your prior-year FICA wages exceeded $150,000, catch-up contributions must be made as Roth contributions rather than pre-tax. That changes the current-year deduction for physicians who were counting on it.

Beyond the solo 401(k)

Physicians with high, stable profit and a longer horizon may have capacity well beyond the defined contribution limit through a defined benefit or cash balance plan. Contribution limits for these plans are actuarially determined based on age, compensation, and the benefit being funded. They are not a fixed dollar figure, and any source quoting one is guessing.

These plans also carry a funding commitment across years, which makes them a poor fit for income that swings widely. They suit a physician with several consistent high-income years ahead, not one testing whether locums work is a permanent arrangement.

Quarterly Estimates and the Safe Harbor

No one withholds tax from a 1099. You are responsible for paying as you earn, through quarterly estimated payments, and the penalty for falling short is an interest charge that does not care why you missed.

The safe harbor under IRC 6654 generally protects you from the underpayment penalty if you pay at least 90% of the current year's tax, or 100% of the prior year's tax. That second figure rises to 110% if your prior-year adjusted gross income exceeded $150,000, which describes most physicians reading this.

The prior-year safe harbor is the more useful one for locums income, because it is a known number in January rather than a moving estimate all year. Paying 110% of last year's tax in four equal installments removes the penalty question entirely, even if this year turns out much larger.

Multi-state work adds a second layer: nonresident states generally expect estimated payments too, on the income sourced to them. A physician meeting federal estimates perfectly can still owe penalties in three states.

What to Do and When

Most of the decisions above are time sensitive, and several cannot be fixed retroactively. The calendar matters as much as the analysis.

Before you accept an assignment

Know the state pair. Understand what the nonresident tax will be and whether your resident state credit will absorb it. Confirm the expected duration and whether it keeps you inside the one-year temporary window.

Before the entity election deadline

If an S-Corporation makes sense for the coming year, the entity has to exist and Form 2553 has to be filed within the window. Entity formation timelines vary widely by state, and some states add publication or licensing board requirements that take months. Starting in December for a January 1 effective date is usually too late.

Before December 31

Retirement contributions, equipment purchases, and most deduction timing decisions close with the calendar year. Employee deferrals in particular require the plan to be in place and the election made before year end, which is why physicians who wait until they file their return find the capacity already gone.

Throughout the year

Keep contemporaneous records of where you worked and for how long, what you spent on travel and lodging, and what your assignments were expected to last when you accepted them. Multi-state sourcing and the tax home analysis both depend on facts that are easy to record as they happen and nearly impossible to reconstruct eleven months later.