Residents and taxes: your questions answered
By Charles Solcher, JD, CPA
In response to the article "Can you deduct it? Income tax hints for residents" (February 1996 ACP Observer), housestaff have submitted additional questions.
Income from fellowships
How should residents report income from fellowship grants?
In some cases, pay received through fellowship grants is considered earned income. This is reported to the IRS using Form W-2 and subject to income tax and Social Security taxes.
In other cases, however, the recipient is not an employee of the hospital or institution awarding the grant, so pay is not considered earned income. If you receive a non-compensation type of grant, you pay no Social Security or Medicare tax on the grant and you can deduct the cost of books, tuition, supplies and required fees. The net amount is considered taxable income.
But be warned: Though non-compensation grants bear a much smaller tax burden, recipients should still make estimated tax payments throughout the year to avoid receiving a large tax bill on April 15.
Income from moonlighting
Does it matter if moonlighting income is reported on Form W-2 or Form 1099?
The answer is maybe.
If you are paid as an employee, your income is reported on Form W-2. In this situation, you pay one-half of the Social Security and Medicare tax and the employer pays the other half. While expenses linked to this income are technically deductible, there are so many limitations that they can not typically be used to reduce your taxable income and are of no tax benefit.
If you work as an independent contractor, your income is reported on Form 1099. You must pay all of the Social Security and Medicare tax. The rate for Social Security is 12.4% on the first $61,200 of earned income, which includes both W-2 and 1099 income. If you already have more than $61,200 being reported by an employer on a W-2 form, you do not have to pay any additional Social Security tax, but you must still pay a Medicare tax of 2.9%. All expenses related to Form 1099 income and half of Social Security and Medicare taxes (known as the self-employment tax) can be deducted.
Suppose that in addition to the salary you're receiving from a hospital, you earn an extra $10,000 from moonlighting and have related expenses (transportation and phone costs, for example) of $1,000. Assuming that you're single and pay a tax rate of 28%, your tax burden on that $10,000 moonlighting income would be as follows:
As you can see, if you make less than $61,200, the net difference between reporting moonlighting income on Form W-2 and Form 1099 may be insignificant. But if your W-2 income exceeds $61,200, you pay no additional Social Security tax on income reported on Form 1099, lowering your overall taxes.
Charles Solcher is a member of the teaching faculty at the University of Texas at Dallas. He specializes in federal income taxation.
_________________________________
Form W-2 Form 1099
_________________________________
Income tax
$10,000 $10,000
@ 28% -$1,000 (expenses)
-$689 (half of self-
employment tax)*
@28%
=$2,800 =$2,327
_________________________________
Social Security tax
$10,000 $10,000
@ 6.2% -$1,000
@ 12.4%
=$ 620 =$1,116
_________________________________
Medicare tax
$10,000 $10,000
@ 2.9% - $1,000
@ 2.9%
=$290 =$261
_________________________________
Total taxes
=$3,710 =$3,704
*One-half of the self-employment tax: Social Security of $1,116 plus Medicare of $261.
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