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Independent Contractor/Partnership Expenses

I am an independent contractor/physician working for a medical group, with a partnership buy in of 3 years. My expenses related to this partnership include:

1) I have to pay the partnership a % of my collections every year as part of the buy in
2) I have to pay for my share of the partnership overhead expenses
3) I have to pay a third party (designated by the partnership) for billing/collections

My business is structured as an S-Corp and I was wondering how I would report these expenses relating to the partnership on my 1120S tax return? Would the buy in fees be tax deductible to my S-Corp and if so, what type of expense would I label it as? For the partnership overhead, would I just deduct these on my return as my own overhead costs?

I would greatly appreciate any help you can provide!

Zip Code: 75041

Re: Independent Contractor/Partnership Expenses

Here's what happens in this situation.

The practice collections all the money earned from insurance reimbursements and other patient fees. The practice will then pay all the overhead expenses, and make any other allocations that are contractually required. In your case, some of your collections will be allocated to the other partners as part of your buy-in.

Any profit allocated to you will be paid out to your S-Corporation. So you wouldn't deduct expenses incurred at the Partnership level and paid by the Partnership, since you will only pick up your share of the partnership's net income as your S-Corp's gross income.

Let's say the partnership collects $1 million from patients you treated during the year. The partnership overhead is 50% of collections, the billing fees are 5% of collections, and the buy-in is 10% of collections. The remaining profit would be 35% of collections, or $350k. (100% - 50% - 5% - 10%)

That $350k would be reported as gross income to your S-Corp. Hopefully, you would receive payments out of the Partnership equal to that amount. (You're taxed on that income whether the partnership pays you that money, keeps it in its own bank account, or uses it to pay down debts of the partnership.) You would then pay your remaining professional expenses not paid by the partnership out of the S-Corp, and deduct those expenses against the $350k of income. You would also need to pay yourself a reasonable salary by setting up payroll for your S-corp, and fund your retirement account, out of the S-corp. Any remaining profit you would take as an S-Corp distributions.

My firm works with a lot of physicians who have this exact arrangement. If you would like to discuss the accounting, tax, and payroll services my CPA firm would provide, and what our annual fee would be, please call me at 800-471-0045.

Zip Code: 01801

Re: Independent Contractor/Partnership Expenses

In my situation, instead of the partnership paying me a portion of my earnings after deducting my share of the buy-in, overhead, and billing fees -- I am actually collecting the insurance checks issued in my name/my S-Corp's name and depositing them straight into my business bank account. I am then responsible for cutting the partnership a check to cover my percentage of the buy-in and overhead and paying the billing/collections company for their billing fees each month.

Would the tax reporting for this be the same (reporting my gross income as the amount that's left after the partnership deductions) or would it be different...I know the end result is the same but was curious if it made a difference since there's now a paper trail that's left on my bank account from these transactions versus the partnership just cutting me a check for my gross income from them.

Thank you so much for your prompt response, Andrew! I am so thankful that I came across this website and will definitely keep your number on hand if I need any further assistance!

Re: Independent Contractor/Partnership Expenses

Thanks for clarifying. In this case, you would report all of the money you collect as your S-Corp's gross income. Payments you make to the Partnership for an overhead charge and their billing fees would be deductible. Same goes for all of the other professional expenses you pay each year.

The payments made for the buy-in are a little more complicated. It depends on the agreement you signed with the Partnership and how the Partership will record the payments it receives from you. The payments would either be deductible to you and reported as income to the Partnership, or the payments would not be deductible to you, and instead, you would amortize (write-off) the bulk of the amount of purchase price over 15 years. You definitely want to get clarification of this from the Partnership's CPA or Attorney so you can better understand how you'll be taxed.

Hope this helps. I think once you get this figured out, you'll be in good shape. It's the type of thing that only needs to be figured out once.

Zip Code: 01801

Re: Independent Contractor/Partnership Expenses

Hi Andrew,

I have one quick question...I believe that in general, all companies except for corporations need to be issued 1099s for payments over $600. Therefore, would I need to issue 1099s to the billing/collections company and medical group (for the overhead and buy-in fees) discussed above? Once again, any help you can provide would be greatly appreciated! Thanks!

Zip Code: 75041

Re: Independent Contractor/Partnership Expenses

The rules require that you issue 1099s to any unincorporated business that you pay more than $600. It's my understanding that includes LLCs as well.

You also need to issue 1099s to certain corporations including law firms and healthcare providers. The 1099-Misc rules can be found here:

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf.

If you want my firm to help you out with this, we'd be happy to do so. Our fee is $75 for the first 1099, and $10 for each additonal 1099. You can contact me through the MDTAXES site.

Zip Code: 01801