Financial Planning for Locums

Financial Planning for Locums

Working as a locum is one of the most common stepping stones in a physician’s career path. By undertaking a temporary position, a young doctor is able to gain valuable work experience and earn a salary while looking to secure a full-time position. While working as a locum, you are not an employee of a practice but rather a self-employed professional. This classification puts you in an interesting financial position that holds different tax implications, thus demanding different financial planning strategies.

As a resident, you received a salary that was negotiated by your provincial residents’ association, such as PARO, and was paid by the Ministry of Health through the medical school you were training at. Through the medical institution, Income Tax, employee contributions to the Canadian Pension Plan (CPP), Employment Insurance (EI), and other benefits are taken from source and you receive the net pay. Further, through institutions such as PARO, you receive employee benefits such as medical and dental coverage and standard disability coverage. When tax time rolls around, your medical institution will provide you with the appropriate tax slips that you need to file your taxes.

Once you leave residency and begin working as a physician, these benefits that you enjoyed during your residency change and you must learn to navigate a different landscape. This is even more prevalent if you are doing locums as you may be working in multiple different locations throughout a year.  Below is a list of some considerations to think of when you are taking on a locum position.

1. Have a Clear Understanding of How You Will be Compensated
   
   With a locum, there are many different fee arrangements. These can range from fee-for-service billing to a daily or negotiated rate for the agreed-upon responsibilities. It is important to have a clear understanding of how you will be paid and what your responsibilities are. Additionally, ensure that additional compensation is negotiated beforehand in the event you take on supplementary work that falls outside of your mandated responsibilities.

2. Tax Planning
   
   If you were a full-time employee, your employer typically handles various financial considerations such as federal and provincial tax contributions, CPP and EI contributions, and record-keeping for your tax planning. Now that you are a self-employed professional, however, the responsibility to handle these various financial dealings is transferred to you.
   
   For Canadian tax purposes, to be recognized as an independent contractor, you must submit regular invoices to your employer (Ministry of Health) either through your own billing code or the host physician’s billing code, carry your own professional liability and malpractice insurance, and not be included in the host practice’s benefits plan or receive holiday pay.
   
   Additionally, it is important to document any of your work-related expenses as they can be used for tax deductions. Be sure to keep all of your receipts, either in digital or hard copy form, in the event you get audited. Some examples of work-related expenses are: costs related to a vehicle that is used for work (gas and mileage of work visits, insurance, maintenance, etc.), moving expenses if you have to move for your locum, all home/office expenses, professional dues and memberships, and insurance premiums. On a personal note, for my business expenses, I find it easiest to keep a folder in the car to store my gas receipts and an Excel sheet on my computer to track mileage of work trips and other expenses as they arise.
   
   Finally, when you receive your pay, it is crucial to remember that you are receiving the gross pay. This means there are no tax or other contributions withheld. When it comes time to file your next income tax, you will owe a large sum of money to the government. To ensure that you are not caught off guard at tax time, it is best to create a segregated account that you can routinely move your taxes-owing into. After your first filing, you will be responsible for paying quarterly tax installments, but the same portioning of your salary still remains.

3. Consider Incorporation
   
   Now that you are out of residency, you have access to one of the largest financial benefits that being a physician offers - incorporation. With incorporation, you medical practice becomes its own legal entity and you receive a personal salary from your incorporation.
   
   There are many advantages to incorporating your medical practice, including access to the small business tax rate (which is substantially lower than personal tax rates), and the ability to keep excess funds inside your corporation so they can grow tax efficiently compared to in a personal investment account. Furthermore, when used concurrently with RRSPs and TFSA, you are able to benefit from many of the tax-deferral opportunities provided to you by the Canadian Tax Code. Also, the costs of incorporation and maintaining incorporation are tax deductible.
   
   Additionally, incorporation allows for increased control over your income stream. Incorporation can allow you to take a regularly timed salary rather than having to manage the fluctuating, variable cash flow that often accompanies switching between locum positions.You also have the option to take income as salary or dividends, both options having their advantages and disadvantages.
   
   There are times, however, where incorporation may not yet make sense (e.g. you have significant student debt or are saving to purchase a house). It is best to talk to your accountant and other financial advisors about which method is best for you.

4. How Much to Save and Invest versus Pay Down Debt
   
   If you have built up debt during your studies and residency, it is important to work to pay down the debt as you enter the workforce and start earning a higher salary. Check with your bank to understand how your line of credit will change once you begin your medical practice.
   
   As you transition into working as a physician, take time to reflect on what your short term and long term financial goals are. Do you want to purchase a home soon? Do you have a sufficient emergency fund?How quickly do you want to pay off your debt? Depending on your total debt amount and various other factors, you may want to focus your efforts on debt repayment rather than saving for the time being.By creating a debt payment strategy and a savings and investment strategy, you will be able to effectively works towards achieving your greater goals.
   
   Finally, with Return of Service programs, you may be able to use a rural Locum experience as a way to earn additional income and debt relief by working in a rural community.

5. Review your Insurance Coverage (Medical Liability, Health and Dental, Disability and Life)
   
   With any life transition, it is important to reassess your insurance coverage.
   
   Medical Liability Insurance. Once you are no longer in residency, you are no longer covered by any insurance that was included by PARO or other resident associations. It is of the utmost importance that you review your medical liability insurance policy and ensure that you have the required CMPA coverage for your role during your locum.
   
   Disability Insurance. As a physician, one of your greatest assets is the physical capital you have developed through your medical training. The significant time and money that you invested in your medical training is reflective of your future income earning potential. The best way to protect your future potential income is through disability insurance. If you do not have disability insurance, in the unfortunate event that you get injured and are no longer able to work, you lose this future earnings power that you have worked so hard for. While there are many different disability insurance providers to choose from, two of the most popular options in Ontario are the group disability coverage through the OMA and private disability insurance through RBC. Considering that as a physician, your ability to earn future income is one of your most valuable long-term assets, it is best to speak to an insurance specialist to ensure that your chosen policy fits best with your needs.
   
   Life Insurance. By the time you finish your residency, you may be looking to or may have already started to have a family and children. If this is the case, it is important to review your life insurance coverage, because as a physician, you do not have any group insurance coverage through your employment. I believe that life insurance is a necessity for any family as it ensures that your loved ones are taken care of in case anything were to happen to you or your spouse. While life insurance payouts can be used for any purpose, oftentimes they are used to supplement lost earnings, pay off the mortgage on your home, and put your children through school.
   
   Medical and Dental Coverage. Finally, as a physician, you no longer have the medical or dental coverage that you did throughout residency. Especially for a family, the cost of medication, dental and eye coverage can quickly add up, so it is important to consider this when re-evaluating your insurance needs. Depending on your family’s health situation and if your spouse is covered through their work, you may choose to purchase additional private coverage or simply be included in your spouse’s coverage if their plan permits it.

6. Establishing Good Financial Habits
   
   Establishing good financial habits early in your career is important as they are the building blocks for longer term success. Here are some simple things you can do:

• Save a portion of each of your paychecks in a separate account be it a TFSA, RRSP or Corporate Investment account.

• Automate as much of your finances as possible including debt payment and monthly bills.

• Review your cash flow so make sure their isn’t leaks that are costly if left unchecked.

Working as a locum is a valuable work experience that allows you to earn a significantly higher wage while having the flexibility to work at a variety of different work places before securing a permanent position. As with any transition, it is important to do a full review of your financial needs to ensure you are maximizing your cash flow and earnings potential while protecting yourself against future uncertainties. If you have any questions or would like to chat more about your personal financial situation, please do not hesitate to reach out to any team member at Bongard Wealthy Advisory Group.