Title: The Unseen Implications of “Forgivable Loans” in Physician Sign-On Incentives
For newly employed physicians, the phrase “signing bonus” typically conjures images of financial stability and an encouraging beginning in a fresh role. Nevertheless, a frequent component of numerous physician employment agreements — the “forgivable loan” — can entail unforeseen tax ramifications that may astonish even the most financially astute individuals.
Forgivable loans serve as a common inducement in the healthcare sector, especially when attracting physicians to hospitals or sizable group practices. Although they provide immediate monetary benefits, failing to grasp their function and the associated tax responsibilities can lead to prolonged complications. Here’s what physicians ought to understand to make educated choices.
Grasping Forgivable Loans for Physicians
As reported by Merritt Hawkins, a prominent physician recruiting agency, over 90% of physician job offers incorporate some version of a signing bonus. In 2023, the average bonus offered surged to $37,473, marking a 21% rise from the previous year, based on statistics from AMN Healthcare.
Though signing bonuses may be presented as complimentary funds, they frequently manifest as a “forgivable loan.” This arrangement provides physicians with an upfront lump-sum payment, generally ranging from $10,000 to $50,000 or more. The loan is considered “forgiven” — meaning repayment is waived — if the physician adheres to particular employment stipulations, usually by staying with the hospital for a designated time, commonly two to four years.
This arrangement is advantageous for both parties: the hospital acquires dedicated talent, while the physician obtains immediate finances, which may assist with relocation, debt repayment, or regular expenses. However, the term “loan” is more than just rhetoric. It carries substantial tax consequences.
Are Sign-On Bonuses Taxable for Physicians?
Indeed — and not necessarily at the time you receive the payment.
One major misconception regarding forgivable loans is when the IRS deems them taxable. Initially, receiving the funds does not activate taxation as it is technically classified as a loan. However, once the criteria for forgiveness are satisfied — such as completing three years of service — the entire forgiven sum is regarded as ordinary income and taxed in that particular year.
For instance, if a physician received a $30,000 forgivable loan in 2021, they wouldn’t incur taxes that year. But if the loan is forgiven in 2024 after finishing a three-year employment period, the full $30,000 must be declared as taxable income on their 2024 tax return.
This scenario can lead to a substantial tax obligation that many physicians do not foresee. Depending on the physician’s tax tier and other income, they could owe thousands in taxes on the forgiven loan amount.
Think about this: the typical signing bonus for a family physician is $22,050. For someone in the 35% federal tax bracket, this may result in an unanticipated tax liability of over $7,000 — and this is before accounting for potential state and local taxes.
Preventing the Sign-On Bonus Tax Shock
To avoid being blindsided, new and transitioning physicians should take proactive measures when negotiating contracts and managing finances.
1. Comprehend the Terms
Thoroughly examine the fine print of the loan agreement. Note the forgiveness timeline, what constitutes a breach of the contract, and the precise moment the IRS would classify it as taxable income. If any aspects are unclear, seek written clarification.
2. Consult a Tax Expert
Not all tax consultants are well-versed in physician-specific compensation models. Collaborate with a CPA or financial advisor with experience in the medical sector to ensure that potential tax liabilities are incorporated into your yearly financial strategy.
3. Reserve Funds
Instead of utilizing the full signing bonus, consider saving a portion — or the entirety — of it until the loan is forgiven and the tax implications become evident. This buffer can help alleviate financial strain when tax season approaches in the future.
4. Consider Alternatives
If the prospect of a future tax burden feels overwhelming, think about negotiating for a standard signing bonus that’s taxed in the year it’s received. Alternatively, request a higher base salary or 401(k) contributions instead of a large upfront bonus.
The Bottom Line
A forgivable loan might appear to be a marvelous benefit for newly recruited physicians. However, unless it is thoroughly comprehended and planned for, this attractive incentive can swiftly morph into a financial trap.
With appropriate planning and expert guidance, you can reap the rewards of your sign-on bonus while steering clear of the unwelcome shock of unforeseen tax liabilities. Evaluating contract terms, recognizing the tax timeline, and preparing for future responsibilities will guarantee you commence your new role on solid financial grounds.
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Shane Tenny is the managing partner of Spaugh Dameron Tenny, LLC, and host of The Prosperous Doc podcast, which emphasizes financial wellness for physicians and other healthcare professionals.
Disclaimer: Securities, investment advisory, and financial planning services are provided through qualified Registered Representatives of MML Investors Services, LLC, Member SIPC.