When physicians accept a job offer from a hospital, they are often enticed with a signing bonus in the form of a forgivable loan.
Given all the complexities of looking for a job and negotiating an employment contract, it's easy to see the words "signing bonus" and overlook the term "forgivable loan."
However, while this may seem like an attractive deal, it carries significant tax implications that physicians should be aware of.
Based on a report by Merritt Hawkins, a physician recruiting firm, signing bonuses are quite common in the physician job market. More than 90% of physician job searches provided by the firm included a signing bonus.
According to the 2023 AMN Healthcare survey — 2023 Review of Physician and Advanced Practitioner Recruiting Incentives — the average physician's signing bonus was $37,473, an increase of 21% from the prior year.
A forgivable loan is a common recruitment tool used by hospitals to attract top physician talent. The hospital provides the physician with a lump sum of money upfront, typically ranging from $10,000 to $50,000 or more.
The loan is "forgivable," meaning that if the physician remains employed with the hospital for a specified period, usually two to four years, the loan does not have to be repaid.
Keep reading or watch the video below to learn more about the "hidden" tax surprise associated with physician signing bonuses, which are considered forgivable loans.
Yes. The tax "surprise" comes from the fact that the signing bonus loan is not considered taxable income by the Internal Revenue Service (IRS) until the year it's forgiven.
For example, if a physician receives a $30,000 forgivable loan, they may owe no tax at all in the year it's received. However, once they meet the employment requirement after three years, the entire $30,000 will be taxable as if it were regular income.
This gap between a signing bonus and taxes can result in a significant tax liability that many physicians fail to anticipate. Depending on their tax bracket, they could owe thousands of dollars in taxes on the forgiven loan amount.
The average signing bonus for family physicians is currently $22,050, which could translate to a substantial tax bill.
To avoid being caught off guard by the tax implications of a forgivable loan, physicians should take the following steps:
By being proactive and seeking professional guidance, physicians can make informed decisions and avoid the hidden tax surprise associated with forgivable loans.
If you need guidance on handling a potential signing bonus in the form of a forgivable loan, please contact one of our financial planners.
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Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
