Shane Tenny, CFP®, explains what to do when a physician signing bonus is also a forgivable loan. While receiving a signing bonus may seem like an attractive deal, it carries significant tax implications that physicians should be aware of.
Transcript:
[00:00:00.000] Hi there. Shane Tenny, Managing Partner at Spaugh Dameron Tenny. I've got a bright pink shirt on today because the weather is warming, and that tells me there is a whole new class of medical residents and fellows out looking for jobs, talking with hospital systems and employers, and exploring employment contracts.
[00:00:21.820] If that happens to be you, then I want you to listen up because one of the things that we are seeing more and more in employment contracts is signing bonuses. Don't get me wrong, a signing bonus is a great thing, but it's really important you understand how it is structured.
[00:00:38.390] You see, a lot of these signing bonuses are actually forgivable loans. That is the phrase to pay attention to because it can pack a really big tax punch down the road. Here's the way they work. The hospital or the practice will offer as part of your contract a signing bonus, say $30,000, which is great. But there is a catch. It is technically a loan that you don't have to repay as long as you are still working there a year or two years later. In the year you get the money, it's not actually taxable income. They've just lent it to you. But once the loan is forgiven after the employment and working period expires, then the entire loan becomes in that calendar year. And so if you've gotten a $30,000 signing bonus with a two-year employment requirement, you'll owe taxes on $30,000 two years after you got the money, meaning tax bill of maybe $10,000 or $12,000 for most physicians, depending on your bracket and the state you live in. A big tax pill to swallow if you're not prepared for it.
[00:01:55.960] So what can you do?
[00:01:58.030] Well, first of all, now that you've been told about this, look carefully at the contract and understand the tax implications of any signing bonus.
[00:02:09.160] Of course, talk with your financial planner or your tax advisor to make sure you understand how it will work and what the tax liability will be.
[00:02:18.430] And if possible, try to set aside some of that bonus money when you get it so that you can cover the tax bill when it's due.
[00:02:27.130] And if you look through the whole thing and you think the if the ramifications of the signing bonus or forgivable loan are just too annoying, then don't hesitate to go back and ask for comparable compensation in a different form, like a traditional cash, taxable bonus, or even perhaps a tax-free moving allowance, which may be just as useful to you.
[00:02:48.900] The bottom line is, do your homework, pay attention, ask questions, and beyond all, don't get caught in the nasty tax surprise of a forgivable loan
[00:03:02.310] Hope this helps. I'll see you back here next time.
