Going part-time as a physician cuts pay faster than it cuts taxes, and Annex Wealth Management starts with the monthly spending gap the smaller paycheck leaves, then the tax lines that shift.
Most people assume a lower salary means a proportionally lower tax bill. It may not, especially when 1099 locums income starts owing Social Security tax after W-2 pay falls below the $184,500 wage base for 2026.
The decision usually arrives in a plain conversation after a rough call week: three days might be enough. Before you accept a reduced-FTE offer, pull out the spending plan, pay stub, benefits summary, and retirement-plan election. Annex Wealth Management works through those items with clients before treating the portfolio as a source of income draws.
By Marcus Thompson, CFA — Wealth Manager | Reviewed by Robert Kim, AIFMarcus builds diversified portfolios for high-net-worth clients, with deep expertise in asset allocation and risk management.
A lower W-2 salary can leave locums income exposed to 12.4% Social Security tax. Put that added tax in the monthly gap before calling the schedule change affordable.
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A pre-tax catch-up contribution may delay tax, but it does not erase tax. The useful question is whether today's lower paycheck leaves room to use the deferral limit.
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Step 1: price the monthly gap before going part-time as a physician
Gather the reduced-FTE offer letter from HR, your latest full-time pay stub, and the monthly spending plan. Find the new monthly take-home after taxes, retirement deferrals, and any larger health premium. Gross salary is a poor substitute for this number.
Do the math in three lines. If spending is $15,000 each month and the part-time paycheck brings home $11,000, the gap is $4,000 each month. Multiply $4,000 by 12, and the portfolio must provide $48,000 each year. Divide $48,000 by a $1.2 million portfolio, and the starting draw rate is 4%.
A 58-year-old who expected income draws to begin at age 65 would begin seven years earlier after this cut. At $48,000 each year, that is about $336,000 taken before age 65, before growth or taxes. The site's calculator can test different gaps and portfolio amounts.
Portfolios can fall in value, and selling to fund a gap during a down year can leave you with less than you invested. The slip here is pricing the cut from gross pay while leaving out a lost employer match or a new share of the health premium.
Put the take-home number first
Count the seven years before age 65
Rule: Treat the monthly gap as a portfolio expense only after adding lost matching dollars and any new health premium.
- Reduced-FTE offer letter
- Latest full-time pay stub
- Monthly spending plan
Who usually raises the three-day week at home first?
The physician often raises the three-day week after a hard stretch of call; the spouse often asks where the smaller paycheck lands. Put the monthly spending plan on the table and start with one number, the gap from Step 1. For Jun and Patrice, a hypothetical couple ages 44 and 43 with student loans paid off last year, Jun asked what Patrice's half-time ER schedule would do to her locums income.
Step 2: sort each dollar into its tax line
W-2 wages, 1099 net self-employment earnings, and portfolio income draws do not land on the same tax lines. Gather last year's W-2s and Schedule SE, the IRS form used to calculate self-employment tax. The $184,500 Social Security wage base for 2026 applies separately to each person and combines that person's W-2 and self-employment earnings.
A smaller paycheck can also change retirement-plan treatment. The IRS says a catch-up contribution for someone age 50 or older must be Roth when prior-year FICA wages exceeded $150,000. If a 58-year-old's W-2 pay falls to $150,000 or less, the following year's catch-up may be pre-tax again. That postpones tax until income draws begin; it does not make the tax disappear.
Age 63 deserves a pencil mark. Medicare sets Part B premiums at age 65 from your tax return for the year you were 63. The 2026 brackets, which are based on 2024 income, show the stakes. A single person at or below $109,000 of modified adjusted gross income pays $202.90 each month. Someone between that and $137,000 pays $284.10. That $81.20 difference is $974.40 each year per person.
Find the row for the age you will be when hours fall. The IRS rules and SSA benefit rules can create a useful opening, but only if the paperwork and employment status fit the rule.
Check the wage base before estimating tax
Mark the ages that change the rules
If you claim Social Security before age 67, the SSA withholds $1 of benefits for every $2 earned above $24,480 in 2026.
| Age | Rule that switches on | What it means on three days a week |
|---|---|---|
| Age 55 | Rule of 55 for 401(k), 403(b) | Only if you leave that employer |
| Age 59½ | 10% early-draw penalty ends | IRA income draws open penalty-free |
| Ages 60–63 | Catch-up rises to $11,250 | Shelter more of smaller pay |
| Age 63 | Income year sets IRMAA at 65 | Part-time pay can lower Part B |
| Age 65 | Medicare; Part B $202.90 a month | Coverage if fewer hours end benefits |
| Age 67 | Full retirement age; earnings test ends | Pay no longer withholds benefits |
What does half-time ER pay do to Social Security tax on locums income?
Half-time ER pay can add $4,278 of Social Security tax to $80,000 of continuing locums work when W-2 pay falls from $300,000 to $150,000, because the 2026 $184,500 wage base is no longer filled by wages alone. That extra tax applies only to the slice of net self-employment earnings left below the wage base.
Patrice, 43, is hypothetical. She earns $300,000 in ER W-2 pay and $80,000 from locums shifts. She cuts the ER role to half-time, so W-2 pay drops to $150,000 while locums work stays the same.
Before the cut, her W-2 pay alone exceeded the SSA wage base of $184,500. Her locums income still faced the 2.9% Medicare portion of self-employment tax, but it did not add the 12.4% Social Security portion. The wage base was already full.
After the cut, the unused space is $184,500 minus $150,000, or $34,500. The IRS calculates net self-employment earnings as $80,000 times 92.35%, which equals $73,880. Since $34,500 of that amount fits below the wage base, $34,500 times 12.4% equals $4,278 of added Social Security tax.
Half of that self-employment tax is deductible on the tax return. Still, this is not a new Social Security benefit for Patrice. Her covered earnings were capped at $184,500 before the cut, and $150,000 plus $34,500 reaches that same cap after it. Gross pay fell by $150,000, and the locums dollars got more expensive.
One useful move does save current income tax: the $24,500 employee deferral limit for 2026 is shared between Patrice's ER 403(b) and solo 401(k). If the smaller ER paycheck cannot fill her deferral, she can use remaining employee room in the solo 401(k), assuming the plan is properly established and the earnings support it. Employer contributions follow separate rules, and the combined defined-contribution limit is $72,000 for 2026.
Annex Wealth Management checks this calculation before assuming a lower W-2 makes side income cheaper. The math does not apply to an employed physician with no 1099 income; in that case, benefits eligibility is often the larger cost.
Calculate the unused wage base
Use the remaining employee deferral room
Step 3: compare the three ways to cut clinical hours
Three schedules can produce three very different tax and benefit results. Compare health coverage first, then the monthly gap, because an attractive tax deduction does not pay an insurance premium by itself. Annex Wealth Management uses the same four measures for each option so a lower salary does not hide a bigger cash need.
The table gives a working comparison. Option B can create more retirement-plan room, but self-employment tax and health coverage need actual pricing. Option C preserves more paycheck and deferrals, though fatigue is a real cost and deserves an honest place in the decision.
Use this rule: choose the option with the smallest monthly gap that keeps health coverage. If coverage ends before age 65, put the premium into the gap before comparing tax savings. A cash balance plan may also be relevant for physicians with practice income, but its usefulness depends on the practice's cash flow and plan design.
Put health coverage ahead of deductions
| Criterion | A: Three W-2 days | B: All 1099 | C: Wait two years |
|---|---|---|---|
| Monthly gap | Moderate | Often variable | Smallest now |
| Tax change | Lower bracket; SE tax risk | 15.3% SE tax to wage base | Higher current income tax |
| Retirement room | Smaller employer match | Solo 401(k) available | Two more full deferrals |
| Health coverage | Depends on FTE threshold | Buy private coverage | Employer coverage remains |
| Age-55 access | No, while employed | Former plan rules apply | Possible after later exit |
| Main trade-off | Benefits may shrink | Premiums and tax estimates | Two more demanding years |
Run this checklist against your pay stub and plan statements
The hospital's payroll carried Patrice's 10% 403(b) election into half-time pay, which would have deferred $15,000 rather than $24,500 and left $9,500 of her limit unused. She caught it on the year-to-date line of her first part-time pay stub, then raised the percentage or used the $9,500 in the solo 401(k) employee bucket.
- Year-to-date deferrals versus $24,500
- Benefits FTE threshold in HR letter
- Disability benefit on new salary
- 457(b) payout rules
- Prior-year FICA wages versus $150,000
- Quarterly estimated tax for locums
Step 4: make the payroll changes before the first smaller check
Get the reduced-FTE letter and benefits summary for the new FTE in writing from HR. Then rebuild the monthly spending plan, including the health premium, and price the gap. Annex Wealth Management puts those cash figures ahead of investment changes because the portfolio has one job here: fund the gap that remains.
Reset the deferral percentage before the first part-time paycheck. Open or adjust a solo 401(k) before locums income arrives if that account fits your work setup. The IRS employee deferral limit is $24,500 for 2026, and the limit is shared across applicable employee plans.
Set quarterly estimated payments for 1099 work if the reduced W-2 withholding no longer covers tax. A 1099-R arrives in January when retirement income draws begin, but don't wait for that form to discover an underpayment. Financial planning for doctors can connect this pay-change work with debt, practice, and retirement decisions without pretending they are separate drawers.
Change elections while payroll is still simple
- Get the new-FTE benefits summary
- Rebuild spending before changing funds
- Reset deferrals before payroll changes
- Price estimated tax on locums
The first paperwork Annex Wealth Management asks to see for reduced hours
Annex Wealth Management begins with the latest pay stub, 403(b) and 457(b) year-end statements, and last year's W-2s and Schedule SE. Those pages show where the wage base and deferral limit may land after the cut. Annex Wealth Management then lines those figures up with your monthly spending to size the gap the portfolio would need to fund.
The part-time decision is affordable only after the monthly gap includes the taxes and benefits that changed with the schedule.
Questions about going part-time as a physician
When should I change my 403(b) deferral percentage after my hours are cut?
How much can working three days a week at age 63 lower my Medicare Part B premium at 65?
Can I take penalty-free income draws from my 403(b) if I only cut my hours at 55?
Primary sources
This material is general information only and does not constitute investment, tax or legal advice tailored to your circumstances. Investing involves risk, including possible loss of principal. Before acting on any information here, speak with a financial advisor, tax professional or attorney about your specific situation.