Recruitment and Signing Bonuses

Recruitment and signing bonuses are a popular topic on WCI this time of year (along with Teslas for some unknown reason). Here are a few things you should consider when negotiating them.

The bonus may be structured as a loan or as immediate income.

  • If it’s a loan, it will typically be “forgiven” over 2 – 3 years and you will pay tax on the amount forgiven in each year. Example: You are given a $75k loan, which is forgiven equally over 3 years. You will sign a loan document at the beginning of your contract and you will receive a 1099 or W2 for $25k/yr over a period of 3 years.
  • If it is immediate income, you would pay tax on $75k when you receive your check (again, 1099 or W2).

Point of negotiation:

  • If this is your first year as an attending, you should probably ask for the bonus to be taxed immediately, as you will be in a higher tax bracket when you are serving a full year as an attending.
  • If you are already an attending, the structuring as a loan should be preferable because you might be able to remain in a lower tax bracket if the income is spread over a period of years.
  • If structured as a loan, you will (should) also be charged interest on the loan. Find out if the interest is included in the annual debt “repayment” or if you will be charged interest on top of the repayment and at what rate.
  • If you leave before the initial term of the contract, you will probably be liable for paying back all or part of the loan. Try to negotiate for higher payback the first year, decreasing each year through the term of the contract.
  • Since the employer can take a tax deduction for your bonus only in the year(s) it is taxable income to you, you may not have much room to negotiate.

The bonus may not be paid immediately

  • Bonuses may be paid before you start work, upon commencement of work, or after a set time period.

Point of negotiation:

  • If you are moving from a state that imposes an income tax to a no-tax state, ask to have the bonus payable after you move.
  • If you are moving from a state that imposes no income tax to a state with an income tax, ask to be paid the bonus before you move. Depending upon the state you move to, you may still be required to pay taxes to your new home state. If you can receive the bonus before the end of a calendar year (December) and start work in the next calendar year, you will be able to escape state taxation.

The bonus may be paid via W2 or 1099

  • Some employers withhold taxes on the bonus (W2) and others, particularly if you receive the bonus before your start date, report on a 1099.

Point of negotiation:

  • This is a great time to be paid via 1099. You’re changing jobs and you’ll be able to set up a solo-401k and roll out the balance of your prior retirement plan to your solo-k in most cases (see next point).
  • If you have been working as an attending for an NPO (Non-Profit Organization) and have a 457b, you will only be able to roll your 457b to another NPO with a 457b plan that accepts rollovers. (Residents typically don’t participate in NPO 457b plans.)

The bonus can be diverted by the employer to pay off debt (typically student loans).

  • You will still get a 1099/W2 and the amount of debt payoff is still taxable same as if you had received a check and sent it on to your loan provider.

You should always check with your CPA and/or financial planner when you are negotiating your contract, particularly when a signing or recruitment bonus is involved. Your financial professional will be able to prepare tax projections and ask the right questions to help you make requests that are most favorable to you.

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