How to Set Your Locum Tenens Rate

Most locum physicians set their rate by asking a colleague what they charge, accepting whatever the first agency offers, or anchoring to their former employed salary converted to an hourly figure. None of these methods account for what 1099 income actually costs to earn. This guide builds a rate from the ground up — starting with your real overhead, adding the tax layer specific to self-employment, and arriving at a defensible hourly floor that protects your net income rather than just matching the market.

1. Why Locum Rate-Setting Is Different From Employment

When you were employed, your employer absorbed a significant layer of costs that are now yours to fund as a 1099 physician. Understanding that gap is the foundation of any accurate rate calculation.

As a W-2 employee, your employer paid half of your Social Security and Medicare taxes, funded your malpractice coverage, covered your licensing and credentialing costs, contributed to your benefits, and handled payroll administration. As a 1099 locum physician, every one of those costs either comes out of your gross pay or reduces your effective hourly rate if you ignore them.

The physicians who underprice themselves consistently are not bad negotiators — they simply have not modeled what their income actually costs to earn. The rate formula in this guide closes that gap.

2. The Four Layers of Your Rate

A defensible locum rate is built from four distinct components. Each needs to be calculated separately before you arrive at a single hourly number.

Layer 1: Your target net income. Start with what you actually want to take home after taxes and business expenses. Work backwards from an annual figure. A hospitalist targeting $300,000 in net annual income needs to earn significantly more than $300,000 in gross locum revenue to get there.

Layer 2: Your fixed annual overhead. The recurring costs of operating as a 1099 physician, regardless of how many assignments you work. Detailed in Section 3 below.

Layer 3: The self-employment tax layer. As a 1099 physician you pay both the employee and employer share of Social Security and Medicare taxes — 15.3% on net self-employment income up to the Social Security wage base, plus 2.9% Medicare on everything above it. This is the most commonly underestimated cost in locum rate-setting. Detailed in Section 4 below.

Layer 4: Assignment-specific variable costs. Costs that apply to specific assignments rather than your practice as a whole — travel, lodging if not reimbursed, additional state licensing for new markets. These are negotiated at the assignment level rather than baked into your base rate, but they need to be accounted for in your total compensation model.

3. Calculating Your Fixed Annual Overhead

Fixed overhead is what you spend every year to practice as a 1099 physician, independent of any single assignment. The major categories:

Malpractice is the largest variable and requires a separate calculation for your situation. Many locum staffing contracts cover malpractice at no direct cost to you — if your agency provides $1M/$3M occurrence coverage, that cost is effectively zero in your overhead model for agency-placed assignments. For direct-hire or independent 1099 arrangements where you purchase your own coverage, 2026 premiums can range from roughly $7,000 annually for low-risk outpatient specialties to well above that for surgical, emergency, and procedural specialties depending on state and claims history. Build your rate assuming worst-case coverage costs, then treat agency-provided coverage as found margin.

A reasonable annual overhead placeholder for a locum physician whose malpractice is fully covered by the staffing company runs in the low five figures — primarily licensing, DEA, CME, and accounting costs. Add self-funded malpractice and the total can reach mid-five figures or higher. The precise figure matters: a $20,000 annual overhead spread across 1,000 clinical hours adds $20/hr to your rate floor before taxes. Underestimate it and that cost comes directly out of your net income.

For a full breakdown of which overhead items are deductible and how to capture them on your 1099 return, see the LPG tax deductions guide.

4. The Self-Employment Tax Layer

This is where most locum physicians leave the most money on the table — not because they miss it entirely, but because they underestimate its scale.

As a W-2 employee, you paid 7.65% in FICA taxes and your employer paid the matching 7.65%. As a 1099 physician, you pay both sides — the full 15.3% on net self-employment income. The structure for 2026:

At a physician income level of $400,000 in net self-employment income, the SE tax bill works out to roughly $22,878 on the Social Security portion (12.4% × $184,500) plus $11,600 on the Medicare portion (2.9% × $400,000) — approximately $34,500 in SE taxes before the additional Medicare tax applies. That is real money, and it needs to be in your rate model.

Second, if your net self-employment income qualifies, the QBI (Qualified Business Income) deduction allows you to deduct up to 20% of qualifying business income. Under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025 (Public Law 119-21), this deduction was made permanent — removing the prior expiration risk for 1099 physicians relying on it for long-term tax planning. The OBBBA also widened phase-in ranges beginning in 2026, making the deduction accessible to more taxpayers. The rate remains up to 20% of qualified business income. Income thresholds and phase-outs still apply — verify your specific eligibility with a CPA current on 2026 OBBBA implementation.

For physicians earning above the SE tax threshold in locum income, an S-corp election can shift a portion of income from self-employment tax exposure to a salary/distribution split, potentially reducing total SE tax liability. Current planning guidance suggests the S-corp structure becomes cost-effective above approximately $80,000–$100,000 in net business income — below that level, the administrative and accounting costs typically outweigh the savings. See the LPG S-corp guide for a full breakeven analysis.

5. A Step-By-Step Rate Formula

With overhead and taxes modeled, you can calculate a defensible hourly rate floor. This formula works backwards from your target net income.

Step 1: Set your annual net income target. This is what you want to take home after all taxes and business expenses. Example: $280,000.

Step 2: Estimate your annual billable hours. A full-time locum physician working 46 weeks at 40 hours per week produces 1,840 billable hours. Most physicians working locum as a primary income source target somewhere between 1,200 and 1,800 clinical hours annually after accounting for unpaid credentialing time, travel, and schedule gaps. Example: 1,400 hours.

Step 3: Add your fixed annual overhead. Use your actual numbers. Example: $18,000 (malpractice covered by agency; licensing, DEA, CME, accounting).

Step 4: Calculate the gross income needed before SE taxes. SE taxes are paid on net self-employment income — your gross revenue minus business deductions. A simplified planning estimate: divide your pre-tax target (net income + overhead) by approximately 0.85 to account for the SE tax layer at physician income levels. This is a planning approximation, not a precise tax calculation — your CPA will produce the exact figure.

Step 5: Compare your floor to market rates for your specialty. If your calculated floor is below the market rate for your specialty and geography, you have room to push above it. If your floor is above market, you have a structural problem — either your overhead is too high, your billable hours target is too low, your income target needs adjustment, or the market for your specialty in that location genuinely cannot support your floor rate. Each of those is a solvable problem, but you cannot solve what you have not modeled.

For current market rate benchmarks by specialty, see the LPG specialty pay guide hub.

6. Variable Costs and Assignment-Level Adjustments

Your hourly rate floor is based on fixed annual overhead. Some assignments carry additional costs that need to be factored into total compensation negotiations — not your base rate, but the reimbursement terms you negotiate alongside it.

Travel. If the agency covers flights and ground transport, your assignment travel cost is effectively zero. If you are driving and the agency reimburses at below the 2026 IRS standard mileage rate of 72.5 cents per mile, the gap is an unreimbursed cost that reduces your effective hourly rate. Model it explicitly for any assignment requiring significant regular travel.

Additional state licensing. Each new state market requires a medical license, which can run $200–$1,200 depending on the state. For short assignments in new states, the licensing cost may not be recoverable from a single placement — factor the amortization into your rate decision for that market. Multi-state licensing through the IMLC can reduce the cost and complexity of expanding into new states. See the LPG IMLC guide for details.

Housing. Agency-provided or stipend-covered housing eliminates a real cost. For assignments where housing is your responsibility, the daily cost needs to be part of your total compensation model — a $200/day hotel over a two-week assignment is $2,800 that either comes from the housing stipend or comes out of your pocket. See the LPG housing stipends guide for how to evaluate stipend structures.

7. When to Revisit Your Rate

Your rate floor is not static. Three situations should trigger a recalculation:

Annual overhead changes. Adding a new state license, absorbing malpractice costs that were previously agency-covered, or changing your entity structure (sole proprietor to S-corp) all shift your overhead model. Recalculate at the start of each calendar year at minimum.

Material income changes. The SE tax cap ($184,500 for Social Security in 2026) adjusts annually. If your income crosses the additional Medicare tax threshold, your effective marginal rate increases. Run updated numbers when your income changes significantly in either direction.

Market rate movement. Specialty supply and demand shifts over time. A hospitalist rate that was competitive in 2024 may lag the 2026 market if physician shortages have deepened. Cross-check your floor against current market benchmarks at least annually — not to lower your floor, but to know how much room you have above it.

For a physician just entering locum tenens, the rate-setting exercise in this guide is the prerequisite to effective negotiation. Once you know your floor, you can use the negotiation framework in the LPG negotiation guide to push above it.