Direct-to-Hospital vs Agency: The Tax, the Malpractice, and the Cut
Yes, the agency spread is real money. So is the tail premium, the state registrations, and the twenty hours a month of unbillable admin. Price all of it before you cut anyone out.
A guide by Taxstra Tax & Accounting · CPA-led tax strategy for business owners
Written by Bryan Martin, CPA, Managing Partner and Founder of Taxstra. Last updated August 18, 2026.
The short answer
Going direct trades a revenue problem for an operations problem. You can reclaim much of the spread between what the hospital pays and what you were seeing, but you inherit everything the agency was silently covering: malpractice and especially tail, credentialing legwork, contract terms, invoicing and collections, and, if you contract through an entity, foreign registration and filings in the work state. For recurring placements at facilities that know you, the math usually favors direct. For scattered one-off weeks, the agency earns its cut. Either way, the deductible costs soften the load; they do not erase it.
The ledger, both columns filled in
| Line item | Through an agency | Direct to hospital |
|---|---|---|
| Rate | Your negotiated slice of the bill rate | Negotiate at or near the full bill rate |
| Malpractice | Typically on agency paper, tail often included | Hospital program if negotiated, else your policy and your tail |
| Tail exposure | Usually not your problem | Potentially 1.5x to 2x annual premium when coverage ends |
| Credentialing and licensing legwork | Agency-assisted | Yours (deductible, but time-expensive) |
| Travel and housing | Often agency-arranged or stipended | You arrange; deductible if you qualify under the tax-home rules |
| Invoicing and collections | Agency pays on schedule | You bill; hospital AP pays when hospital AP pays |
| Entity compliance in the work state | Rarely triggered by you | Foreign registration and filings commonly required |
| Non-compete / non-circumvention | Restricts converting facilities to direct | Check before you pitch the hospital directly |
Two lines deserve the highlight. Tail is the one that turns a good year bad: on a claims-made policy, the coverage for claims filed after you leave is a separate purchase, and on a direct contract nobody buys it unless your contract makes them. Get the malpractice clause priced before comparing rates at all. And non-circumvention clauses: most agency agreements restrict working directly for facilities they introduced you to for a period. The clean direct relationship is one that either predates the agency or outlives the restriction; read the clause before the conversation, a topic we cover alongside the rest of the contract fine print in the agency contract tax guide.
A worked comparison: same week, two channels
One recurring monthly week of hospitalist coverage (illustrative)
- Agency channel: your rate $190/hr x 40 hrs x 12 weeks
- $91,200 to you; malpractice, tail, scheduling handled
- Direct channel: negotiated $250/hr x same calendar
- $120,000 gross
- Less: your malpractice allocation + tail reserve for this line of work
- about $12,000
- Less: credentialing, contract review, billing time, entity registration in the work state
- about $5,000 in cash, plus your hours
- Direct net before tax
- about $103,000
Roughly $12,000 a year of real improvement for a recurring placement, IF collections behave and the tail reserve is honest. Scale the same overhead against three scattered one-week assignments and the agency column wins. Illustrative numbers; your specialty’s premiums and your negotiated rates decide it.
On taxes: the direct route’s added costs are overwhelmingly deductible, malpractice and tail, licensing, contract review, qualifying travel, billing infrastructure, so the after-tax gap between the channels is narrower than the gross gap. What direct contracting does not change is sourcing: the income is taxed where you worked it, whichever entity invoices for it, and running the contract through your S-corp adds the state registration obligations people keep hoping it removes. And with no agency stipend program, structuring your own travel benefits correctly matters more; the rules are in the stipend taxability guide.
Collections risk is a real line item
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Frequently Asked Questions
How much does an agency actually take from the bill rate?
Hospitals commonly pay agencies substantially more than the physician sees; spreads reported across the industry often run 25% to 50% of the bill rate depending on specialty and market tightness. Going direct lets you negotiate closer to the full bill rate, in exchange for doing the work the agency was doing: sourcing, credentialing support, scheduling, billing, and carrying certain coverages.
Who pays for malpractice and tail coverage on a direct contract?
Whoever the contract says, which is why the tail clause is the most expensive sentence in the document. Agencies typically carry claims-made coverage and often the tail while you are on their paper. Go direct and either the hospital adds you to its program, or you buy your own policy, and tail on a claims-made policy can cost one and a half to two times the annual premium. Premiums and tail you pay for 1099 work are deductible business expenses.
Are the extra costs of going direct tax-deductible?
The legitimate business costs are: malpractice and tail premiums, credentialing and licensing fees, contract review, travel that qualifies under the tax-home rules, billing software or services, and entity maintenance. That softens the cost of independence but does not erase it; a deduction returns your marginal rate on the dollar, not the dollar.
If I contract through my LLC or S-corp directly with a hospital, do I need to register in that state?
Usually yes. An entity doing business in another state through its physician generally must register there as a foreign entity, and the income is sourced there regardless. Direct contracting removes the agency from the paperwork chain, which means its compliance burden lands on you.
Is direct contracting worth it for an occasional assignment?
Rarely. The fixed overhead, entity registrations, your own coverage negotiation, invoicing, contract review, amortizes well over a long or repeating placement and terribly over a one-off week. The classic winning pattern: convert a facility that already knows you from agency placements into a direct, recurring relationship once the contractual restrictions allow.
Is there any tax difference between a 1099 from a hospital and a 1099 from an agency?
The form is identical and so is the federal tax character: self-employment income sourced to where you worked. What differs is everything around it: agencies often run stipend programs and carry malpractice, while direct contracts push those onto you (deductibly). Same 1099, different expense profile, which is why the after-tax comparison never matches the gross comparison.
Can I run agency and direct assignments in the same year?
Yes, and most converts do exactly that during the transition. Both streams land on the same Schedule C (or in the same S-corp), share one set of quarterly estimates, and your deduction file just tracks which costs belong to which engagements. The only real hazard is contractual: non-circumvention clauses covering the facilities the agency introduced.
What if the hospital never sends a 1099?
The income is taxable whether or not the form arrives; your invoices and deposits are the record, and direct relationships with smaller facilities do sometimes fumble the reporting. File from your books, not from the forms, and chase a corrected 1099 only when one arrives WRONG, since mismatches between filed forms and your return generate automated notices that are tedious to unwind.
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This page is educational, not individualized tax advice. Locum tenens tax outcomes depend on your contracts, your states, and your numbers. Savings vary by client and results are not typical of every situation. Consult a qualified tax professional before acting on anything here.