When clinicians working in the practice are designated as employees, the practice owner is responsible for paying half of their Social Security and Medicare taxes. The practice owner also needs to withhold and deposit the employees’ share of federal, state and local taxes and to file quarterly paperwork documenting this.
And, each January, the practice owner must prepare a W-2 tax form for each employee and file a W-3 form with the Social Security Administration.
To save themselves the trouble and expense of all this record keeping and filing, some practice owners designate clinicians in their practice as independent contractors. In January the practice owner just needs to provide them with the simple 1099 tax form, which summarizes their total earnings for the previous year.
Independent contractors are considered self-employed. They are responsible for filing all their own tax forms and for paying their entire Social Security and Medicare taxes.
Can a practice owner arbitrarily decide to classify a clinician as an employee or independent contractor?
The short answer is no. Designating a clinician in one’s practice as an employee or independent contractor is not based on preference, but on certain criteria set by the IRS.
In general, the more control that the practice owner has over a clinician’s hours, referrals and how they do their work, the more likely that the IRS would consider the clinician an employee.
The three factors considered by the IRS are:
*Behavioral: Does the practice owner control or have the right to control what the clinician does and how he or she does their job?
*Financial: Are the business aspects of the clinician’s job controlled by the practice owner? (These include things like how the clinician is paid, whether expenses are reimbursed, who provides supplies etc.)
Type of relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
The following examples are provided for illustrative purposes only. They are not intended as legal or tax advice.
*Reggie Wrath is an anger management consultant. He does training and workshops at four local agencies. He negotiates with each agency separately as to what training he will provide, days and times he will be on site and how much he will be paid.
In essence, Reggie is self-employed. He is paid for doing the work, but it is on his own terms. He provides all his own handouts and other materials and decides how to present his training. Unless it is part of his agreement with the agency, he is not expected to attend staff meetings or to do other things that would be required of an employee.
Given the above, the IRS would likely determine that Reggie’s work relationship with the agencies is as an independent contractor.
*Betty Shrinkman works part-time as a therapist in a mental health private practice. The practice schedules appointments for her two evenings per week and Saturday mornings. She is required to show up even if no one is scheduled in case there are walk-ins or emergencies. She sometimes is assigned to make home visits and is reimbursed for her transportation and parking expenses.
Because Betty is accountable to the practice owner, not just for work performed but also where, when and how she works, it is likely that the IRS would consider her to be an employee regardless of her part-time status.
*Similar rules apply to administrative staff. A bookkeeper who works from home on her own schedule, producing weekly financial statements for the practice, is more likely to be classified as an independent contractor than a receptionist who is hired to work specific hours at the front desk, and who is given specific instructions as to how to do the job.
The independent contractor designation is not based on the type of work done, but on the level of control that the employer has over the employee’s work activities.
What if a worker is misclassified as an independent contractor?
If the IRS audits a group practice and finds that people working in the practice are paid as independent contractors but are treated as employees, the practice owner could be assessed back taxes and a hefty fine.
Thus, if you are a group practice owner it would be a good idea to consult with your tax advisor as to whether the clinicians and administrative workers are properly classified according to IRS rules.
If you work in a group practice and think that you might be misclassified, review the IRS rules and make a list of factors that you believe are relevant to your situation. Then discuss them with the practice owner.
Reference available from author
Pauline Wallin, Ph.D., is in private practice in Camp Hill, Pa., and is co-founder of The Practice Institute, LLC, and the Center for Advanced Professional Education. She is a past-president of APA Division 42, Independent Practice, and Division 46, Media Psychology and Technology. Her email is firstname.lastname@example.org