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Misclassifying an employee as an independent contractor has serious ramifications for medical practices. Make sure you know the distinction.
Misclassifying an employee as an independent contractor has serious ramifications for medical practices including both wage-based lawsuits and significant tax penalties. This week I will discuss how the IRS and Department of Labor defines the difference.
In last week's article on this issue I provided some details about the nationwide effort to crack down on employers who, either innocently or intentionally have misclassified employees as contractors. Below, quoted heavily from the IRS' own website, are excerpts explaining how the government views the difference.
Independent contractor defined
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, and subcontractors who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case.
The general rule (and I mean very general) is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax. If you are an independent contractor, you are self-employed. To find out what your tax obligations are, visit the Self-Employed Tax Center.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax. However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors or Employees.
Determining whether those providing services are employees or independent contractors
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be:
• An employee (common-law employee)
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common law rules
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker's job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. 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?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. As always, this is not specific legal advice, we can't provide that in an article meant to be widely read by a wide variety of physicians, medical executives, and medical practice employees. It is a simple starting point of issues to consider and a warning on the complexity of these issues that must be professionally addressed to protect your practice and comply with tax and labor laws.