Medical Offices: Knowing a Contractor from an Employee
Many doctors believe that there isn’t much of a difference between employee and contractor, but unfortunately that misconception could lead to long term employment issues. Are you hiring an employee or an independent contractor? It is essential to understand the different types of employment relationships and how they can affect your practice.
The difference between an employee and contractor is simple in terms of taxes. With an employee, you must withhold income, Social Security and Medicare taxes. You will deposit and report the withholdings in accordance with the IRS guidelines which can be found in Publication 15, Employer’s Tax Guide.
On the other hand, for an independent contractor, you do not withhold taxes. At tax time, your contractors will receive a Form 1099-misc instead of the W-2 you fill out for your employees.
How do you know which is which?
So, when it comes to your medical practice you need to understand what the functional difference is between an employee and a contractor.
The IRS defines an employee relationship as a situation where an employer can control exactly what is to be done and how to accomplish it. Employees receive training, resources, and benefits. And they have a portion of their pay withheld for taxes.
But a contractor is someone who independently provides their services to an office or the public. Unlike an employee, the entity responsible for paying the fee for services rendered is not the employer. They do not have control over the contractor’s time. There is still an expectation that an agreed-upon task is completed effectively, but the contract’s means to completion is not within your control.
An independent contractor will pay self-employment tax on their earnings, rather than having them withheld by an employer.
It may seem as if the dividing line between contractor and employee can be very narrow, and it can be, but it never disappears. The IRS offers some guidance. For example, it notes that "anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed."
The IRS breaks down the contractor vs. employee distinction further with three criteria:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- 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.)
- 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?
Of course, there are subtleties and exceptions, so you should be sure to get the advice of an expert if you have any doubts. We're here to help you.