By Jodi Schafer, SPHR, SHRM-SCP
I just brought another physician into my practice. She is right out of medical school and I spend a lot of time developing her skills. I currently pay her through accounts payable, as an independent contractor. I was told to set it up this way by my accountant years ago when I brought in my first associate doctor. However, this new associate has requested to go on payroll as employee. Her husband is an attorney and she told me that according to her husband, she does not qualify as an independent contractor. Is she right? How does one qualify as an independent contractor? What are the advantages of keeping her as an independent contractor? By the way, my other associate is fine with the current arrangement.
Independent contractor status is governed by Internal Revenue Service (IRS) regulations, and therefore regulated by the IRS. It really is a tax issue.
There are definitely advantages to paying your associates as independent contractors. You don’t have to pay payroll taxes on their earnings, or unemployment insurance or even worker’s compensation. Independent contractors are also exempt from most employment and labor laws. However, if you are going to pay them as contractors you have the burden to prove that the parameters of the working relationship qualify as such in the eyes of the IRS. It is not the job you are testing but the business relationship. It all centers around the amount of control the practice has over her work; both behavioral control and financial control. The more control you have as the practice owner, the less control she has and therefore is not truly ‘independent’. Here are some questions to get you started thinking.
Does the practice control (or have the right to control) the worker’s duties and how those duties are carried out? How dependent is she on your practice for patients? Do you control her hours? Is she expected to follow the practice’s work rules and procedures?
Does the practice control the business aspects of the worker’s job? Does the associate work for other medical practices? Does she have the right to decline work? Does she set her own schedule?
Who incurs the costs associated with doing business? Does she pay for any of the supplies she uses? Do you deduct money for these expenses? Do you reimburse her for expenses she incurred for the practice?
Does the worker have a written employment contract or access to employee benefits such as a pension plan, insurance, or vacation pay? Are you contributing to her 401K or other type of retirement account? Does she receive paid time off, a uniform allowance, CME reimbursement, professional memberships, licensing fees, etc.?
Will the relationship continue and are the duties the worker performs a key aspect of the business? Is this a short-term relationship or do you expect the person to stay and perform medical services similar to the services provided by the office as a whole?
The IRS has a form (SS-8) that you can use to test the relationship in more depth. It’s a rather long form to complete and no one factor on the test is more indicative of employee status than another. However, as I said earlier, the more control you have as the practice owner, the less likely she should be classified as an independent contractor. When it comes to the IRS, it’s always best to err on the side of caution. A further consideration for you is that your new associate has requested that she be paid as an employee. Unless you can provide her with your testing documentation that definitively shows otherwise, she may go to either the IRS or the Department of Labor with her concerns, which could trigger an investigation.
If you are unable to defend the independent contractor relationship, what you end up paying in steep fines, back taxes, interest and other retroactive damages will far outweigh the initial cost savings. The penalties for misclassifying a worker can be huge. As they say, if it looks like a duck, walks like a duck and quacks like a duck…. Is it really worth it? I’d put her on payroll and convert your other associate as well if the working relationship is similar.