When a clinician joins a practice, either full-time or part-time, the question often arises about whether he or she should be characterized as an “Employee” or as an “Independent Contractor.”
One key difference is who pays the payroll taxes. When the clinician is an employee, the employer pays the matching Medicare and FICA tax (about 8%) . At the end of the year, the employee gets a W2 form.
If the clinician is an independent contractor, he or she pays the full Medicare and FICA tax, often quarterly. At the end of the year, the independent contractor gets a 1099 tax form from the employer.
Whether a clinician is designated as an employee or independent contractor is not simply a matter of preference. Rather, it is based on many factors specified by the Internal Revenue Service (IRS), including whether the employee has other sources of earned income (something which is easy for them to assess). Another factor is the degree of structure imposed on the clinician. The greater the structure, the less likely it is that the clinician will be designated as an Independent Contractor. For example, if the clinician is required to see certain types of clients, attend specific meetings, and chart in a certain ways they are functioning more as an employee rather than as an independent contractor.
A full description of these roles is at this IRS website. In this document the IRS outlines three major categories they use to assess the status of the “worker.”
Behavioral control – Who controls how the work is done. While the clinician may determine what actually happens in the session, the IRS might deem that the employer controls such things as when the work is done, how much is charged, what policies are followed and even perhaps the treatment approach if the practice has a particular philosophy or approach to practice.
Financial Control – Does the clinician have unreimbursed business expenses or potential to realize a profit or loss from the business? If the practice pays malpractice insurance and travel expenses, and also compensates the clinician on a percentage basis, the IRS could regard this as an employee relationship for tax purposes.
Type of relationship – Does the clinician have the freedom to work for similar practices? Does the clinician, receive employee benefits? Are the services provided a key aspect of the regular business of the practice? A contract with a restrictive covenant, that offers some employee benefits to a clinician who provides psychotherapy in an outpatient behavioral health practice could be viewed as indicative of an employee rather than independent contractor relationship.
Of course, the IRS can, and does, audit payroll records. Following such an audit, the IRS can require payment of all the back payroll taxes, and can assess fines and penalties. While this usually impacts the employer directly, it can also impact the clinician if the employer has to makes radical changes in the operations of the practice (e.g., deciding to hire only full-time employees or closing an office to help decrease other expenses).
Although it may initially seem easier to label clinicians as “Independent Contractors”, we advise you to use extreme caution before using this designation. Do check with your accountant or tax attorney.