Should you hire additional therapists for your practice as 1099 or W-2 employees? I'll walk you through the decision process in this blog series so you can make an informed decision.
If your private practice is thriving and you are considering hiring additional therapists, one of the major questions is how to structure the employment relationship. Should you hire additional therapists as a 1099 contractor or W-2 employee?
In my private practice consulting experience and based on recent discussions in my Private Practice Toolbox Group it seems that most private practice therapists favor hiring therapists as 1099 contractors. When I ask why I often hear something like, "I hire 1099's because then I'm not responsible to pay the therapists employment taxes and it provides some cushion against legal responsibility for the acts of therapists providing contract services." While these statements are true, there is a lot more to consider when structuring the employment relationship and misclassification can be a costly mistake.
So what what's the difference between hiring a 1099 and W-2?
An 1099 independent contractor is a tax-related and legal term referring to an individual who contracts his or her services out to other businesses. An independent contractor is considered self-employed and is not considered an "employee" of the practice. The 1099 workers pays all of their own income tax in addition to self-employment taxes.
"Independent contractors do the work where, when and how they choose. Nobody tells them what order to do the job in, what hours to work, or when they can take off, " says Employment Attorney, Donna Ballman, author of How To Stand Up For Yourself Without Getting Fired.
A W-2 employee is an official employee of a company, or a private practice, whose taxes are withheld from and whose earnings are reported to the IRS at the year-end via a W-4. The practice owner participates in paying the employees state and Federal taxes and has the ability to control how, where, and when the work is performed by the employee.
Michigan attorney Donald A DeLong says that control is the key issue. "If you control when the therapist works, where he/she works, how and when he/she gets paid, you require that he/she use your equipment, etc., then that worker is a (W-2) employee."
As I've researched this topic it is clear that there are no easy answers and a lot of grey areas. I hope to share some helpful information and resources over the next several posts to help you make the best choice when it comes to hiring.
The costs of inaccurately classifying employees
Inaccurately classifying workers can be very costly to an employer warns Vincent Porter, CPA of Porter & Company CPAs in Arlington Tx. Porter shares these words of caution with employers.
The IRS can conduct an audit of a business that is paying employees on a 1099 and hit them with back payroll taxes that can be very costly to a business not in compliance. This is a big issue we face almost daily with clients. They should understand that if they were to be audited by their State Unemployment agency or IRS they could face severe penalties for improperly classifying employees as contractors. Not only could they face unpaid employment taxes they could face heavy penalties.
In my next post in this series I'll tell you about my employment tax audit experience a few years ago!