Does the state tax commission really take the time to audit small private practices? I didn't think so, until my practice was selected for an audit.
A few years ago my clinic was selected for an employment tax audit. Lucky me, right? When the auditor walked into my office suite and saw many offices with different names on the doors, he looked at me pleadingly and said, "Please, please don't tell me that these therapists are all classified as 1099 contractors."
I replied, "I won't. We're all W-2's."
There was a look of relief on his face.He then proceeded to tell me that health and mental health private practitioners are notorious for incorrectly classifying 1099 employees. In his experience many groups are set up as contract workers when they are acting like employees (I'll go over into detail about the the IRS criteria for how to classify an employee as a 1099 vs. W2 employees in a forthcoming post).
The auditor requested access to all of my financial documents including bank accounts, accounting, payroll information and tax documents. He asked us questions about any large checks written directly to employees to make sure we were paying our employment taxes. After a brief review of my payroll and tax documents the auditor thanked me for making his job easier and left with a smile. I breathed a huge sigh of relief.
Had I hired the therapists working with me as 1099 I may have been penalized with a hefty fine and required to pay back employment taxes on all of the therapists' income. I was not in a position to shell out thousands and thousands of dollars. Had I been incorrectly classifying employees it may have put my practice in jeopardy.
Do you know the IRS criteria for classifying 1099 contract workers vs. W-2 employees? It isn't based on whether or not you want to pay your therapist's taxes or want to have them pay self-employment taxes. It isn't based on whether they are full-time or part-time workers. It isn't based on whether or not you provide benefits.
There are many misconceptions about classifying employees in private practice. I'll address theses criteria for how to distinguish between hiring 1099 vs. W-2 therapists in upcoming posts.
Watch for the next Therapist Blog Challenge coming next week, too!