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Employee vs. Independent Contractor: Differences You Need to Know

Sandy Weitz, MD, explains why it's essential to understand the differences between being an employee or an independent contractor when you need to add staff.

When you are ready to hire staff deciding whether to hire them as an employee or an independent contractor can be very confusing.

Now you may be wondering why you need to understand what it means to be an independent contractor and, how that status different from being a full employee. Most importantly, I’m sure you’d like to know how hiring the person as an independent contractor or employee is going to affect you as the employer.

I know that if you are first starting your medical practice, you are eager to keep your expenses low. And many physicians who are hiring their first staff members are under the impression that independent contractors are going to be less expensive than an employee.

There are certainly advantages to independent contractor status for both the person being hired and the employer. However, there are rules that define whether someone is truly an independent contractor or an employee.

Contrary to what you may think, it’s not simply that you choose which status you want to hire someone as. You have to meet the criteria for the new hire to be treated as an independent contractor or you will owe money to the IRS. The consequences for having the wrong status is borne by the employer so you want to make sure you get this right. Otherwise, what initially seemed to be the cheapest way to hire new staff is going to be an expensive mistake.

Now that I have your attention, let’s get into the definitions of what is an independent contractor and an employee.

 

You have to meet the criteria for the new hire to be treated as an independent contractor or you will owe money to the IRS. The consequences for having the wrong status is borne by the employer so you want to make sure you get this right. Click To Tweet

 

What Is an Independent Contractor?

For some reason, defining what an independent contractor is can seem difficult. In reality, the IRS, Fair Standards Act and prior court findings can help you determine whether the best status for your new hire.

The IRS and many states have adopted common law principles to define an independent contractor. These rules focus primarily on the level of control an employer has over a service or product, meaning, whether or not the employer actually defines what is being done and how it will be accomplished.

The method of compensation helps to define employment status. For example, if a person is on your payroll and receives a steady paycheck then that person is clearly an employee and not an independent contractor.

An independent contract controls their own hours of employment. If your clinic is open from 8 am to 5 pm and you dictate the hours the person works, they are an employee. On the other hand, if they can show up whenever they want, make their own schedule and, leave when they want, that person may be an independent contractor.

 

An independent contract controls their hours of employment. You dictate the hours the person works, they are an employee. On the other hand, if they can show up whenever they want, make their own schedule and, leave when they want, that… Click To Tweet

 

At this point you should be thinking to yourself that front office staff and medical assistants that are expected to be at work during the hours that the practice is open are most likely employees and not independent contractors.

The nature of the work that you expect this new hire to perform also helps to define the employment status. When work is considered integral to the business, it is more likely that the person is an employee.

On the other hand, work that is temporary and non-integral may imply independent contractor status. The person you hire for your front desk is most likely to be an employee as is your medical assistant.

 

The Economic Realities Test

In an attempt to interpret provisions of the Fair Labor Standards Act and help establish the differences between employee and independent contractor status, some courts and federal agencies have come up with the “economic realities test.”

 

The method of compensation helps to define employment status.

 

The “economic realities test” looks at the dependence of the worker on the business they work for. If a person gains a large portion of their salary from that business, chances are that person qualifies as an employee. Again, if you hire a medical assistant for your clinic and that’s their primary job, they are probably an employee.

The test also factors in such things as level of skill, integral nature of the work, intent of the parties and payment of social security taxes and benefits.

 

The Right to Control Test

The courts also use the “right to control” test. When the employer controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. In the case of a medical practice, if you have a policy and procedure manual that defines how you expect your staff to perform, you are essentially exercising their “right to control.”

Now, as much as you might like to have your staff classified as independent contractors, it’s pretty unusual (and unrealistic) to think that you are going to allow your front office and clinic staff to do whatever they want rather than you have the right to control it.

 

In the case of a medical practice, if you have a policy and procedure manual that defines how you expect your staff to perform, you are essentially exercising their “right to control.” Click To Tweet

 

On the other hand, if an employer doesn’t have authority over how a party accomplishes their work but simply requests or gives an outline, the person could be considered an independent contractor.

 

In my practice, the only independent contractor we had was our marketer.

Danielle made her own schedule. We didn’t dictate when she started her day or ended it. We gave her a general marketing plan but didn’t control any aspect of how she did her work. All of our other staff were employees. Everyone who came to work during clinic hours, performed the tasks we trained them for and that they were assigned to do were all employees.

As an employer, your tax liability is determined by your worker’s employment status. When a worker is an employee, you must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to your state’s insurance fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments. This is why everyone is always trying to classify their new hires as independent contractors. But, if you incorrectly define a worker as an independent contractor, you’ll may find yourselves liable for past taxes including FICA and federal unemployment tax and, of course, the associated penalties.

 

When a worker is an employee, you must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to your state’s insurance fund. Click To Tweet

 

The Law Is Clear

Certain factors define a worker as an independent contractor: not relying on the business as the sole source of income, working at his or her pace as defined by an agreement, and retaining a degree of control and independence. An employee, on the other hand, relies on the business for steady income, gives up elements of control and independence and works within constraint of workplace.

Again, most of the staff that you would hire for your medical practice are most likely going to be employees. Marketers and, potentially, billing staff may fit the criteria for being classified as independent contractors. I would strongly encourage you to review the IRS guidelines and have a conversation with your CPA prior to hiring any new staff.

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