What’s the Difference Between an Employee and Independent Contractor in Private Practice?

Employee or Independent Contractor? It’s important to get it right when hiring - and that’s not just because the IRS is keeping an eye on proper worker classification. Possibly more importantly, hiring an employee or a contractor really matters for achieving the goals and the culture you want for your private practice.

First, you want to make sure you are within the boundaries of employment law. But as long as you meet the legal requirements, decide which worker classification is the BEST fit for your practice. Let’s start by summarizing the law.

What is the difference between an employee and an independent contractor?

The Overview:

There isn’t a one-size-fits-all formula to worker classification. It comes down to the overall relationship between the worker and the employer or business. And we all know that defining relationships can be complicated!

The IRS offers this: The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. (Cite)

A contractor is presented with a job to be completed and is allowed to reach the end goal by whatever means the contractor chooses. A simple example: My air conditioning recently stopped working, so I called a repair shop to have a look. I hired this person to fix the problem - to prevent me from sweating within the walls of my home - but I did not (could not) tell the contractor HOW to fix the problem. I presented the situation, a timeline, and left the rest up to the HVAC expert.

It stands to follow then, that if the employer DOES control how and what work is done, it would be an Employee relationship. It’s important to note that even if the employer gives great freedom to the worker in performing their services, it is STILL an employee relationship if the legal right to control how the work is performed falls with the employer. In other words, micromanagers AND laissez-faire management styles are not what define the relationship.

The HVAC example is very straightforward. Things get sticky when the type of work performed is the same by both contractors and employees. Another example: a school teacher and a tutor. A school teacher is an employee because they are required to be at a specific location at specific times. They are told what to teach and often how to teach it. They are paid on a regular basis with taxes and benefits withheld. The classroom, desks, and required equipment is provided by the school/employer.

In contrast, a tutor can determine when and where they will teach, how much they will charge, even what curriculum they will use. They hold the right to make these decisions. Although there are many similarities in the work a teacher and a tutor performs, the critical difference here is the control of how, what, and where!

The Zoom In:

The IRS considers three major factors when evaluating the full picture of the worker/business relationship: Behavioral Control, Financial Control, and Relationship of the Parties.

Behavioral Control: Who has the legal right to control the HOW and WHAT and WHERE of the work to be done?

Financial Control: Who is making the decisions about worker payments and has their financial neck on the line?

Relationship of the Parties: Is the relationship generally intended to be permanent and are the services performed essential to the business?

A More Granular Look:

No single factor is the determining factor - it’s a comprehensive look at the whole of the relationship. On a more granular level, the IRS uses a 20-Factor Test:

Why Is It Important?

At this point, you may be wondering why all the fuss?! Worker classification matters legally because there are numerous Fair Labor laws protecting employees like OSHA, ADA, and Equal Pay. It matters financially to the government because taxes like Social Security & Medicare, Unemployment, and Workers’ Compensation must be paid for employees. (Read: If you hire an employee, YOU have a responsibility to collect and remit employment taxes for this worker.) Although hearing the words “Internal Revenue Service” can make knees tremble, state unemployment income audits are much more common than IRS worker reclassifications. Because state laws are often more restrictive than the IRS, be sure to know your state requirements to avoid any potential problems with unemployment taxes.

You’ve probably gathered by now that employees and contractors are completely different animals when it comes to tax laws. If you have any questions, I STRONGLY encourage you to seek the advice of an Employment Lawyer or Private Practice Attorney who can steer you in the right direction for your specific situation!

The Fit for Your Practice - Pros & Cons:

Now that you know when a worker MUST be considered either an employee or a contractor based on the 3 factors, what if they truly could be either? (Note that some states do not allow therapists to be contractors, so be sure to check if this applies to your location.)

Because your clinicians ARE your practice, you may want to ponder these things:

• Do you want processes managed a certain way?

• How much structure do you want in your practice?

• Do you want to require specific continuing education or staff meeting attendance?

• Do you want an individual to work exclusively for your practice or to see their own clients?

• What can you afford to pay an employee vs. a contractor?

Talk with other Private Practice owners to get their take on the pros and cons of having employees and contractors.

	Contractors	Employees
PROs	Can be less expensive Simpler to pay Simple compliance (1099 only) Less supervision No unemployment claims No FICA (Social Security and Medicare Employer portion)	Complete control over schedule & hours Control over process and how work is done No compliance issues More committed to your business Can offer benefits, PTO, etc Typically pay a lower % of session fee Fewer restrictions on work that can be done Less compliance on the employee’s side
CONs	Less supervision No control over hours & schedule No control over how work is done Some states don’t allow Typically pay a higher % of session fee	Required to pay FICA (Social Security and Medicare) Payroll compliance Unemployment insurance and claims Workers compensation May be required to offer sick leave May need to provide malpractice insurance

Final Notes:

Employers are required to withhold and pay employment taxes for their employees. So, if you are hiring an employee, you will need some sort of payroll software. (We recommend Gusto) Although hiring a contractor would be more simple and likely would cost less than paying taxes and benefits for an employee, please do not make a decision based on ease or money alone! If it is discovered that a worker is misclassified, there can be some serious financial consequences in the form of back payment of taxes and penalties. We also don’t condone fear-based decisions, so simply make an informed decision from the start!

Resource List:

IRS Understanding Employee vs. Contractor Designation

The Group Practice Exchange: Should You Hire an IC or Employee for Your Group Practice

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This article is designed to provide information only and should not be considered legal or tax advice. Because of the complexity of the law and the variables in your own personal tax situation, you can’t rely on our advice specifically related to your unique circumstances. In order to get the best tax savings and legal advice available to you, you should consult with your own accountant, attorney or advisor regarding your particular facts and circumstances. GreenOak Accounting is an accounting firm that specializes in working with counselors and therapists in private practice. We provide monthly accounting & bookkeeping services, tax services and online courses. For more information on our specialized services for therapists please visit www.greenoakaccounting.com