Independent Contractor vs. Employee: What Is the Difference?
There are many essential roles within medical offices. Employees fill the bulk of these positions, but independent contractors can play an important part in providing great service as well. This classification also offers numerous benefits for healthcare practices. If you improperly classify an associate doctor or other employee as a contractor, though, there could be legal consequences.
Independent Contractor vs. Employee: What Is the Difference?
Independent Contractor vs. Employee
There are many differences between employees and outside contractors who handle certain tasks in the medical field. If you were to boil the difference between these two categories down to one word, it would be control. Whether an individual gets classified as an employee or an independent contractor relies on how much control an employer has over the individual.
Unfortunately, anyone asking "what is an independent contractor?" has realized that the differences aren’t always black and white. Outside contractors typically get paid on a per project basis. They are not privy to things like a regular wage or employee benefits. And since contractors have to handle their own taxes, employers avoid many of the employment taxes they’d typically owe.
Classifying Your Team: A Taxing Situation
The big issues that arise with independent contractors and employees relate directly to taxes. There are certain benefits for both workers and employers under both categorizations. When looking at the tax implications, though, the advantage is easily the employers.
Employees are staff members who pay taxes, but the employer pays a bulk of other taxes on their behalf. This includes Medicare and Social Security taxes. Employers must also withhold, report, and pay other employment taxes.
Independent contractors do not qualify as employees. These individuals are not typically eligible for unemployment payments — although the coronavirus pandemic changed this somewhat — and they don’t receive employee benefits. They also have to handle their own taxes every year. This takes a significant burden off employers.
Recommended reading: Self-Employed Individuals Tax Center
The “New” IRS Independent Contractor Test
Many medical office managers would love the idea of being able to choose whether a worker qualifies as an employee or an outside contractor. This isn’t how it works, though, and many companies get in trouble by trying to skirt the law. The more common situation for medical professionals, however, is the accidental miscategorization of temporary employees and associate doctors.
The following Independent Contractor Test comes directly from the Internal Revenue Service.
1. Behavioral Control
The amount of control an employer has over a worker's activities is very important. Do they set specific work hours or dictate certain ways jobs should get done or does the individual choose these things on their own as long as the finished product is up to the company's standards?
2. Financial Control
If a medical office provides a regular or guaranteed wage — or if someone is salaried — it's likely that person is an employee. They typically pay independent contractors on a per-job or per-project basis.
3. Type of Relationship
We must also consider the relationship between a company and a worker. If someone's work relates directly to a business's core function, the IRS is likely to view them as employed by your office. This is also true if you provide certain benefits (e.g., health insurance, paid holidays). Long-term workers are also more likely to qualify as employees.
These three factors should make it easier for you to classify those who perform work for your practice properly. If you’re still having trouble understanding the difference or dealing with other compliance issues, reach out to us at HR for Health for additional guidance.
What Forms Should You File?
If one of your workers qualifies as an employee, you'll need to provide certain benefits and also withhold, report, and pay applicable taxes. You're required to file a Form W-2 every year for each employee. If you pay an independent contractor more than $600 during a tax year, you'll also need to file Form 1099-MISC and arrange a Form W-9.
Recommended reading: DOL Clarifies Independent Contractor Rules
Why Do Employers Misclassify and How to Avoid It
Misclassification of employees comes down to two reasons: accidental vs. intentional. Some employers purposefully misclassify employees to avoid the taxes they’d otherwise have to pay. Because of the complexity and nuance of the rules, though, most medical offices and smaller businesses that make this mistake simply didn’t understand classifications.
Avoiding this is as simple as reviewing the IRS Independent Contractor Definition. If you’re at all unsure about the right definition, it’s safer to go with a designation of employee rather than an outside contractor. Of course, this can get expensive as time passes. Your safest bet is to schedule a consultation with HR for Health to learn proper classification rules.
What Happens If I Misclassify an Employee as a Contractor?
Misclassifying an independent contractor as an employee has consequences, but misclassifying an employee is far more serious. If the IRS realizes someone has done this, the employer will need to pay back taxes and additional penalties for not having paid them before. Penalties will also assess from Social Security, income taxes, unemployment taxes, and Medicare.
Employers also frequently have to reimburse misclassified employees for paid time off, higher wages, and other benefits they should’ve received as an employee rather than an independent contractor.
How HR for Health Can Help
Properly classifying someone as an employee or outside contractor can seem a little tricky. And while honest mistakes happen all the time, they can still lead to major repercussions for medical offices. This is why you need a team of human resource professionals on your side.
At HR for Health, our goal is to ensure your practice remains in compliance with applicable laws. Whether it's properly classifying independent contractors or working within the confines of federal regulations, we're here to help. Contact HR for Health here to schedule a consultation and learn how we can help your office excel.