Independent Contractors: The Essential Guide
Independent contractors can solve staffing woes, but you have to tread carefully. Errors in classifying independent contractors can cause expensive problems. Here’s what you need to know.
Staffing your practice is one of the biggest challenges you face as a practice owner. You need enough employees to provide excellent patient care, but you don’t want too many — the excess payroll wreaks havoc on your budget.
The problem is that there are times when your core team can’t keep up. For example, every pediatrician knows how hectic things get when kids need summer camp or back-to-school physicals — and that says nothing about covering your employees’ sick days, vacations, and leaves of absence.
How do you increase your employee count for busier periods without finding yourself overstaffed when things slow down? Is letting your teamwork overtime the answer? Should you add associate doctors and as-needed team members to handle overflow inpatient care?
Some practices solve temporary staffing gaps with independent contractors. Others build their team around associate doctors and classify them as independent contractors to reduce payroll taxes and benefits expenses. Unfortunately, solving one problem can create another.
There are complex regulations around hiring and paying an independent contractor correctly, and it is critical that your practice stays in compliance. Small errors can create big, expensive problems that completely offset the savings you hoped to achieve.
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Table of Contents
Independent Contractors vs. Employees
The first and most important step in hiring an outside contractor is to look at the difference between independent contractors and employees. This isn’t simply a matter of how you choose to classify them. There are detailed guidelines that define who does — and does not — qualify. So, what is an independent contractor?
The IRS defines independent contractors this way:
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.
Conversely, employees are defined as follows:
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.
In other words, independent contractors typically make their own rules — they decide whether, when, and how they work once you hire them for a project. That’s a hard standard to meet if you are talking about technicians and assistants who must abide by the rules of your practice.
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Updated Department of Labor Guidelines for Classifying Independent Contractors
Effective March 8, 2021, the Department of Labor updated its rules with regard to classifying independent contractors. It looks at two elements of the employer/worker relationship to differentiate between independent contractors and employees.
These are the two core factors that the Department of Labor considers in determining independent contractor status:
• The nature and extent to which individuals have control over their own work.
• The individual’s realistic opportunity for profit or loss — also referred to as the economic reality test.
For example, if you bring in an associate dentist, the regulations look at whether and how you control their work. Are they able to make independent decisions on how to work on patients? Can they set their own schedule? If so, they may qualify as independent contractors — but be aware that there is still some risk in classifying them as such.
You can drill down to determine whether your team members qualify as independent contractors by reviewing IRS and Department of Labor (DOL) guidelines. Each looks at unique factors in categorizing team members, and each imposes consequences when employees are misclassified.
If the individual meets the requirements for classification as an independent contractor under one agency but not the other, the safest choice is to classify that team member as an employee. Remember, the costs of misclassifying an employee are quite high. You could be liable for back pay on taxes, worker’s compensation, and wages — including vacation, PTO, sick leave, and overtime.
Who Can Be an Independent Contractor in a Medical Practice?
If you would like to bring in an outside contractor to meet short-term or long-term staffing objectives, begin by verifying that the position you have in mind meets all IRS and Department of Labor requirements for independent contractors. If so, you may be able to hire independent contractors for positions such as cleaning and maintenance, bookkeeping, and business consulting. Think back to what an independent contractor is.
Generally speaking, it is unlikely that the following team members will qualify as independent contractors:
• Associate Doctors – with a possible exception for doctors who specialize in an area other than that of your practice.
• Hygienists, Opticians, and Vet Techs – your practice is very much in control of the work completed by these team members, so they typically do not qualify as independent contractors.
Again, if there is any doubt, the safest move for your practice is to hire team members as regular employees.
Form W-9 and Other New Hire Paperwork for Independent Contractors
Once you have established that your new team member qualifies as an independent contractor, the next step is to ensure you have collected a W-9 form. This works in much the same way a W-4 form works for a regular employee. The W-9 records the individual’s Social Security number or tax ID number, as well as basic contact information.
Other important new hire paperwork for outside contractors includes a resume or other record of experience, and proof of professional credentials. You will be responsible if you permit an unlicensed person to perform work that requires a license, so it is wise to confirm credentials through the appropriate state agency.
Finally, depending on the position, you may wish to complete a background check. In certain cases, state law requires this. Examples include positions that put the team member in contact with children, disabled patients, and the elderly.
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Paying an Independent Contractor
One of the reasons many practices prefer to hire independent contractors is that pay calculations are simpler to manage than they are with regular employees. Depending on the agreement you have with the individual, you can pay for the completion of a specific project, or you can pay a predetermined hourly rate.
The good news is that you can generally skip all the extras — Social Security tax, Medicare tax, income tax, and unemployment tax. Outside contractors pay these when they file their own personal or business returns.
Independent Contractors and Tax Reporting
Though you aren’t typically required to withhold standard taxes from pay issued to independent contractors, you do have reporting obligations for any payments you make to them. You must report the total to the IRS each year through a Form 1099-NEC, and it is due by January 31 of the following year. You are also required to furnish a copy to the outside contractor for their records. This requirement is effective as of the 2020 tax year — before that, these payments were reported through Form 1099-MISC.
Creating a Contract for an Independent Contractor
Setting clear expectations for the work your independent contractor will complete and how much you will pay is key to a successful relationship. For example, if you plan to hire an independent contractor to manage bookkeeping, outline the specific tasks you want to be completed, how often you want them completed, when you expect reporting, and the agreed upon fee. When, where, and how the work gets done is up to the bookkeeper.
Put together a contract that outlines these points, along with any confidentiality and nondisclosure agreements you want your independent contractor to comply with. Keep in mind that contracts are a complicated area of law, and there are a number of potential pitfalls. You may wish to consult with your legal advisor to draw up this document.
How HR for Health Can Help
HR for Health is your partner in navigating the complexities of independent contractors versus employees. Our consultants will help by walking you through independent contractor requirements to determine if you have your team classified correctly.
When your team members do qualify as independent contracts, the HR for Health system automates related documentation, ensuring all required forms are signed electronically. Contact HR for Health here to schedule your consultation.