In the healthcare industry, you may come across a variety of different types of workers. You will see regular W2 employees, as well as some 1099 independent contractors. It can be tricky to determine how to classify them. However, it is very important to identify them correctly. The IRS and Department of Labor have been cracking down on violations regarding misclassifying employees, so now, more than ever, you want to be sure you have all employees identified correctly. The first step to correctly classifying your employees is to understand the difference between a regular employee (W2) and a contract employee (1099).
The Department of Labor provides you with 20 different criteria to help you determine if an employee is a regular or contact-based worker. All of these criteria are really asking the question, “How much control do you really have over the individual working at your practice?”. Although the list of criteria is long, there are 3 main determining factors that can help you classify employees accurately and efficiently. This is commonly referred to as “The ABC Test”, which refers to checking these three criteria to determine if an employee is an independent contractor or not.
- The degree of behavior control. An independent contractor would be “free from the control and direction” of the practice when it comes to the performance of their work.
- The degree of financial control. An independent contractor would be performing work that is “outside the usual course of the hiring entity’s business”.
- The type of relationship that exists between the worker and the business. An independent contractor would be “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed”.
Let’s break these down one by one, starting with behavioral control. What exactly does behavioral control mean?
Behavioral Control of a 1099 Independent Contractors
To determine the amount of behavioral control, the employee is usually subject to the business’ instructions about when, where, and how to work. This would include the business having control over the employee’s schedule. Typically a W2 employee will be given a schedule by the business that they have little to no control over. Their hours would be addressed and laid out in the hiring process, so the employee would agree to them, but they are not usually flexible. A regular employee will usually have their entire job schedule determined by the employer, whereas an independent contractor has a lot more control over their own work schedule.
The independent contractor also has control over where they work. For example, an independent contractor might be able to complete their tasks from their personal home or office. As an example, The Dental CFO would complete your practice’s bookkeeping from our home office, and not within your practice’s location. However, in the dental practice area, contractors might need your office space to complete their work, especially if they are interacting directly with patients and your staff.
Training can also help you determine the classification of an employee. Typically, employees are trained by the business to complete their tasks for their position. The business provides them with the training so that they have the skills necessary to properly complete their assignments. However, independent contractors will usually have their own methods and are already equipped to complete assignments without the training of the employer. They operate as their own business, so they would have prepared themselves without the training of the business they are working with. To help you further understand this, your 1099 independent contractors could be tasked with creating molds of your patient’s impressions. They would come to your practice with the knowledge of the process and how to complete it correctly, without needing to be trained by your staff or another educational process.
The next portion of classification determines the financial control the employee or employer has.
Financial Control of the Employee
To determine the degree of financial control, you can look at equipment and tools as an example. A regular employee will rely on the business to provide them with everything they need in order to complete their job. An independent contractor, on the other hand, usually has their own tools and equipment that they use, and they do not rely solely on one business to provide for them, because they are not working full time in one place as consistently as a regular employee. Independent contractors typically also have a lot more control over where they go and who they work with. An example of this could be hiring an independent contractor to paint your practice. You would expect the painter to provide their own materials and supplies. However, if you hired an individual to act as a dental hygienist, they would most likely expect your practice to provide them with the tools they need to perform their job, thus making them a W2 employee.
How the Employee is Paid:
Regular employees will consistently be paid by the hour, week, or month, whereas an independent contractor will usually be paid by the project. Sometimes, independent contractors will also be paid by the hour, week, or month, so it is important to check other determining factors. For example, a bookkeeper that manages your finances on a regular and long-term basis might be paid hourly, while our painter from earlier will be paid once your office project is complete. Finally, there will frequently be some written agreements stating that an employee is considered to be an independent contractor. As an employer, you should clearly state in hiring paperwork the type of employee you are hiring to ensure there is no confusion on either end of the contract. You can also look to see if the employee receives employee-type benefits such as insurance, paid time off, and other benefits. Independent contractors typically do not receive these types of benefits.
Lastly, to determine if your employee is a W2 or 1099 worker, you should address the relationship you have with the worker.
The Type of Relationship Between the Business and the Employee
When determining the type of relationship that exists between the worker and the business, something to consider is the permanency of the working relationship. Is this person working for you indefinitely? A regular employee, typically under a W2, will work for you for an undetermined amount of time. They have no plans of not working for you, being scheduled for you, and being paid by you until you or they decide to end the working relationship through the termination of their employment. On the contrary, if the worker is brought on to work on a specific project over a predetermined period of time that is sure to end, such as the length of a project or for a specific amount of time (one month, year, quarter), then that worker is very likely an independent contractor. Of course, there are always exceptions, so be sure to check all of the other determining factors to ensure you’re identifying the worker correctly.
All of these determining factors are important because of the laws and rules in place with the Department of Labor and the IRS that are concerned with the classification of employees. The main reason being because the classification of a worker, whether they are a regular employee or an independent contractor, will determine that worker’s taxes. The IRS prefers for employees to be classified as regular employees because, by law, employers are required to withhold income taxes and the employee’s share of Social Security and Medicare contributions from any compensation paid. An independent contractor, however, will not have their taxes withheld and will be responsible for paying their portion of taxes separately. The Department of Labor lawsuits have been on the rise and will probably continue on an uptrend for two reasons:
- Many employers are continually violating wage and hour laws and do not seem to know that a violation has occurred until it is reported.
- Individuals are becoming more and more aware of the laws regarding wages and hours. Employees who are unhappy will be inclined to investigate and look for wage and hour violations and report them to the Department of Labor.
In order to avoid violations and repercussions, it is vital that you make sure your workers are classified correctly. Do not assume that your employees are classified correctly just because you have not run into any problems before. Our recommendation at The Dental CFO is to perform a quick audit of who you have employed at your practice, and how they have been classified. You want to be positive that you are complying with wage and hour laws per the Department of Labor to avoid any issues. Not checking your employees carefully puts you at risk for issues with the Department of Labor and IRS.
By checking these determining factors and being sure you are complying with the Department of Labor laws, you are protecting yourself from potential violations and their repercussions, ensuring a clarity in the expectations of your workers through proper classifications, and enjoying peace of mind that you are operating properly with no worries about trouble with the Department of Labor or IRS. We’d love to hear from you with any questions about employee classification, so give us a call or contact us today.