Whether someone is an employee or a contractor depends on how the work is done, not what you call them or what the agreement says. Getting it wrong can mean back payroll taxes and penalties, so make the call with your CPA or an employment attorney before the person starts.
Why owners lean toward contractor
A contractor looks cheaper. No payroll taxes, no benefits, no payroll service, a 1099 at year end instead of a W-2. For a new practice watching every dollar, that's tempting. The risk is that the IRS, the Department of Labor or your state decides the person was an employee all along.
What decides it
The rules look at the whole relationship. The questions usually come down to three areas:
- Control over the work. Do you set the hours, the schedule and how the job gets done? Do you train them on your way of doing it?
- Money. Do they invoice you, use their own tools, work for other clients and have a chance to make or lose money?
- The relationship. Is the work ongoing and central to what the practice does? Do they get benefits?
A medical assistant who works your hours, at your clinic, using your systems, will usually look like an employee. A billing consultant who serves several practices from their own office may look like a contractor. Federal and state tests differ, and some states are stricter than the IRS. Your attorney or CPA will know which ones apply.
What a wrong call can cost
If a contractor is reclassified as an employee, the practice can owe the payroll taxes that should have been paid, plus penalties and interest. There can also be wage and overtime claims and state unemployment issues. The longer it runs, the bigger the bill.
A made-up example
Say you pay a front desk person $3,500 a month as a contractor for two years. They work 9 to 5 at your desk on your schedule. If they're reclassified, the practice is looking at two years of employer payroll taxes on $84,000 of pay, plus whatever penalties apply, and the cleanup in your books.
How each one shows up in your books
- Employees go through payroll. Wages and employer taxes are recorded from payroll reports.
- Contractors are paid as vendors. You collect a W-9 before the first payment, and your bookkeeper tracks totals so 1099s go out on time.
What I'd do this week
- List everyone you pay who isn't on payroll.
- Write down how each one works: hours, location, tools and who sets the schedule.
- Take that list to your CPA or an employment attorney.
- Make sure every contractor has a W-9 on file.
Common questions
Does a contractor agreement settle the question?
No. An agreement helps, but the actual working relationship decides it. Ask your attorney to review both.
Can a provider be a contractor?
Sometimes, depending on how the work is set up and your state's rules. Ask an employment attorney before you sign anything.
What if I've already been paying someone as a contractor?
Talk with your CPA or attorney soon. Fixing it early usually costs less than waiting.
Want payroll and contractor payments recorded right?
We record payroll from your reports, track contractor payments and keep W-9s organized so 1099s go out on time. If that's what you need, apply to work with us.