What to Consider with Bringing on an Employee or Independent Contractor
Perhaps your practice is growing or maybe you need to balance your practice with other professional or personal responsibilities. Whatever the reason, you’ve wondered whether you should hire an “employee” or bring on an “independent contractor.”
The answer really depends on your individual work style and the particular needs you want to fill by adding workers (see sidebar for pros and cons). Whatever you decide, it’s important for you to understand the differences and how to properly classify workers.
Facts Used to Determine Worker Status
You might prefer to bring on independent contractors because you do not have to pay the employer’s portion of Social Security tax, unemployment taxes, workers’ compensation insurance premiums or employee benefits. That is because employees often cost 30 percent or more in overhead.
But keep in mind that according to IRS and U.S. Department of Labor guidelines, the relationship of the worker and the business must be examined to determine the degree of control and the degree of independence. Facts that provide this evidence typically fall into three categories: behavioral control, financial control and the type of relationship of the parties.
Behavioral Control covers facts that show whether the business has a right to direct or control the worker through instructions, training, or other means. A worker is considered an employee when you have the right to direct and control the way work is done, whether you actually do so or not.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job, including:
- Whether the worker has unreimbursed business expenses.
- The extent of the worker’s investment in the facilities and supplies used in performing duties.
- How the business pays the worker.
- The extent to which the worker can realize a profit or incur a loss as a result of the work being done.
Type of Relationship covers facts that show how the parties perceive their relationship. This includes:
- Written contracts describing the relationship the parties intended to create (see sample of an employment contract).
- Whether the business provides the worker with employee-type benefits: insurance, a pension plan, vacation or sick pay.
- The permanency of the relationship.
- How integral the services performed by the worker are to the regular business of the company.
It’s important to consider all the facts in each case—no single fact provides the answer.
A word of caution: If you incorrectly classify an employee as an independent contractor for tax purposes, you can be held liable for uncollected employment taxes—and benefits— for that worker, plus a penalty for not having adequate workers’ compensation coverage.
This is why it’s important to consult with your tax and legal advisors before making any hiring decisions. You can also request a status determination from the IRS by filing a Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (Form SS-8).
If you do decide to go the independent contractor route, then develop a specific contractor agreement and make certain the contractor is adequately insured to reduce your potential risks.
It is also important, whether bringing on a doctor as an employee or an independent contractor, that he or she has malpractice insurance in comparable amounts to what you carry.
The Hiring Doctor’s Perspective on Independent Contractors versus Employees
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