When hiring associates, doctors understandably want to limit costs as much as possible. One of the ways in which doctors often try to reduce costs is by categorizing associates as independent contractors, rather than as employees. While classifying an associate doctor as an independent contractor is an appealing option, there can be substantial consequences for improperly categorizing an associate as an independent contractor when they should be categorized as an employee.
Benefits Of Hiring Independent Contractors
There can be a number of benefits for a hiring doctor to classify an associate as an independent contractor. For example, the hiring doctor is not required to withhold or pay certain federally-mandated taxes. Instead, the independent contractor will be responsible for paying his or her own self-employment tax in addition to Social Security and Medicare taxes. The hiring doctor also will not be required to provide an independent contractor with benefits like unemployment and worker’s compensation insurance, both of which employers are required to provide to employees under Arizona law.
Another benefit to classifying an associate as an independent contractor is that the hiring doctor can reduce exposure to a potential employment lawsuit. Independent contractors usually are not covered by Arizona or federal laws related to wages, overtime and medical leave, among other things, and therefore doctors do not need to worry that an inadvertent oversight with respect to an independent contractor’s schedule could lead to potential liability.
Determining An Associate’s Status
Although there are a number of benefits in using independent contractors instead of employees, those benefits only apply if the associate is correctly categorized as an independent contractor. The starting point for correctly classifying an associate is to look at the level of control you will have over the associate. The IRS provides some guidance that can be helpful in determining how best to classify the associate, but the basic test is that when a hiring doctor has the right to direct the associate in what and how work will be done, the associate should be categorized as an employee, whereas when the hiring doctor only has control over the end result of the work, the associate can be classified as an independent contractor. The following chart identifies some factors that may be considered in determining whether your associate can be categorized as an independent contractor.
|W-2 Employee||Independent Contractor|
|Senior Doctor oversees the work of Associate||Contractor works independently|
|Senior Doctor reviews and approves diagnoses and treatment plans||Contractor has complete autonomy to diagnose and treat patients|
|Associate uses the practice’s equipment.||Contractor provides basic equipment or leases the office equipment of the practice|
|Associate does not provide similar services for other practices||Contractor works part time in several different practices|
|Associate’s schedule is controlled by the practice||Contractor sets own schedule|
|Associate uses the office’s support staff||Contractor provides own support staff|
|Associate provides the same services as the Senior Dentist.||Contractor provides some special expertise or service the practice wouldn’t otherwise provide|
These factors are not exhaustive, and no single factor will be determinative. Instead, the factors need to be considered as a whole. As you can see from these guidelines, though, many associates will not qualify as independent contractors. Instead, they will need to be classified as W-2 employees and treated accordingly.
Consequences for Misclassification
Misclassification of an employee as an independent contractor can bring serious consequences. Intentional and fraudulent misclassification can result in criminal charges, but even if the misclassification was unintentional, potential liabilities can include:
- Penalties and back taxes from the Internal Revenue Service
- Fines from the Department of Labor for violations of the Fair Labor Standards Act
- Fines from the Industrial Commission of Arizona for not having worker’s compensation or unemployment insurance for misclassified associates
- Overtime wage claims from misclassified associates
Additionally, the associate who has been misclassified as an independent contractor has some potential liability. Although most of the penalties will fall on the hiring doctor, the IRS in particular can review and disallow tax deductions the associate has taken as business expenses that otherwise would not be deductible by an employee.
Hiring an associate as an independent contractor can provide both the hiring doctor and the associate substantial benefits. However, if the associate is incorrectly classified, and the incorrect classification is discovered through an audit, the consequences can be severe. If you have any doubts, you should speak with an attorney or accountant to see whether your proposed associate relationship will qualify as an independent contractor relationship and, if not, whether it can be restructured to fit within the requirements for independent contractors.