PRACTICE PERSPECTIVES


Employee vs. Independent Contractor: Establishing the Right Classification


by DAVID THEIN, DDS, MSD, MBA interviewing WILLIAM P. PRESCOTT, EMBA, JD, ESQ.


D


o you know the legal distinction between an employee classification and an independent


contractor in the eyes of the IRS or state taxing authorities? Chances are you do not. Many dentists, including myself, harbored inac- curate assumptions regarding how the independent contractor status can be utilized in a dental practice for both the doctor and possibly the staff who work with them.


Similar to owning their own practice, a con- tractor is able to fully deduct all legitimate business expenses from their income. This is a major tax advantage of being an owner as compared to an employee. The classifica- tion also allows one greater independence, more predictable control of their work, and often, greater job security. But becoming an independent contractor is more complicated than simply declaring yourself as one. The IRS provides a 20-point checklist to help individuals determine if they should be paid on a W-2 or a 1099.1


sify a worker (or themselves) as an employee and when it makes more business sense to consider independent contractor status. I hope you find his responses to the questions I asked helpful in your own practices.


Why are the Internal Revenue Service, Depart- ment of Labor and the states so concerned about worker misclassification?


This document provides


easy-to-understand information regarding the differences between employee and con- tractor status. It ultimately comes down to the specific work environment and who has control. But in the end, obtaining sound legal advice from a qualified attorney is your best avenue to avoid making a mistake that could cost you significant penalties and back taxes if you are misclassified.


I sought counsel years ago in my own situa- tion from a recognized national expert, Bill Prescott. I recently reconnected with Bill to ask him to help clarify when one should clas-


22 focus | JAN/FEB 2020 | ISSUE 1


Worker classification continues to be an ongoing problem for associates and retired dentists who continue to render professional services post-retirement (collectively “Associ- ates”) because the Internal Revenue Service (IRS), Department of Labor (DOL) and the states believe they are incurring a significant loss in revenue, as well as workers being denied benefits from misclassification.2


The IRS conducted approximately 6,000 comprehensive employment audits, roughly 2,000 each for the years 2010, 2011 and 2012 for small businesses, including professional practices. While the findings have not been released yet, the purpose of the audits was to provide the IRS with information about areas of concentration for future audits,


elevate taxpayer compliance and raise revenue.3


The audits covered


four areas: worker classification, Form 1099 compliance, executive compensation and fringe benefits.


Who does worker classification af- fect in a dental practice and why do practices and associates often prefer independent contractor vs. employee status?


A practice cannot afford to pay the Associate well and also pay the direct business expenses, insurances and benefits attributable to the Associate (collectively the “Business Expenses”). Therefore, the practice


prefers to classify the Associate as an inde- pendent contractor to eliminate payroll taxes and business expenses. The Associate prefers to be classified as an independent contrac- tor because the Associate can fully offset business expenses against income and also receive a higher rate of compensation as an independent contractor than as an employee because the practice has eliminated payroll taxes and the cost of the Business Expenses.


What are the consequences if worker misclas- sification is found?


Often, the practice and Associate think that so long as the Associate agrees to pay all applicable taxes, they can elect to treat the Associate as an independent contractor. I am often asked, “If the Associate, as an indepen- dent contractor, and practice pay all appli- cable taxes, no harm no foul, right?” No. The IRS has stated that where worker misclas- sification is found, the penalty is steep. The practice would be assessed all unpaid federal taxes, FICA, FUTA, fines and interest.4


The


Associate would lose nearly all deductions for the Business Expenses, subject to the two percent of adjusted gross income limitation.5


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