Hiring your first staff member is an exciting milestone for your mental health practice. Whether you need a part-time receptionist or another therapist, you must decide if they will be an employee or contractor. This decision isn’t as straightforward as it may appear. Let’s delve into the details together, taking a closer look at control, taxes, benefits, legal obligations, and, of course, IRS criteria.
Employee vs. Contractor – Definitions and Key Differences:
Control: With employees, you set the schedule, define the job roles, and retain control over how the work gets done. Contractors, on the other hand, value their independence, often working for multiple clients, and setting their own hours. Think of a contractor as a self-employed individual, that performs the same services for many clients (and your business is one of those clients).
Taxes: A W-2 or a 1099? That’s the question! With employees, you must withhold taxes and pay social security, Medicare, and unemployment taxes on wages. You’ll almost certainly want to use a payroll provider. For contractors, they handle their own self-employment taxes. You won’t withhold or pay any taxes for them. That being said, you will issue them a Form 1099 after the end of the calendar year. Best practice is that before the contractor starts work for you, you should collect a W-9 form from them (it doesn’t get filed anywhere, just keep it somewhere safe). That W-9 form provides you with the info you need to issue the contractor a 1099 form after the year’s end.
Benefits and Legal Obligations: Think of employee benefits as a specially tailored suit, designed with care and attention. From health insurance to paid vacation, these extras often define the relationship. With contractors, it’s a more casual affair – less binding but with its own set of legal considerations.
IRS Criteria for Determining Employee vs. Contractor:
It’s important to recognize that whether or not somebody will be an employee or contractor should never be a ‘discussion’ or part of the negotiations. Rather, it’s one or the other based on the specific facts and circumstances. While this is often a significant grey area, and there’s plenty of abuse of it in the business world (employers treating workers as contractors to avoid having to pay the payroll taxes if they were an employee), the IRS has crafted a three-factor system to help guide this decision:
- Behavioral Control: Do you, as the business owner, have a right to control how the work will be done? This is more common in an employee relationship.
- Financial Control: Who has the control over the economics of the worker’s job? Independent contractors often have a significant investment in their work and the ability to make a profit or loss.
- Relationship: How do both parties perceive their relationship? Written contracts, employee benefits, permanency of the relationship, and regular business activities can all affect this perception.
Understanding these factors can save you from IRS scrutiny and unnecessary stress down the line.
Pros and Cons of Each Option:
- Employees: More structure and commitment, but also increased responsibilities and expenses.
- Contractors: Greater flexibility and simplicity, but you’ll have to relinquish control.
Avoiding Misclassification:
- W-2 vs 1099: Knowing when to issue each tax form is crucial. A W-2 is for employees, whereas a 1099 is for contractors.
- Penalties and Risks: Misclassification can be damaging (both emotionally and financially). Think IRS scrutiny, lawsuits, and/or late payroll tax returns with taxes owed plus penalties and interest.
Practical Tips for Hiring:
- Contracts: Clarity is key, whether it’s in a therapy session or a legal document. Get the details on paper and make sure both parties are 100% on the same page.
- Consult a Professional: Sometimes, a second opinion is vital for peace of mind. Talk to a professional or a more experienced colleague that has already worked through this issue.
Choosing between an employee and a contractor is like selecting the right therapeutic approach for a client. It requires insight, careful consideration, and understanding of the unique needs of your practice. Navigating the complexities of hiring doesn’t have to be an overwhelming process. Need assistance? Book a consultation and let’s work together to grow your practice.
