EMPLOYEE? INDEPENDENT CONTRACTOR? WHICH CATEGORY FITS YOUR SITUATION?

How should workers in your practice by classified?---Employee?---Independent Contractor?---and what difference does it make?  The classification affects the payment of employment taxes, benefits, retirement plan funding, etc.  In summary, the items listed are examples of what must be paid by an Employer for an Employee; whereas,  they are not paid for an Independent Contractor who must, therefore, pay his or her own.  The IRS monitors such payments closely, believing that 20% or more of workers for whom taxes should be paid are misclassified as Independent Contractors, thereby “cheating” the IRS out of taxes owed for Employees.  In case of an audit which, incidentally, are increasing to as many as 6000 random audits this year, the IRS uses 20 criteria to determine the category into which each worker in your office fits.  Bottom line:  most workers, even temporary fill-ins and prospective staff members doing a working interview, are Employees.  The primary criteria for classification as an Employee is the control the Employer has over the employee’s work, such as responsibilities, work hours, patient load, furnishing of equipment and supplies, payment of regular wages and benefits, etc.

An Associate Dentist is one of the few exceptions who can be classified an Independent Contractor IF he or she practices under a corporate structure which he or she owns.  In this case, the practice owner contracts with the Associate’s corporation as an Independent Contractor providing dental services in the owner’s office.  Therefore, appropriate taxes are paid by the Associate/Independent Contractor.

Clinical and business staff are considered Employees unless they are Employees of a staffing agency that contracts with the dentist/owner.  Even hygienists who are paid by the hour and whose work hours vary by the day or week are considered Employees by the IRS.

If the IRS reclassifies an Independent Contractor as an Employee, all back payroll taxes, interest, and penalties will have to be paid by the owner/employer/dentist.  And the misclassified Independent Contractor becomes liable for taxes and penalties for excess contributions to the practice retirement plan made while mistakenly working as an Employee. 

Since the IRS is determined to stop all misclassification of workers so that the agency can collect payroll taxes owed by Employers for Employees, we recommend you and your CPA evaluate each worker in your office and make certain each is classified correctly.  Both the number of IRS random audits and any resulting penalties are increasing significantly.