Difference Between a Medical Contractor and an Employee

Many doctors do not believe that there is a difference between employees and contractors, and unfortunately, these misconceptions can lead to long-term employment issues. Do you know whether you are hiring an employee or an independent contractor? It is essential to understand the different types of employment relationships and how they affect your medical practice.

The Basics

The difference between an employee and contractor is simple in terms of taxes. With an employee, you must withhold income, Social Security, and Medicare taxes. You will deposit and report the withholdings in accordance with the Internal Revenue Service (IRS) guidelines. For an independent contractor, you do not withhold taxes. At tax time, your contractors will receive a Form 1099-misc instead of the W-2 you complete for your employees.

Which Is Which?

When it comes to your medical practice, you need to understand what the functional difference is between an employee and a contractor.

• Employees. The IRS defines an employee relationship as a situation in which an employer can control exactly what is to be done and how to accomplish it. Employees receive training, resources, and benefits. And a portion of their pay is withheld for taxes.
• Contractors. Contractors independently provide their services to an office or the public. Even when you pay the fee for their services, you are not acting as an employer. You do not have control over the contractor’s time, and completion of the agreed-upon task is within the control of the service provider. An independent contractor will pay self-employment tax on their earnings, rather than having them withheld by an employer.

It may seem as though the dividing line between contractor and employee can is narrow, and it can be, but that’s why it is so important to properly classify your workers. The IRS make the distinction using the following three criteria:

• Behavioral. Does the company control when, where, and how actions are performed?
• Financial. Does the company control how the worker is paid, if expenses are reimbursed, or who provides tools and supplies for the job?
• Type of relationship. Are there written contracts or employee benefits and is the work performed a key aspect for operations?

If you can answer yes to any of these questions, your worker should be classified as an employee rather than as a contractor.

Of course, subtleties and exceptions exist, so when in doubt, always get the advice of an expert. We’re here to help you.