I recently received an email from a coaching client asking me the question below.
Because this is a question that frequently pops up in my coaching work, I thought it would be helpful to post this as a support to other therapists who hire employees, or clinicians who may have similar concerns and questions (shared with my client’s permission):
Great coaching session! OK, I am checking off the tasks we went over this week and I had a question on employee status, W2 or 1099. You had mentioned that though my employees are 1099 currently, you were concerned because it sounded as if they were really W2, eeek! So, that stuck with me, and now I’m feeling a bit worried about this. Can you clarify, or should I wait until our call next month?”
Here is my response:
Thanks for your email, and yes I agree, an excellent session indeed - we make a great team. I am very happy you are focusing on the tasks we discussed, good job!
Regarding your question on 1099 vs. W2 employees, I am glad to hear that you are asking for clarification and are willing to do the research. I have found that this part of business practice creates a lot of confusion, and sometimes anxiety for the therapist employer.
As this is a dense topic, we can discuss more fully in your next session, but because this is a critical issue for any small business person who hires employees, I wanted to take some time to outline the following information for you here as a support.
Here are some key points to consider:
Over the years in my coaching and consulting role I have supported therapists who have contracted 1099 employees but are treating them as W2 employees. Often this is because they had no idea what the law says about employment status and hiring, are intimidated by this area of business management, and/or they do understand what the IRS has to say about hiring and are rolling the dice, and hoping that they simply stay off the IRS’s radar.
Good to remember that the IRS doesn’t care if you are a wonderful therapist helping hurting people heal. They don’t care if you’ve written books, or won awards, or overcome your own challenges. They don’t care if you are a well respected member of the clinical community. The IRS is branch of the government (United States Treasury to be specific), and their primary purpose is to collect taxes and enforce the Internal Revenue Code (aka the law) for every citizen, and yes, that means therapists as well. The IRS is in place to ensure that all citizens (and business owners) pay their taxes and understand how to do this.
Their other purpose is to make sure that those who try and skirt around the law still pay their fair share of taxes. In a nutshell, the IRS is a cold hearted bastard that doesn’t give second chances. If a therapist is hiring 1099s and treating them as W2s and the therapist “gets caught”, they will very likely pay a fine and owe for those back taxes. These fines can be hefty and in the ball park of tens of thousands of dollars depending upon the business structure, length of time they’ve been employing, and other factors.
The IRS has very specific and clear guidelines with respect to the differences between 1099 and W2. They do not hide this information, it is easily located on their website here: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
Please be sure to read over the information the IRS is providing on their website. Equally important is to speak to your CPA. Part of any good CPA’s role is to ensure that their client is operating legally and following tax law. Business owners sometimes think that their CPA is there to figure out clever ways of dodging the IRS. While your CPA should be looking at every tax advantage for your business, they also must alert you to red flags and help you structure your business legally.
Additionally, every business owner who hires employees should have a relationship with an employment attorney. As we discussed in our session, contacting an attorney to see if it is a good fit need not be an expensive endeavor. Make a connection, see if it feels like a good fit, and go from there. Having an employment attorney review important documents such as an Employment Policy Handbook is very important as well. Discussing the hiring and termination procedures within your state is another topic you will want to make sure you discuss with an employment attorney.
Because our clinical training does not often provide business classes, and not all therapists entering in to private practice have the benefit of 30 years of small business ownership as I have, it is wise to think of your private practice or group practice as a business first and foremost.
While we clinicians must always adhere to our licensing boards law and ethics, the second and equally important lens a therapist who is in business for themselves will want to look through, is as a business owner and operator. Business ownership has many important foundational parts that must be attended to. We work hard for our licenses, and so much has gone in to our practices/businesses that we do not want to play fast and loose with the IRS. The IRS doesn’t play (as they saying goes).
Here are a few key differences with respect to 1099 vs. W2 employees:
have their own equipment
have their own unique business cards
have their own unique website
have their own unique email
set their own hours
choose the types of clients they work with
are paid by the project not the hour
set their own policies and procedures
schedule their time off and vacations as they wish
have other sources of income and clients
do not have a nameplate on the business owners office door
pay their own income taxes, and other tax related expenses
pay for their own training and CEUs
W2 employees often…
have equipment provided by the employer
have gone through an employment meeting
have gone over the employment manual with HIPAA guidelines (if you need this, you can find that here)
have the company’s business card with their name
are part of the businesses website
have an email with the business name
abide by the set hours of that business
agree to work with the clients of that business
are paid by the hour or another agreed upon pay structure
adhere to the businesses policies and procedures
agree to the hours assigned
submit vacation time for approval
And, generally speaking, employers with W2 employees withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
Here is a snippet from the IRS website (link above) that further clarifies. However, do your research, speak to your CPA, discuss with your employment attorney:
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Finally, if you are uncertain if your employee(s) fall in to the W2 or 1099, you can also fill out what is called a “Form SS-8” (you can locate that form here: https://www.irs.gov/pub/irs-pdf/fss8.pdf), however, this can be a time intensive process.
Again, not to be a broken record, but your CPA should be able to advise you on what status your employees fall in to (and from our conversation during your coaching session, as shared, it sounds to me as if you are employing W2 but treating as 1099).
In closing, I realize this is a lot of information to digest. However, as your business coach part of my role is to support you in areas of your business that may be uncomfortable or challenging. Burying one’s head in the sand and hoping that the IRS will not catch on is not a wise business strategy. Thus, good job for having the courage to look in to this. Once you speak to your CPA, let’s get this part of your business tightened up and on track.
And yes, meeting with your CPA and starting a relationship with an employment attorney is part of your coaching homework! Hope this information is helpful, and I look forward to being of further support during your coaching call next month!
If you are a therapist reading this blog, I hope this information has been helpful. If you’d like to set up a consultation or coaching call, you may do so here. You can also read what other therapists have to say about working with me here, or if you need private practice materials, forms, or manuals (including plenty of “freebie” forms), you can find those in the Therapist Toolbox.
And, please take a moment and introduce yourself in the comment section below.
Kindly and in support,
Mari A. Lee, LMFT, CSAT-S