Practice Management Alert

Hint: If dress code is involved, you’re talking employee, not contractor.

How did you fare on the quiz? Check your answers here and then keep reading for more information on how to make sure you’re pointing workers toward the right tax forms.

The answers to the quiz on page 3 are:

1. Independent contractor
2. Employee
3. Employee
4. Employee
5. W-9

One of the major differences between employees and independent contractors is their tax status, but that is determined by various factors.

Think About These 3 Categories

The Internal Revenue Service (IRS) points to three categories to help employers determine whether their workers are employees or independent contractors:

Behavioral control: If the company can dictate what the worker does, how the worker does the job, or whether the worker needs to follow a dress code, then the worker is being treated more like an employee than a contracted worker.

Financial control: If the company controls or decides the financial aspects of a worker’s job — pay, expense reimbursement, equipment, or supplies — then the worker is being treated more like an employee than a contracted worker.

Relationship of the parties: If the company provides benefits like a pension, insurance, or paid time off, then the worker is being treated more like an employee than a contracted worker.

One way to think about a company’s responsibility to independent contractors: If you hire a plumber to come work on your house or at your practice, you don’t expect to provide them with the tools they need to do their work, says Thomas Field, CPC, CEMC, a healthcare economics consultant. You hire the plumber for a defined job, and they charge a fee; they also decide what clothing makes the most sense for their day and which tools they need.

Companies have a lot more control over employees, but they have more responsibilities, too. For example, businesses with employees must withhold income tax and individual’s portions of Social Security and Medicare taxes, the IRS says. Businesses with employees must also pay the Social Security, Medicare, and unemployment taxes on their employees’ wages and provide employees with a Wage and Tax Statement that shows the amount of taxes withheld.

Distinguish W-2, W-9, 1099 Forms

The IRS has various forms for collecting appropriate taxes from companies and workers, based on their respective situations.

A W-2 form is usually associated with employees, and the IRS requires a W-2 form for employees who are paid more than $600 in a year.

A W-9 form is for contracted workers. “If you’ve made the determination that the person you’re paying is an independent contractor, the first step is to have the contractor complete Form W-9, Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the payee. The W-9 should be kept in your files for four years for future reference in case of any questions from the worker or the IRS,” the IRS says.

A 1099-NEC form is the employer’s responsibility and is a record of the payments made to an independent contractor or other associate who is not an employee. “If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-NEC needs to be completed, and a copy of 1099-NEC must be provided to the independent contractor by January 31 of the year following payment. You must also send a copy of this form to the IRS by January 31,” the IRS says.

Documentation Matters Here, Too

Documentation is crucial to illustrating patient health and reporting correct coding choices, but it’s also important for worker classification. Companies might be at risk of financial penalties if they misclassify their workers. The IRS, the Department of Labor, and state government entities all perform audits to make sure businesses are classifying their workers correctly.

Practice managers and other administrators with hiring or staffing responsibilities may have an especially tough time classifying coders and billers as employees or independent contractors because the classification of these roles varies across the healthcare industry. One cardiology practice may use independent contractors to handle their coding and billing while another practice with the exact same needs chooses to use in-house employees instead.

Protect yourself from bad audit outcomes by being very clear about your business’s expectations. Specify, in all job descriptions, exactly the role you want to fill and be clear about compensation when negotiating and finalizing the hire. Written contracts are especially important in situations involving independent contractors.

Rely on written contracts to keep expectations and boundaries clear for everyone. The IRS notes that written contracts are particularly important in situations where the other facts — behavioral and financial control or the relationship between the parties — don’t make classification clear.

For more information, check out this IRS information on determining whether a worker is an employee or an independent contractor: www.irs.gov/businesses/ small-businesses-self-employed/independent-contractor-self-employed-or-employee.