In representing hundreds of medical practices and physicians, the most common explanation we hear from medical practices for wanting to have a 1099 independent contractor relationship with physicians is the avoidance of payroll taxes, pension benefits, and professional liability for medical malpractice. The most common reason we hear from physicians for desiring a 1099 arrangement is perceived tax benefits, specifically the ability to “write off” expenses. While some (but not necessarily all) of those perceived benefits may exist, the threshold question is always whether or the arrangement is compliant with applicable laws and regulations.
Georgia Physician Employment Attorneys
Often, perception of perceived benefits rather than actual analysis of legal principles is the driver of the decision to classify a physician as an independent contractor. Because the decision to classify as 1099 can have significant adverse consequences if mistaken, a medical practice should consult with its counsel to fully evaluate this issue.
Improper classification as 1099 is subject to active enforcement activities by the Internal Revenue Service. An adverse determination regarding classification may result in harsh outcomes for the employer, including the following:
- Liability for unpaid payroll taxes, plus interest and penalties.
- Disqualification of employer’s qualified retirement plan and assessment of penalties.
- Additional potential penalties by state taxing authorities.
- The inability to meet all requirements of certain protections from liability under the Medicare-Medicaid Anti-Fraud and Abuse Amendments and Stark Law that attend bona fide employment.
The 1099 physician faces the risk of overestimating the perceived benefits of 1099 status. The parameters for what constitutes proper business deductions are, generally speaking, fairly strict. A 1099 physician will also have to pay self-employment tax on self-employment income.
As a general rule, proper classification as W2 or 1099 is tied to the factual issue of control. The IRS has identified 20 factors that are considered in determining whether there is sufficient direction and control to establish an employer-employee relationship. See Revenue Ruling 87-41, 1987-1 C.B. 296. Facts relevant to the control question are categorized as follows: A) Behavioral: whether the company controls or has the right to control what the physician does and how he or she does it; B) Financial: to what degree business aspects of the physician’s jobs is managed by the company; C) Type of relationship: to what degree there are employee-type benefits. Independent contractor (self-employed) or employee? | Internal Revenue Service (irs.gov). The IRS explains that there is no “magic” set or number of factors and the context of the job matters.
If a medical practice cannot satisfy itself that it is making the right decision regarding classification, the practice has the option of submitting a Form SS-8 to the IRS. The IRS will then make a determination of status based on the facts presented. This process may take up to six months.
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Our health law team invites you to reach out and let us know what physician employment issues you are resolving. To schedule a confidential meeting to get to know us better, email us at info@littlehealthlaw.com, or call us at (404) 685-1662. We look forward to meeting you.