Should Your Associate Be an Independent Contractor or an Employee?
December 2, 2015
Many associate optometrists are treated as independent contractors, but in most of these cases, the IRS would disagree. I generally recommend that practice owners who hire an associate treat the doctor as an employee because if you read the IRS regulation on this topic that is the definition we meet. I’ll give you a quick summary below on the key elements that lead me to making the associate an employee.
There may be some resistance by practice owners to using the employee classification because that requires the practice to withhold employment taxes such as Social Security and Medicare (FICA) and pay 50% of that FICA tax. The employee pays the other 50%. If the associate OD is an independent contractor, no taxes are withheld by the practice, which might sound good to the associate at first, but the same taxes are still due in any case. The independent contractor must file quarterly estimated income taxes and must also pay all of the FICA tax which is currently at 15.3% of the salary. Clearly, the associate would be better off with the employee status.
The practice owner is ultimately better off as well by choosing to treat the associate as an employee because the IRS has often ruled that way on audit and the employer must pay back all the taxes that should have been collected. In fairness, this issue is subject to some interpretation and I’m sure some ODs have had the IC status upheld by the IRS. It is always smart to get the input of a CPA or financial advisor, but read on and form your own opinion based on your situation.
The IRS website (IRS.gov) lists three common law rules to help guide employers into the correct decision. The IRS makes a judgment about the degree of control and the amount of independence a worker has.
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
In my experience, the practice owner usually controls these aspects and should want to control them to maintain high standards for the practice. The practice owner typically sets the work schedule, determines the fees, decides about the record keeping system and controls the length of appointment slots.
Financial: Are the business aspects of the worker’s job controlled by the company? This includes things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
Associate optometrists do not typically collect fees directly from patients or insurance companies. Those entities pay the practice and the practice pays the associate on a regular basis. Also, the practice generally provides most of the equipment, supplies and product inventory.
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?
The use of a contract or employment benefits often falls more to the associate doctor being full time or part time, but “employee” is usually the right classification in either case. The big factor here is that you expect the associate to continue working indefinitely and the work is certainly a key aspect of the business.
All three of the above factors generally lead to the conclusion that associate ODs are employees and not independent contractors.
If you currently have an associate who you would like to convert to employment status, it should be pretty easy: just say it is mandated by the IRS and the rules will provide for the practice to cover half of the FICA taxes.