Though it is customary for many medical practices to pay its physicians as 1099 independent contractors (instead of W-2 employees), doing so can be very expensive because the IRS is expected to increase its investigations and enforcement actions in this area.
Small to mid-sized employers (especially in the areas of hospital based specialties) have traditionally had a very relaxed attitude about how their staff is paid. They figure “What’s the big deal? What difference does it make if I pay someone as an independent contractor versus withholding taxes and paying them as a W-2 employee?” The answer: Plenty! Why? Because if the IRS determines a person is wrongfully characterized by the employer as an independent contractor, the employer would be responsible for all the employer related taxes plus penalties.
Determining whether or not a person would be viewed as a W-2 employee instead of an independent contractor is not a simple thing. The “20 Point Test” typically used to guide the determination is not cut and dry. And tax advisors often advise “When in doubt, characterize the person as a W-2 employee, not as an independent contractor.” That advice has never been more true than now, when our government is actively seeking ways to soothe our financial woes.
Though characterizing people as W-2 employees will impact retirement plans (given the discrimination testing requirements), mistaking employees for contractors will definitely sting!