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Medical Practices Using Independent Contractors Beware

by admin on April 14, 2011 No comments

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!


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