The Wisconsin Department of Workforce Development and the Internal Revenue Service have strict guidelines for when a person can be an Independent Contractor. Workforce Development enforces the proper classification of workers. If a person cannot meet the 20-question test for an Independent Contractor, he or she is considered misclassified. Workforce Development can then assess the employer for penalties and interest.
At Shorehaven, all of our clinicians are employees. An employee received a W-2 form at the end of the year. An Independent Contractor (IC) receives a 1099 form.
The IC must face other tax requirements.
The IC pays 15.3% Self-Employment Tax. This covers the Social Security and Medicare payments, half of which are normally covered by the employer. The IC can deduct half of that amount as an expense, dropping the tax to about 13.5%.
The IC has to cover his or her own benefits - health insurance, disability insurance, malpractice insurance, life insurance.
The IC has to pay for all continuing education personally
The IC has some advantages. One is the IC can have a SEP-IRA plan which is like a personal 401K, except there is no one to contribute a matching amount. The match guarantees a generous rate of return right from the start.
The IC can deduct expenses on taxes to a greater extent than can en employee.
The IC must earn a rate of about 71% to equal a 55% rate as an employee with benefits.
Mis- classifying an employee as an independent contractor can result in fines and penalties. The IRS uses 20 factors - as a guide -- to determine whether a company has enough control over a worker to be an employer.
If you answer Yes to all of the first four questions, the person is probably an independent contractor. Yes to any of questions 5 through 20 means the worker is probably an employee and should be so classified.
- Profit or loss. Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? (This should involve real economic risk-not just the risk of not getting paid.) If the company loses money, and the clinician is not at risk to cover the loss, as one might in a co-op or group practice in which each clinician has ownership, or if the company makes a profit, and the clinician does not benefit, this test may not be met.
- Investment. Does the worker have an investment in the equipment and facilities used to do the work? (The greater the investment, the more likely this is independent contractor status.) If the employor supplies the furniture and computer and software without assessing rent, the clinician appears not to have an investment in the equipment.
- Works for more than one firm. Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn't conclusive since employees can also work for more than one employer.)
- Services offered to the general public. Does the worker offer services to the general public?
- Instructions. Does the employer have the right to give the worker instructions about when, where, and how to work? (This shows control over the worker.)
- Training. Does the employer train the worker to do the job in a particular way? (Independent contractors are already trained.)
- Integration. Are the worker's services so important to the business that they have become a necessary part of the business? (This may show that the worker is subject to employer control.)
- Services rendered personally. Must the worker provide the services personally, as opposed to delegating tasks to someone else? (This indicates that the employer is interested in the methods employed by that one hire, and not just the results.)
- Hiring assistants. Does the employer hire, supervise, and pay the worker's assistants or support personnel? (Independent contractors hire and pay their own staff.)
- Continuing relationship. Is there an ongoing relationship between the worker and the employer? (An independent contractor more likely completes tasks or assignments or projects and is not in an ongoing continuous relationship.)
- Work hours. Does the employer set the worker's hours? (Independent contractors are masters of their own time.)
- Full-time work. Must the worker spend all of his or her time on the job? (Independent contractors choose when and where they will work.)
- Work done on premises. Must the individual work on the employer's premises, or, alternatively, does the employer control the route or location where the work must be performed? (Answering no doesn't by itself mean independent contractor status.)
- Sequence. Does the employer have the right to determine the order in which services are performed? (This shows control over the worker)
- Reports. Must the worker give reports accounting for his or her actions? (This may show lack of independence)
- Pay Schedules. Does the employer pay the worker by hour, week, or month? (Independent contractors are generally paid by the job or commission, although by industry practice, some are paid by the hour.)
- Expenses. Does the employer pay the worker's business or travel costs? (This tends to show control.)
- Tools and materials. Does the employer provide the worker with equipment, tools, or materials? (Independent contractors generally supply the materials for the job and use their own tools and equipment.)
- Right to fire. Can the employer fire the worker? (An independent contractor can't be fired without subjecting one to the risk of breach of contract lawsuit.)
- Worker's right to quit. Can the worker quit at any time, without incurring liability? (An independent contractor has a legal obligation to complete the contract.)