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1099/W2 Misclassification Concerns from Practice Owner

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  • 1099/W2 Misclassification Concerns from Practice Owner

    Hi,

    I am seeking some perspective and advice on classification of my work as an employee versus independent contractor. I’d like help answering the question of whether or not it is defensible to remain an independent contractor, and what the risk exposure is for doing so.

    I am a dental specialist working in a group of the same specialty where I have been paid as an independent contractor for the past 2+ years. I work only for this practice. I have autonomy in what I do, and within reason, the days I work. The compensation was competitive, and both my attorney and accountant expressed no concerns about the independent contractor status.

    The owner of the practice hired a new attorney who has him very worried about penalties for misclassifying me. His proposed solution is to reclassify me as an employee, reducing my compensation slightly to partially offset the amount he will now have to pay as the employer. The impact to me would be substantial as I would be ineligible for the 199A deduction, the solo401k, and about 30k in deductions for various expenses. I therefore want to remain an independent contractor.

    I have the contract setup between the owner’s corporation and my PLLC, and issue myself a W2 through my s corp at the direction of my CPA. While I thought this was defensible, the owner’s attorney says it is not, that this is not a gray area, and that I am an employee because the practice controls “income, patients, schedule, supplies, etc.” The owner has heard rumors about practices being audited for this and fears penalties.

    I have consulted my accountant again, who has no concerns about this. He is an aggressive accountant, so this does not surprise me. My attorney says he can see where the owner is coming from, but admits he is not a labor law attorney and does not know the details of my work.

    Please share any insight or advice you might have on this. I am about to head down the path of having my attorney renegotiating an employment agreement as I can’t seem to convince the owner to budge on the classification issue.

    Is there a great risk to either me or the practice owner to continue with this arrangement? Are there any particular elements of the arrangement that could be changed to make it more defensible? Is there really a trend of audits for these types of things among dentist and physician practices?

    Thanks!

  • #2
    • Last question first, the employer is the one with the liability for misclassification. At the federal level, it is rare for the IRS to challenge the classification of healthcare professionals as an independent contractor. (IC)
    • It is relatively easy for a client to construct a contract to meet the Behavioral Control, Financial Control and Relationship of the Parties to classify a healthcare professional as an IC.
    • See https://www.irs.gov/newsroom/underst...or-designation
      • Think of these as a road map for constructing the contract. It is the totality of the facts and circumstance, not a 100% requirement on all points. A few examples that generally can not be met but do not in and of themselves do not prevent classification as an IC.
        • Significant investment in equipment: You are mostly likely going to be using the equipment provided by the practice
        • Method of payment: Almost all ICs providing individual services are paid hourly.
        • Services provided will be a key activity of the client.
      • Al the others can be met with contractual roles and responsibilities. Some examples that can easily be met.
        • Services available to the open market: Have a website, business cards, LinkedIn profile offering your services to the community. The contract should explicitly allow you to provide services to others not to interfere with the contract services. Whether you actually do provide services is not critical, only that you can.
        • The ability to hire help: The contract should give the IC the ability to hire hep to perform their services subject to the approval of the client. Whether you actually hire additional help to provide services is not critical, only that you can.
    • If the practice owner really wants to be sure, they can file Form SS-8 "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding". Here again the client should fill out the form consistent will roles and responsibilities condusive to an IC classification.
    • I have worked for several Fortune 500 companies as both as employee and IC. Theyfor IC were very cautious about not running afoul IRS rules. They either performed classification compliance in-house or used third party compliance company. I never saw a problem getting ICs I was engaging vetted for my company or getting myself vetted for IC classification from a client..
    • The IRS and the states are more concerned with going after companies with large numbers of exploited ICs who absolutely should be classified as employees. Not highly paid professionals at small businesses who knowingly agree/desire to be ICs for their own benefit.

    Comment


    • #3
      I worked with a practice that was audited for categorizing physicians as 1099 ICs. The initial audit found that the company should have classified the docs as employees and not ICs. The CPA and attorney felt strongly that the case could be won in court, but the expense was not worth it.

      As the IRS said that the area is a gray area, and all 1099s had been properly filed, they accepted a reclassification and payment of employer taxes for one year only. It was not that expensive and it worked out just fine.

      As far as the disagreement between your advisor and the practice's advisor, this is not at all uncommon. How conservative or how aggressive an approach they want to take determines their opinion. Since your employer controls things here, you either have to convince the employer to get a second opinion from a more aggressive CPA, or simply accept that you are going to be classified as an employee going forward. The only other option would be to seek another job.

      Comment


      • #4
        I think you're in a tough situation. I too am an independent contractor similar to you working for only one organization at only one site. Two years ago I had a similar conversation because somebody new in the personnel department decided they needed to review all the contracts, including my IC contract. I got lucky I think because I'm not working full-time for them and made it clear that I preferred my IC status (for many of the same reasons as yours) so they've let it go for now but I do know that all new part-time hires are W-2 employees.

        The risk is definitely on the owner of the practice. If an IRS audit rules that you are an employee, the owner is responsible for back taxes, penalties and fines. If the owner is adamant on changing your status, I'm not sure how much you can do other than what you're doing to re-negotiate the employment contract. I wish you luck in obtaining the best deal possible.

        Comment


        • #5
          can you still be required to sign a non-compete if you work as a 1099?

          Comment


          • #6
            ^^^ read spirit riders post

            Comment


            • #7
              Anyone know any cases of inappropriately classified 1099s that have sued for back taxes paid or are penalties typically fines that Don’t involve the 1099 party? Thinking 10 years at 600-700k income

              Comment


              • #8
                Originally posted by Sundance View Post
                Anyone know any cases of inappropriately classified 1099s that have sued for back taxes paid or are penalties typically fines that Don’t involve the 1099 party? Thinking 10 years at 600-700k income
                I don’t, apparently White.Beard.Doc does have personal experience, andspiritrider provided an excellent template. As he said, the IRS targets misclassified low-income workers whose “employers” are not correctly classifying them as employees. This is a strong motivation for said employees not to report income (typical for the employer to “overlook” the 1099s), in which case they have no access to workmen’s comp and unemployment benefits. The only loser for high earners, such as in your case, is the state/federal unemployment system, which is not exactly significant for physicians and other HIPs. Iow, there is no real benefit to go after these “employers” other than to prove a point.

                Iow, not your problem and I wouldn’t poke the bear.
                Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  the state /fed unemployment thing did come into play during covid furloughs in my area- the w2 daytime anesthesiologists I know that got furloughed were able to collect NJ unemployment that as 1099s they wouldnt have been able to. A once in a lifetime situation (hopefully), but still significant for those involved. They were out of work for almost 3 months.

                  Comment


                  • #10
                    Originally posted by billy View Post
                    the state /fed unemployment thing did come into play during covid furloughs in my area- the w2 daytime anesthesiologists I know that got furloughed were able to collect NJ unemployment that as 1099s they wouldnt have been able to. A once in a lifetime situation (hopefully), but still significant for those involved. They were out of work for almost 3 months.
                    Actually, the govt made an exception stating that 1099 workers impacted by COVID could apply for for unemployment benefits. I found out when a client informed me they were receiving benefits lol.
                    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #11
                      Originally posted by jfoxcpacfp View Post

                      Actually, the govt made an exception stating that 1099 workers impacted by COVID could apply for for unemployment benefits. I found out when a client informed me they were receiving benefits lol.
                      I dont think NJ did for the state part of it. If they did, is there anyway to claim it after the fact? They are all back at work now, so Im guessing not

                      Comment


                      • #12
                        spiritrider thanks for the thorough response. As I wrote this I was hoping you'd weight in, and you didn't disappoint! I will suggest that my attorney propose modifications to our existing agreement to address these issues.

                        White.Beard.Doc , you are right, and it will be a challenge to convince him at this point. I have not given up, as I have found no evidence that his exposure is high. I don't want to convince him to do anything that is truly not in his best interest. Changing things after we previously agreed on a contract, significantly lowering my after-tax pay, and having to look for someone to replace me may be in his best interest. That's his call I suppose.

                        jfoxcpacfp thanks for your response on this. I just need to find an authority the owner will trust who will tell him this. His attorney has never prepared a tax return or defended an audit (I asked). While he's reviewed many healthcare employment agreements, his confidence on this matter just doesn't seem to match his experience.

                        Do you have any suggestions for a third party expert to consult on this? Tax attorney or CPA?

                        Additionally, the attorney is urging a mid-year change, recommending correcting this on a prospective basis with a strange sense of urgency. The IRS has a program to address misclassification, the VCSP (https://www.irs.gov/businesses/small...lement-program). He has not suggested this program. I'm tempted to suggest that he either enter the program (if the risk is truly high, that would be the most conservative position) or that we work to modify out existing agreement as spiritrider recommended. And I can happily report that at least in my state, 1099 docs taxed as SPs and S-corps were paid unemployment during COVID.

                        GasFIRE thanks for the comment and the good wishes.

                        Thanks again, everyone, for the helpful responses. I really appreciate you all.

                        Comment


                        • #13
                          Originally posted by billy View Post

                          I dont think NJ did for the state part of it. If they did, is there anyway to claim it after the fact? They are all back at work now, so Im guessing not
                          Upon reading this, I rolled my eyes and thought, "Only in NJ (or maybe CA)" But my research shows otherwise. . In fact, SD is apparently the only state that doesn't comply, and that's for the extension. Don't assume it's too late until you have checked for yourself. And, of course, wave #2 may hit this fall, meaning you may be eligible then.
                          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14
                            Originally posted by jfoxcpacfp View Post

                            Upon reading this, I rolled my eyes and thought, "Only in NJ (or maybe CA)" But my research shows otherwise. . In fact, SD is apparently the only state that doesn't comply, and that's for the extension. Don't assume it's too late until you have checked for yourself. And, of course, wave #2 may hit this fall, meaning you may be eligible then.
                            thats, it wasnt for me but I'll pass along to my friends and tell them to apply. I'm a lowly W2 but luckily wasnt furloughed lol.

                            Comment


                            • #15
                              Originally posted by billy View Post
                              I dont think NJ did for the state part of it.
                              NJ did comply with all parts. 1099s are eligible & receiving the $600 & the "wages" portion. There is a cap of $231 I believe on the "wages" portion for 1099 peoples. I'm certifying for a not-so-compter-savy 1099 who has been receiving both parts since May.

                              No idea about claiming after the fact.
                              "Oh look another bajillion point declin-Ooooh!!! A coupon for pizza!!!!" <--- This is what everyone's IPS should be. ✓✓✓

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