Independent contractor or employee? How to keep the IRS off your back

Many of you physician business owners have workers in your office or practice.  And some of you entrepreneurial physicians may be working for others in the role all of "independent contractor".

Since there are significant payroll tax implications for both you or your workers, it's important to figure out how to classify you or your workers -- employee (W2 folks) or independent contractor (1099 people)?

From an older Wall Street Journal article, this description provides (minimal) help:

Figuring out the difference between an employee and an independent contractor can be very tricky. The IRS provides this rule of thumb: Anyone who performs a service for you is your employee "if you can control what will be done and how it will be done". That's the case "even when you give the employee freedom of action," the IRS says. "What matters is that you have the right to control the details of how the services are performed."

Perhaps these four questions might provide more insight:

• Will this person be working on your business's premises?
• Will  this person work exclusively for your business or for you?
• Will you provide equipment and tools for this person to do his or her work?
• Do you control the hours this person works for you?

If you answered "yes" to any of the four questions, there's a high likelihood that you're actually employing the person (they are your W-2 employee) and that you are required to withhold the appropriate payroll taxes.

To hear it straight from the horses mouth, here is the IRS 15-A publication that spells out the details.  Pay particular attention to page 6.

And if this isn't warning enough, recognize that "The Internal Revenue Service is joining with more than two dozen states in an intensified effort to crack down on employment-tax violations." (WSJ Nov. 2007). I imagine it is only going to get worse as everybody's budget scrambles for to pick whatever low hanging fruit they can get their mitts on!

(Thanks to Intuit Small Business for inspiring this post)