The IRS Crackdown on Independent Contractors
In order to increase their profits, some dentists choose to pay their associate dentists as independent contractors. By doing so the dental business owner avoids paying Social Security taxes, Medicare taxes, Workers Compensation Insurance and Retirement Plan Contributions on wages that are paid to independent contractors. But the risk and consequences of paying associate dentists as independent contractors has recently spiked - big time!
The IRS uses the following 20 Factor Test to determine if a worker is really an employee or independent contractor.
1. Instructions. Workers who must comply with your instructions as to when, where, and how they work are more likely to be employees than independent contractors.
2. Training. The more training your workers receive from you, the more likely it is that they're employees. The underlying concept here is that independent contractors are supposed to know how to do their work and, thus, shouldn't require training from the purchasers of their services.
3. Integration. The more important your workers' services are to your business's success or continuation, the more likely it is that they're employees.
4. Services rendered personally. Workers who must personally perform the services for which you're paying are more likely employees. In contrast, independent contractors usually have the right to substitute other people's services for their own in fulfilling their contracts.
5. Hiring assistants. Workers who are not in charge of hiring, supervising, and paying their own assistants are more likely employees.
6. Continuing relationship. Workers who perform work for you for significant periods of time or at recurring intervals are more likely employees.
7. Set hours of work. Workers for whom you establish set hours of work are more likely employees. In contrast, independent contractors generally can set their own work hours.
8. Full time required. Workers whom you require to work or be available full time are likely to be employees. In contrast, independent contractors generally can work whenever and for whomever they choose.
9. Work done on premises. People who work at your premises or at a place you designate are more likely employees. In contrast, independent contractors usually have their own place of business where they can do their work for you.
10. Order or sequence set. Workers for whom you set the order or sequence in which they perform their services are more likely employees.
11. Reports. Workers whom you require to submit regular reports are more likely employees.
12. Payment method. Workers whom you pay by the hour, week, or month are more likely employees. In contrast, independent contractors are usually paid by the job.
13. Expenses. Workers whose business and travel expenses you pay are more likely employees. In contrast, independent contractors are usually expected to cover their own overhead expenses.
14. Tools and materials. Workers who use tools, materials, and other equipment that you furnish are more likely employees.
15. Investment. The greater your workers' investment in the facilities and equipment they use in performing their services, the more likely it is that they're independent contractors.
16. Profit or loss. The greater the risk that your workers can either make a profit or suffer a loss in rendering their services, the more likely it is that they're independent contractors.
17. Works for more than one person at a time. The more businesses for which your workers perform services at the same time, the more likely it is that they're independent contractors.
18. Services available to general public. Workers who hold their services out to the general public (for example, through business cards, advertisements, and other promotional items) are more likely independent contractors.
19. Right to fire. Workers whom you can fire at any time are more likely employees. In contrast, your right to terminate an independent contractor is generally limited by specific contractual terms.
20. Right to quit. Workers who can quit at any time without incurring any liability to you are more likely employees. In contrast, independent contractors generally can't walk away in the middle of a project without running the risk of being held financially accountable for their failure to complete the project.
There is also a safe harbor provision which allows a business to continue to treat a certain class of worker as independent contractors if they have set a precedent by always historically paying workers of that class as independent contractors in the past. Our experience and the collective experience of our peers in the Academy of Dental CPA’s (“ADCPA”) has been that in 2013 the auditors have become unreasonable and extremely aggressive in classifying workers as employees.
In 2013, both the IRS and State taxing authority (California Employment Development Department) have dramatically increased their audits of dentists for improperly misclassifying their workers as employees. Above and beyond IRS and EDD penalties, the California Labor Code can also assess penalties as high as $15,000 for a first time violation. The government has now gotten serious about policing this, and the penalties for non-compliance are severe.
Ken Rubin is the owner and operator of Ken Rubin & Company, CPA’s, a Dental CPA firm based in San Diego. Ken Rubin also owns and operates Ken Rubin Practice Sales, a San Diego based dental practice transition company. He is the co-founder of the Academy of Dental CPA’s (“ADCPA”) and a frequent author and lecturer.Forward this article to a friend
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