Independent Contractor Status Requires Close Scrutiny
Because of the controversy surrounding the classification of chiropractors as independent contractors or employees, we thought you might want to see the 20 factors the IRS uses to make the determination.
What's at stake?
If a chiropractor is an independent contractor, the employer need not withhold income or payroll taxes, nor pay the employers portion of FICA taxes. Also, health insurance and other employee benefits generally need not be provided. In recent years a good number of chiropractors began treating associates as independent contractors. The IRS has come down hard on the classification issue targeting the health care industry and those companies that tend to use professional consultants.
In light of the IRS's crackdown on independent contractors, it is vital that a senior doctor or corporation who classify their associates as independent contractors first seek professional advice. The following represents the IRS's 20 factors for determining employee status. These factors are used by the IRS to determine whether a recipient of services has had enough control over an associate to be an employer. The 20 points are only intended to be a guide to help determine if there is sufficient control to show an employer/employee relationship. Answering "YES" to the first 16 factors tends to indicate control and employee status. Answering "YES" to factors 17 to 20 tends to indicate independent contractor status. The IRS says that the importance of each factor depends upon the facts and circumstances of a particular case than the type of services being provided.
Do you have the right (whether or not exercised) to make associates comply with your instructions on when, where, and how they must work?
Do you provide training for associates, requiring them to work with someone experienced or by having them attend meetings?
Are the duties of associates an integral part of your operation? Are their functions necessary to your practice?
4. Services Rendered in Person
Do you require associates to provide the services personally or can they delegate them to someone else?
Do you hire, fire, and pay the associate's assistants? (If the associate contracts to provide both labor and materials, and is responsible only for the ultimate service, this tends to show independent contractor status.)
Is there a continuing relationship between the associate and yourself? Are services performed frequently (although irregularly)?
Do you set hours during which the associate must perform the work?
8. Full Time
Must associates devote all of their time to your job? (Independent contractors can work when and where they please.)
9. On Premises
Must the associate work on your premises, especially if the work could be performed elsewhere? (Or do you have the right to designate travel routes or times or otherwise control the time and place of performance?) The IRS says that the absence of this factor does not necessarily negate an employee relationship.
Do you have the right to set the order in which services are performed, whether or not you exercise that right?
Do you require the associate to give you written or oral reports?
12. Hourly, Weekly or Monthly Pay
Do you pay the person by the hour, week or month? (A worker might still be an independent contractor and be paid on this basis. Contractors tend to be paid by the job or on straight commission, but could be paid monthly or weekly so as to spread out contract payments.)
Do you pay the associate's business or travel expenses?
14. Tools and Materials
Do you provide the associate with equipment or materials?
15. Right to Fire
Do you have the right to fire the associate? There can be a tricky distinction between controlling associates via the threat of firing if they do not follow your instructions -- which would indicate employee status -- and having the right to terminate a contract because the contractor has not performed according to specifications.
16. Worker's Right to Terminate
Can the worker quit at any time?
Remember, answering YES to the rest of the questions tends to show independent contractor status for an associate.
Does the associate have a significant investment in equipment or facilities that are not typically maintained by employees?
18. Profit or Loss
Can associates incur a profit or loss as a result of their work (in addition to the profit of payment for the work)? A contractor should bear an economic risk over and above the risk of not being paid.
19. More than One Job
Does the associate work for more than one practice at a time? (Note, however, that the IRS says that an associate could be an employee of numerous service recipients.)
20. Service Available to General Public
Does the associate offer services to the general public on a regular basis?
A final note: A provision of federal law may, under certain limited circumstances, provide relief from withholding responsibility in cases where a business has consistently treated workers as independent contractors. The provision is Section 530 of the Revenue Act of 1978. If all of its requirements are met, an associate will not only be treated as an employee for withholding purposes -- even if the associate would be classified as an employee under the IRS's 20 factor test.
What does all of this mean? If there is any remote possibility that your associate is being classified as an independent contractor and you have not passed the 20 aforementioned factors, then you may be in violation of the IRS codes and subject to penalties.
I highly recommend that you seek advice from your accountant or contact a member of the Society of Chiropractic Management Consultants.
Richard E. Vincent, DC, FICC
Richard Vincent, DC, a graduate of the Chiropractic Institute of New York (1950), is a seasoned veteran in the ongoing social, political and economic evolution of the chiropractic profession. He has served as president of the Massachusetts Chiropractic Society, chairman of the Massachusetts Board of Chiropractic Examination and Registration, president of the Federation of Chiropractic Licensing Boards and president of the National Board of Chiropractic Examiners.