Employees vs Independent Contractors (Part One of Two)

‍

Join the discussion on Facebook!

Full Transcript:

Jonathan:

Welcome to the Tooth and Coin podcast, where we talk about your adventure of being a dental practice owner. In these episodes, we're going to be talking about problems that you will likely face as a practice owner, as well as give an idea about actionable solutions that you can take, so that you can get past this problem in your practice. Some of these concepts are really big ones, some of them are very specific, but we hope that these episodes help you along with your journey.

Jonathan:

Now, a very important piece for you to understand is that, this is not paid financial advice. This is not paid tax or legal advice. We are not your financial advisors. We are not your CPAs. This is two CPAs, talking about informational and educational content, to help you along with your journey. A very important piece for you to understand.

Jonathan:

Another thing that you need to know is, if you enjoy today's content, join us on the Facebook group. So we've got a Facebook group that is active with dentists, that is going to have content talking about what we're talking about today, to continue the discussion. Agree with us, don't agree with us, have a story to tell, have something to share? Join us in the Facebook group. If you go to Facebook and you search for Tooth and Coined podcast, click on it to join it, and be able to join us there.

Jonathan:

Finally, if you need some more help, we're developing a list of resources that are going to be centering it around our topics of discussion, to be able to help you a little bit more than what the content is doing. So if you'd like access to that, whenever it becomes ready, all you have to do is text the word Tooth and Coin, T-O-O-T-H, A-N-D, C-O-I-N to 333444. Again, that's toothandcoin, all one word, no spaces, to 33444. Reply with your email address, and we'll email you instructions on how to get into the Facebook group, as well as add you to the list, to be able to send you those resources when they're available. And if they're available, we'll go ahead and send them to you as well.

Jonathan:

So, on to today's episode, I hope you enjoy it.

Jonathan:

Hello, ambitious dentists, welcome to Episode Six of the Tooth and Coin podcast. In this episode, we're going to be talking about a decision you're going to have to make, many times throughout your career. And it's one that almost no one talks about and almost no one thinks about, until that moment in time happens for you. This decision is, how are you going to treat someone who is working for you? Are you going to treat them as an employee or, are you going to treat them as an independent contractor? And the way that you pay them, matters. There are consequences to doing it the wrong way. And it's a little bit tricky.

Jonathan:

There's a lot of, I don't know, social norms or just industry standards that people seem to follow, but don't really know why. And in this episode, we're going to be talking about four different types of instances, of this. We're going to talk about this on a broad level. We're going to talk about it as, if you have an associate doctor in your office, we're going to be talking about it. If you have a specialist in your office, and finally, we're going to be talking about it if you have a hygienist in your office, and you're considering doing this in a certain way. And it's a big problem, because if you don't do it right, you could end up paying lots of penalties, interest, fines, and just a whole bunch of other mess that you don't want to go through, because it's not fun to deal with the government. We all love big brother, but we don't want him messing with our stuff, as much as we can handle it.

Jonathan:

Joseph and I are going to be starting, talking about this. So Joseph, talk to me about independent contractors and employees. This is one of the things that I didn't really know was an issue, in the dental world, until I started getting an email once every other week from a client saying, "Hey, I don't know how to do this. What am I supposed to do?" Talk to me about the relationship, what it means and all those things.

Joseph:

Sure. Well, I think at a high level, there's a couple of things that we've got to keep in mind. Why does the government care about 1099 versus W2, versus not issuing 1099s? So I think we can maybe get a chance to give our listeners a little bit of a heads up, on why that matters. I think we can also talk about, at a high level, what decisions do you make as a business owner? So, as all of the people that listen to this podcast know, every day in your life, in your business, in your career, you take risks. There is not ever a way to completely avoid risk, but what you want to do is, you want to be able to mitigate your risks. So we want to talk through a little bit of this, at a high level, and help dentists understand how to mitigate these different risks and how to make sure that they're staying in compliance.

Joseph:

And, one thing... Jonathan and Spencer pointed this out on our team, to me, I said to him, one day. I said, "Why is this 1099 thing a big deal? Why do we even care, and why are we having to do all this work?" And he said, "Well, you've seen the checkbox on the return, right?" And I said, "No, what are you talking about?"

Joseph:

He said, "Well, on every single business return, there is a check box that says, 'Is your business required to issue 1099s?' Yes or no. And then if you say, 'Yes, I'm required,' 'Did you actually issue them?' So every single return that's going out the door, we're clicking that box. And the client is signing, that they agree that yes, that they've issued all the 1099s that they're required to do."

Joseph:

So those are a couple of things, kind of at a high level, that immediately jump out to me. Number one is, you can't eliminate risk, but what you want to do is you want to do everything in your power to mitigate your risk, and to put your practice in the best situation. Number two is, there are reasons that the government cares about 1099s versus W2's, and we'll talk a little bit about that.

Joseph:

And number three is that, it's part of your tax return, whenever you follow the tax return as a business.

Jonathan:

Yeah, that's a great point. So let's start with the first, and the first is that, one of the big reasons why you had to be filing this right, is because you have to say... This isn't something that is not checked. This is something that is a core critical component of complying with some of the government's requirements. What Joseph was alluding to is, whenever you're filing any type of return that has a business component to it, one of the assertions you have to make, and you have to agree to as the signer of that tax return, is that if you had a payment that was going to a contractor that was appropriate, that you issued them a 1099.

Jonathan:

Now, so you're required to issue 1099s, and you're required to do those pieces. we're not going to really get into the nuts and bolts of how to fill out a 1099, or who gets, hen it happens and things like that. But that is something that we have to make sure that we're doing correctly, when that box gets checked. Make sure that we issue all the 1099s we were supposed to. Was there more that we wanted to expound upon, on that piece/.

Joseph:

Yeah, just in general, those are the things that matter, kind of at a high level. And the government, the government wants to... Like, if you wanted to be super spiteful, you'd say, "The government wants all of the government money that the government can possibly get." But at the end of the day, what the government's trying to do with our tax system and with tax returns is, they're trying to trace the money that's coming in and out of our economy and make sure that it's appropriately taxed, and that the appropriate taxes are paid on each one of those. And a 1099 is a critical component of that. And there certainly are some pieces that go with a W2 versus 1099 decision, that affect the government, that if the government had their druthers, they would rather people be W2 employees and subject to the FICA tax, and the one half of self-employment and all of those other pieces. So, what are your thoughts in general, at a high level, what the government's trying to accomplish with this topic?

Jonathan:

So I've always taken a little bit different of an approach. I've always taken an approach of, they're going to... The government is really more trying to protect the individual employee level. So, me as a business owner, they're going to get their pound of flesh from me, but they're trying to protect the pound of flesh that's on the employee's back. Is what I typically feel like, the reason that they're doing, that they get so strict about these requirements. We haven't gotten into the requirements yet, or how they view it.

Jonathan:

But to me, the way I've always seen it is, that they want to try and curb abuse from the employer side, to try and get the employer out of having to pay their portion of the employment taxes. Because the government's going to get those employment taxes, one way or the other, whether it's an independent contractor or if it's from the employer. They really, honestly, shouldn't care much about where that money is coming from as long as they're getting it. But to me that the reason that they're doing that... So, if that logic holds true, then why are they being specific about it? To me, it's because they want to make sure that the employee isn't getting taken advantage of.

Jonathan:

There's a lot of... Joseph, you have one that you're going to share, another one that's very, very common right now is, Uber drivers. A lot of them have been independent contractors, because they own their own equipment and they have their own vehicle. They drive around, they make their own hours. They just use the app as a way to coordinate, and things like that. And I believe on a federal level, they've ruled that those people are employees, now. Even though they fit a lot of criteria, to be independent contractors.

Jonathan:

And the reason is that, all of these people were filing their tax returns and nobody... And they're all like, "Oh my gosh, I've got so much that I owe in taxes. Why is that?" It's because they all owed self-employment taxes. And so, the government still got their money, but it was, the employees were left holding the bag, in terms of paying in money and things like that. So to me, it's always been more about, less about making sure that the employer pays in more taxes and more about making sure the employee is not being taken advantage of, in many different ways.

Jonathan:

Now there's one caveat to that, and that's on the state level. On the state level, I feel like it's definitely, that they want the employers to be on the hook. And the reason is, is because independent contractors don't typically pay self-employment, they're not eligible for unemployment. And the State is who dictates unemployment, generally. There's a federal unemployment tax that is paid into the system, which is very minor. It's like 70 bucks a year, per employee, where on the state level, it's much higher.

Jonathan:

And we've had lots of states come after business owners, and just basically, rename everyone as employees. We've had people that literally have had a yard service company, that does their yard in the summer once every week and a half, to make sure that the yard in front of the office is done. They've reclassified those people from contractors to employees. That is, I don't know, like $2,000 a year in services and they're a company. And the reason is, is because those state departments want to raise unemployment tax revenues. And if you're an employee, you're eligible for unemployment. If you're not, if you're an independent contractor, you are typically not able to get unemployment. There are some states that have some provisions and safety nets for independent contractors, as well. But in general, that's how it goes down.

Jonathan:

So that that's always been my perception of it. Whoever knows, really, what the government wants out of everything. All we know is that they do care about the classification. They have been very strict about it. There have been people that have gone to the highest courts in the nation, to try and defend what their decision was, in terms of making this. So what was the example that you're willing to share, in terms of the story about independent contractor versus employees?

Joseph:

Yeah, so there are a number of different tests that are out there. There are a number of different rules, but one of the ones that almost always gets individuals versus the company, and puts people on the hook to become a W2 employee versus 1099. The technical term is risk of loss. So in other words, if you're going to have a 1099 contractor, they need to be in business for themselves, and they need to have a risk of loss. So I'll give you a very, very simple example.

Joseph:

If you hire someone to come and paint your office, paint your dental office. You meet with the painter, he comes out, he tells you this is how much it's going to cost. There's two different roads, and I'll use two different extremes on this, to illustrate the point of risk of loss. And then I'm going to tell you about the famous court case that came out, several years ago.

Joseph:

If the painter shows up and as the painter shows up, you provide that painter with a uniform, the white painters get-up. You provide that painter with a ladder, and with paint rollers and with paint, and you provide them with the materials to make sure that they don't get paint on the floor, and you do all of those things. And all the painter does is just show up and paint with the paintbrush, paint with the paint roller. Let me ask you this, Jonathan. What is the risk of loss? Is there any risk of loss for this painter whatsoever, outside of their time?

Jonathan:

Other than maybe falling off a ladder, or something like that. No.

Joseph:

So there's really no risk of loss. And if you couple that, and look at another scenario, if that painter shows up with his own paint truck, his own paint uniforms, his own crew that he has, that are working for him. He's got his own equipment, he's got his own workers' compensation insurance. He's got all of these different pieces, that enter into his risk of loss, so that is much more likely to be a 1099 person. Where in my first example, when there's absolutely no risk of loss, there's virtually no financial risk of loss in that situation.

Joseph:

And FedEx and UPS kind of got in trouble for this a couple of years ago, whenever they had all their drivers. And they were doing just exactly what I described. They would provide the uniforms, they would pay for the gas, they would provide the truck, they would provide the maintenance on the truck. They would provide everything. And the driver just had to show up, drive the truck from A to B and deliver the packages. And what the courts determined was that, there was no risk of loss in that situation. So rather than all of those drivers stay as 1099 independent contractors, the government reclassified all those wages and said, "These are all W2 wages. Oh, and by the way, you owe 7.65% in FICA taxes, and the employer portion of Social Security and Medicare on all of these wages."

Joseph:

And since then, they've made big changes at those companies, and those are all considered W2 employees. But that's a very real case of this risk of loss piece, that basically factors into this decision. So I think I'd just kind of use that as a launch off point for you Jonathan, to talk about these specific situations that we see in dental offices. And as we were talking through some of the bigger questions that we get, this is one of the biggest questions that we get. It's a question that I get multiple times a year, specifically when we're out trying to figure out 1099s, when people are coming on board, when we're having new practice owners come on board. They're like, "Oh, can I just pay them as a contractor?" And I'm like, "Well, it depends." Just like every fact and circumstance is going to, is going to dictate the situation.

Joseph:

So what are some these specific... I mentioned the painter. I mentioned the drivers for UPS and FedEx. What are some specific situations in which dentists have to face this decision?

Jonathan:

So, and to be specific, it's every time you have someone that's going to provide a service for you. Whether it be your front office person, whether it be your telephone company, whether it's going to be an associate or anyone else. What we're talking about, we've described the problem to outline how this is going to affect you guys. Whenever you decide to hire anything, you have to decide, is this going to be... Is this a service that someone is providing me? If so, then are they going to be... There's technically another classification. Are they going to be an employee, an independent contractor, or are they just a company that's providing me services that I'm paying them money for?

Jonathan:

And if it's a company, then they are, if it's an LLC, or if it is incorporated in some way, it is typically... Well, sorry, if it's an LLC, that's been incorporated as a subchapter S, then it will be excluded from this conversation. They could still be, technically, a contractor that is an employee of that. And it gets really convoluted, and really confusing. But for purposes of this discussion, we're going to be assuming that it's not services being provided like AT&T. You're not going to send a 1099 to AT&T. They were specifically excluded, back in I believe 2008, they tried to make it where even those companies would get 1099s. Congress finally said, "This is going to be too big of a headache. There's no reason you should be issuing a 1099 to the Home Depot when you go and buy $800 worth of repair items in a year." And so, that's all not taken care of.

Jonathan:

Now, that is in terms of the protocol in which how you report what you paid, that doesn't affect how you choose to pay someone. So that's an important distinction, here. We're not saying that, just because you issued someone a 1099, that does not mean they were an independent contractor. What we're talking about is the basis point, the starting point of how you're paying them, whether it be as an employee relationship or as an independent contractor relationship, or again, that third example was a service relationship between yourself and another company. Some people try to conflate or mix the independent contractor with another company.

Jonathan:

So let's say they have an associate, that owns an S-corp and, "Well, it's an S-corp, and I'm paying the S-corp for those services. And they're trying to get away with," and those types of situations. Assume that the government is logical enough to be able to see through that. I could probably explain that to my second grader, and she'd probably have to be able to see through that. The IRS will be able to see through it, too. So don't try and be, we're not going to be trying to be clever, in this conversation. We're going to be trying to be real-world examples of what will actually happen, if you go down this path.

Jonathan:

So, specific examples, the most specific example that we get is, we get a new doctor getting out of school. And they're saying, "Hey, I'm talking to this company, and they're saying that I can choose to be either an independent contractor or be an employee." On the other side of that, we have a client that's a practice owner that comes to us and says, "Hey, I've got this associate. Do I need to classify them as an employee, or an independent contractor?" Same exact situation, for both sides of that. And the answer is the same for both of them. So, given that type of a situation. Joseph, what is your typical reaction and answer to that question?

Joseph:

Sure. Well, I think we go through a bunch of the different tests. The one that almost always gets everybody, is this risk or loss piece. So, do you have an associate that's coming in, and... Have they done anything to get new patients? No. Are they bringing in all of their own tools, and their own equipment in order to do dentistry? No, they're using ours. Do they have any control over their schedule? No. I tell them when to be here. How is it that they're compensated? Based on a production percentage. And I'm like, "That's pretty simple. Like we don't have any risk of loss. This is not an independent contractor." And this is somebody that's basically coming in... That's a pretty clear cut case for me, as someone that comes in as an employee, and is not a contractor.

Joseph:

What are some of the other tests that you see, that you use, whenever we're trying to give people guidance? And we would certainly encourage you to talk to your CPA about this and make a good decision together. It's not always a really easy, clear cut, black and white. I like to use extremes, so that we can illustrate our point, here. But what are some of the other things that you're looking for?

Jonathan:

There are a few. The simplest question to answer for a lot of people is, is that associate... And we're talking about, from the social perspective. Is the associate working somewhere else, and free to work somewhere else? And, not under some type of a non-compete, that's super vast. That's a really simple test, as well, because if they're literally not going to be able to work anywhere else, then you've got financial control over that person. The reason we're saying these words and financial control, and risk of loss and things like this, the reason that we're saying this is because you then, as the person who will be paying for these services, have the choice how to pay people. If you're correct or not is determined by a set of tests that is distinguished by the federal government, as well as your state governments. And sometimes, those two governments can disagree on these things.

Jonathan:

So you need to be aware that, that is a part of it. And what we're talking to you through is some tests that they will be testing you on, in terms of deciding if you were correct in your interpretation and application of these ways that you pay people, and then report it to the government later on. So the IRS, it's like a seven step test for the federal government side, which when I say IRS, I'm talking about the federal government. And as I said, risk of loss is a big one. That's just a bigger concept. It's an easier one to talk about.

Jonathan:

Financial control is another one. So if you're really in control of that person, like if you're able to fire them without them having a whole lot of say in it, you've got a lot of financial control. If you're the person making the schedule, if your practice is making the schedule for them, if your practice is providing all the ways for them to be able to do dentistry. If all they're doing is showing up and doing dentistry, and have a defined time they're supposed to be there. Then, that's a lot of financial control that you're covering over that person. And you're likely to be classified, that person is likely to be classified as an employee for you.

Jonathan:

Doesn't matter what you want. Doesn't matter what the person who is giving you the services wants, that is what the government will likely end up saying. So, that is an important distinction. So when I say financial control, the big pieces are that are one, can they work other places? Are they under non-competes? Two, do they make their own hours, or do you set the hours for them? Three, do they bring their own supplies? Do they have their own stuff, their equipment? Is it, they're paying on a machine that they were using? And really, four, are they responsible for their own labs, and things like that? Are you providing the ecosystem for them, or are they doing it?

Jonathan:

Again, Joseph mentioned earlier, are they going out and getting patients, are they building up a clientele, and things like that? That's really important stuff to interpret and decide on, if they're doing that in your office or not. So I will say, my typical answer to people is that, if ever questioned you will likely end up being classified as an employee- employer relationship, whenever there's an associate dentist that is there, full-time, effectively full-time, they will most likely end up... Regardless of how clever you try to be and say, "Oh well, they're making their own hours, but the hours they're choosing to do just happened to be when we're open every day."

Jonathan:

No matter how clever you get on it, they're probably going to be able to just be like, "Sorry, we're just going to reclassify you." And you're going to have to pay the back taxes, the penalties and interest that associated with it, and then, just deal with it. Because, I'm going to be honest with you, you fighting that is going... For that one employee, that one time that you're having to do it, is going to cost you a lot more to fight it than it is just to pay the interest and penalties and back taxes. And if it did go higher up in the courts, you're probably going to end up losing it anyways whenever they look at the situation, if you're following that fact pattern.

Jonathan:

There are some shades of gray in this. Like I said, what happens, what if you're one of those associates that's only working there two days a week, and you're working somewhere else, two days a week? That's a very common thing. A dentist has, not tons of capacity, but they've got a lot of demand and they don't have enough capacity for it, so they need to have someone there two days a week. You're kind of phasing in, and things like that. That's where it starts getting a little bit more gray. It starts getting a little bit more difficult. Does that associate have that financial control, and things like that? In those circumstances, to me, unfortunately again, you're more likely to get reclassified as an employer-employee, even if the government comes in and checks that, than you are to be remained as an independent contractor.

Jonathan:

More likely, I'm not saying that's a definite, I'm saying, you're more likely. You'd want to have as many of those check marked boxes checked as possible, that you have control of those things. Specifically your hours, some type of financial control, some type of way of dictating how your schedules is made, and things like that. All those things would be really important to have, to be able to try... If you're a really, really worried about that independent contractor level coming up. So those are my thoughts in terms of where that happens, specifically for the associate dentist situation.

Jonathan:

And Joseph, did you have anything to add, in terms of that?

Joseph:

I guess the other thing is that, this thing has a tendency to only go one way. We've not ever had somebody that's been classified as a W2 employee, that raises a stink about it, they challenge that, and then they get reclassified as a 1099.

Jonathan:

Yeah.

Joseph:

So back to the risk mitigation piece, like this is the duck test, guys and gals. Like, if it walks like a duck and looks like a duck, it's probably a duck. And in a lot of these scenarios and situations, when you really start digging into it, "Sure looks like an employee to me and not an independent contractor," when we start applying these tests and that kind of thing. So, I've not ever seen it go that way, you and I both know and have seen many, many times... There's lots of famous cases where somebody that was classified as an independent contractor gets reclassified as an employee. We don't, we've not... Not that it hadn't happened, but I've not ever seen it happen where somebody was classified as a W2 employee, and it went the other way and they became all of a sudden, an independent contractor.

Joseph:

So back to the risk question, right? Every day as a business owner, you're taking risks that are out there. What risks are you willing to take, and what risks do you want to take?

Jonathan:

Yeah, exactly. And, let's talk about what those risks are. Let's say that it does get reclassified from independent contractor to an employee status...

Jonathan:

Hey, everybody, Jonathan checking in, really quick here. This episode got a little long, so we cut it into multiple pieces. This is Episode One, you can find Episode Two next week, or in the following weeks. So make sure that if you listened to this episode, you listen to the other episode as well, so you have the full context around everything that's going on. Thanks for tuning in, and we will see you next time.

Jonathan:

That's it for today, guys. I hope you enjoyed this episode of the Tooth and Coin podcast. If you are going to be a practice owner or a new practice owner, and you're interested in CPA services, head on over to toothandcoin.com, where you can check out more about our CPA services. We help out around 250 offices around the country, and would love to be able to have the discussion about how we could help your new practice. We do specialize in new practice owners, so people that are about to be an owner of a practice they're acquiring, about to be an owner of a practice they're starting up, or have become an owner in the past five years. That is our specialty, and we'd love to be able to talk to you about how we could help you in your services, with your tax and accounting services.

Jonathan:

And if you enjoyed today's episode, again, go to the Facebook group. Talk to us about what we've talked about, join in on the discussion, and let's create an environment where we can talk about some of these things so that we can all help each other get through these things together, so that this adventure of business ownership is more fun, more productive, and better in the longterm.

Jonathan:

Lastly, if you want access to those resources that we are currently building, just text the word toothandcoin to 33444, that's toothandcoin, no spaces. T-O-O-T-H, A-N-D, C-O-I-N to 33444, reply with your email address. We'll send you instructions in the Facebook group. We'll send you the resources when they're available, and we will see you next week.

‍