Correctly Classifying Workers in Your Physical Therapy Practice

As a physical therapy practice owner, one of the most important decisions you'll make when hiring is determining whether the individuals providing services are employees or independent contractors. The distinction between these two classifications carries significant financial and legal implications for your practice, especially when it comes to tax obligations. Misclassifying workers can lead to costly penalties and disrupt your practice’s operations.

In this article, we’ll guide you through the key differences between employees and independent contractors, how to determine the right classification, and what to do if you’ve made a mistake.

Employee vs. Independent Contractor: Key Differences

When you hire someone to work in your physical therapy practice, you need to understand the tax responsibilities associated with their classification.

Tax Responsibilities for Employees

If a worker is classified as an employee, you are required to:

• Withhold and deposit income taxes, Social Security, and Medicare taxes from their wages.
• Pay the employer’s portion of Social Security and Medicare taxes.
• Contribute to unemployment taxes based on the wages you pay to the employee.

Employees often come with more administrative responsibilities, including managing payroll taxes and providing certain benefits.

Tax Responsibilities for Independent Contractors

For independent contractors, your obligations are much simpler. Generally, you:

• Do not withhold income taxes or pay Social Security and Medicare taxes.
• Do not pay unemployment taxes or provide employee benefits.

Independent contractors are typically responsible for managing their own tax obligations, which can save you administrative time but comes with risks if you misclassify a worker.

Scenarios in Physical Therapy Practices

In physical therapy practices, it’s common to work with both employees and independent contractors. For example:

• Hiring a full-time physical therapist to provide consistent patient care and maintain a regular schedule would likely classify them as an employee.
• Contracting a specialist to provide occasional services, such as consulting on specific cases or offering part-time physical therapy sessions, may classify them as an independent contractor.

The classification depends on the level of control you exercise over the individual’s work and their independence in how they perform their job.

Determining Worker Classification: Key Considerations

The IRS uses a series of common law rules to help businesses determine whether a worker is an employee or an independent contractor. These rules fall into three main categories:

Behavioral Control

Does your practice control how the worker performs their job? For example:

• Do you provide specific guidelines on how the physical therapy treatments should be carried out?
• Do you set specific hours and require the worker to be present at the practice?

The more control you exert, the more likely the worker is an employee.

Financial Control

This involves the financial aspects of the worker’s role. For example:

• Are you in charge of how the worker is paid, whether expenses are reimbursed, and who provides the tools or equipment?
• Does the worker have the opportunity to make a profit or loss based on their services?

If you handle most of the financial arrangements, the individual is more likely an employee.

Type of Relationship

Consider the long-term nature of the relationship. For example:

• Is there a written contract, and does it specify employee-type benefits such as insurance, vacation pay, or retirement plans?
• Will the relationship continue indefinitely, and is the work performed a key aspect of your practice?

These indicators can point toward an employment relationship rather than an independent contractor setup.

Common Mistakes in Classification

Misclassifying workers is a common issue, especially in healthcare settings like physical therapy practices, where you might hire part-time or temporary workers. The key is to evaluate all aspects of your relationship with the worker and consider the degree of control and independence. No single factor determines the classification, so it’s important to document your process thoroughly.

What Happens If You Misclassify Workers?

If the IRS determines that you misclassified an employee as an independent contractor, you could face significant penalties. These include:

• Being held liable for back taxes, including both the employee and employer portions of Social Security and Medicare taxes.
• Potential fines and interest on the unpaid taxes.
• Loss of tax relief opportunities if you’ve had no reasonable basis for the misclassification.

To avoid these penalties, it’s crucial to classify workers correctly from the beginning.

Steps to Ensure Proper Classification

Documenting Your Decisions

When making a classification decision, be sure to document each factor you considered, such as the level of control you have over the worker’s duties, financial independence, and the nature of your relationship. Clear documentation can provide a defense if the IRS ever questions your decision.

Filing Form SS-8 for Worker Classification Determination

If you are uncertain about a worker’s classification, you can file IRS Form SS-8, which allows the IRS to make the classification determination for you. While this process can take several months, it provides a definitive answer, helping you avoid potential penalties down the road.

Employment Tax Obligations

Once you’ve classified a worker, it’s important to fulfill the associated tax obligations:

• For Employees: You’ll need to file employment tax forms such as Form 941 for income tax withholding and Forms W-2 for year-end wage reporting.
• For Independent Contractors: You must issue Form 1099-NEC to any contractor you’ve paid $600 or more during the year.

Keeping up with these tax filings is essential to remain compliant and avoid IRS scrutiny.

What to Do If You’ve Misclassified a Worker

Relief Provisions for Reasonable Misclassifications

If you have a reasonable basis for not treating a worker as an employee, the IRS may relieve you from paying employment taxes for that worker. This relief only applies if you’ve consistently filed federal information returns (e.g., Form 1099-NEC) as though the worker was an independent contractor.

Voluntary Classification Settlement Program (VCSP)

If you realize you’ve misclassified workers and want to correct the issue going forward, the IRS offers the Voluntary Classification Settlement Program (VCSP). This program allows you to reclassify workers as employees with reduced penalties for past mistakes. To participate, you must meet eligibility requirements and file Form 8952.

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Final Thoughts: Protect Your Practice with Proper Worker Classification

For physical therapy practice owners, correctly classifying workers as either employees or independent contractors is critical to staying compliant with tax laws and avoiding costly penalties. While the classification process can seem complex, taking the time to evaluate the relationship, document your decisions, and seek expert advice can save you a lot of trouble in the long run.

If you have any doubts about worker classification or need help managing payroll and tax obligations, The Profitable Therapist is here to guide you every step of the way.