Independent Contractor or Employee: What’s the Difference?
It’s a vexing question for practice owners: How do you classify a potential new veterinarian who is joining your practice? Is the veterinarian an independent contractor or an employee?
The misclassification of an employee as an independent contractor can result in serious financial ramifications, including taxes, fines, and penalties from both state and federal agencies.
What is an independent contractor?
Generally, veterinarians are independent contractors if they have control over the number of patients they see and their work schedule. They are not independent contractors if they perform services that can be controlled by the practice.
Practices often classify veterinarians as independent contractors to avoid having to comply with state and federal withholding requirements and payroll taxes. The practice simply issues 1099s to the veterinarian at the end of each year, and the veterinarians are responsible for reporting their income, which is subject to self-employment tax.
What is an employee?
If the practice has control over the veterinarians’ patient load and schedule, they are employees of the practice. Employees are supervised by the practice and may be entitled to certain benefits and protections under state and federal laws. For instance, the practice is responsible for withholding a portion of employees’ earnings for tax purposes.
4 classification factors
Independent contractors have complete autonomy over their work lives, whereas employees must answer to and abide by their employers. State and federal agencies consider four primary factors when determining if a veterinarian is an employee or an independent contractor.
The first factor is who supervises the veterinarian. There are four questions to be answered:
- Is the veterinarian under direct control of the practice’s supervisors?
- Does the veterinarian work for other practices?
- Who is responsible for corrective treatment and addressing such issues with the patients?
- Does the practice provide the veterinarian with any training?
This factor concerns a veterinarian’s schedule and hours:
- Do the patients belong to the practice or the veterinarian?
- Who schedules the patients?
- Who determines the veterinarians hours?
- Can the veterinarian refuse to treat certain patients?
- Does the veterinarian have to request time off?
3. Benefits and insurance
This category focuses on insurance, healthcare coverage, and more:
- Who pays for the veterinarian’s healthcare insurance?
- Who pays for the veterinarian’s malpractice insurance?
- Who pays for the veterinarian’s licensing fees and continuing education credits?
- Is the veterinarian entitled to any benefits from the practice, such as paid time off or a retirement account?
4. Payment and expenses
The following five questions can sometimes be contentious, so it’s best to spell them out clearly:
- Who determines the rates paid by the veterinarian’s patients?
- How is the veterinarian paid?
- Does the practice provide the veterinarian with tools, supplies, and equipment?
- Who pays for laboratory fees?
- Does the veterinarian independently pay to advertise services?
If an agency, such as a state department of labor or the U.S. Internal Revenue Service, audits a practice and finds that the practice has misclassified a veterinarian as an independent contractor, the consequences of a misclassification can be severe. The agency will likely seek payment of unpaid employment, disability, and Social Security taxes, along with additional interest and penalties. This could potentially cost the practice millions of dollars.
In addition, the misclassified veterinarian may be retroactively entitled to insurance coverage and other benefits that should have been offered by the practice if the veterinarian had been properly classified as an employee. If the veterinarian is deemed to be a nonexempt employee and worked more than 40 hours in any given week, the practice will also be responsible for back payment of overtime.
What can a practice do to protect itself?
The only fail-safe way to survive an audit is to classify veterinarian and staff in compliance with the criteria established by federal and state laws. Although this list is not exhaustive or foolproof, it is a start for identifying the best practices for maintaining classification as independent contractors:
“Compliance with a well-crafted independent contractor agreement is the best defense in a reclassification audit.”
- The veterinarian establishes their own business entity with its own Federal Employer Identification Number that the practice will contract with.
- The veterinarian procures their own general and professional liability insurance.
- The veterinarian is solely responsible for paying appropriate taxes on revenue they receive from the practice.
- The veterinarian is solely responsible for their own business expenses and provide their own tools, supplies, and materials, as necessary.
- The veterinarians do not receive any benefits or bonuses from the practice.
- The veterinarians establish their own work schedule and vacation schedule.
- Theveterinarians sign a written agreement that provides that they are an independent contractor, that they meet the criteria of an independent contractor, and will indemnify and hold the practice harmless.
Compliance with a well-crafted independent contractor agreement is the best defense in a reclassification audit.