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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.
The status of an individual working for someone can be that of an independent contractor or an employee. Sometimes, businesses hire other businesses to perform services and at times, the term “outsourcing” is used. This term describes the transfer of responsibility to others for the performance of the service in question. It limits the responsibility to the business needing the service and shifts its responsibility to others and away from the enterprise in question needing the service to be completed.
The status of an individual working for someone can be that of an independent contractor or an employee. Sometimes, businesses hire other businesses to perform services and at times, the term “outsourcing” is used. This term describes the transfer of responsibility to others for the performance of the service in question. It limits the responsibility to the business needing the service and shifts its responsibility to others and away from the enterprise in question needing the service to be completed. Rather than having someone under the direct control of the enterprise where the service is needed, the source of the provider of the service becomes responsible. Business owners try to save money by paying for a service without the need to employ someone within their own organization. Savings take place by not paying any fringe benefits, employment taxes or insurance, such as worker’s compensation for those providing the service. An outside company is paid to perform certain services that an employee could normally complete. When the service is performed under the direction of another business, these employee charges do not take place because an employee is not used to provide the service. Sometimes a business owner requires an employee of his or her business to complete a task and uses a non employee status for that person when payment is due. This causes the person to be treated as an independent contractor on the books of the business owner because a payment is made to the person but no taxes are withheld from the person’s compensation. No employee benefits are paid. The owner tells the worker to pay his or her own taxes.
It Sounds Easy and Saves Money
Paying someone and not deducting taxes or paying the appropriate payroll taxes and benefits due an employee may sound easy but it is probably not correct. This can cause a major problem for the employer and can cost thousands of dollars in penalties and interest charges when the correction is made by a taxing authority such as the Internal Revenue Service. There are rules and specific guidelines that are published by the Internal Revenue Service so that an employer knows who is and who is not to be considered an independent contractor. The status of a worker classified as an employee is also known to employers who follow the rules published by the Internal Revenue Service. If rules exist and guidelines are published, why is there a controversy?
The controversy and its reasons
Employers hedge and sometimes use the independent contractor status rather than employee status for a worker, primarily is for one reason . Money is the issue. If there is vagueness as to which status should apply, the employer will sometimes use any reasonable idea available to push for independent contract status position. The amount of money at stake is a combination of employer taxes such as social security, medi care and many state unemployment taxes and fringe benefit charges. These can be equal to an addition of 25% or more of someone’s pay. This gives an employer a strong incentive to “hope” that the worker is an independent contractor and not an employee. The most critical issue in determining the status of a worker is the direct control that the business has over the worker. Does the worker have to report for the job at a specific place and time? Can the worker complete the job at any number of locations? Is the worker under the direct supervision of the business? Are there tools or equipment that are only available at the place of business that must be used? Can the patient go somewhere other than the office of the business in order to be treated?
Can a Dentist Hire an Independent Contractor as an Associate?
Before answering this question, consider the penalties and interest charged in the event of an incorrect answer. In reading the preceding paragraph and the concentration of “control,” that is used as the highest level of consideration in determining whether a person is an independent contractor or an employee, think of the dental chair. Where is your associate performing his or her duties? Is the patient scheduled to arrive at the office at a certain time and to be in the chair and no where else while the service is being performed? Is your associate allowed to perform the assigned duties and to treat the patient anywhere other than your office? Who is paid by the patient for the services that are performed by the associate? There are those who argue that during litigation with the Internal Revenue Service, proof can be offered as to why the associate is really an independent contractor and not an employee. If you have been involved with litigation, you know that when you win, you lose. The legal fees and time involved in defending a case cause you to lose the case even when you win because it is so expensive to prevail.
ERISA and Independent Contractor Status
The issue with employer sponsored qualified retirement plans have caused dentists to use the independent contractor status as well as the classification for an associate and to specifically deny employee status. This is a terrible mistake. Not only will you have a problem with employer payroll taxes, but your entire retirement plan can be disqualified because of this misclassification, especially if it is done with purpose. This is another area where it is so important to retain expert advice because of the consequences in making an incorrect decision in this determination.
Where do you go for Advice?
The Internal Revenue Service publishes a list of the points that must be considered when the determination is made as to employee versus independent contractor. If there is a question, contact a CPA with payroll tax audit experience. Someone who knows qualified retirement plan guidelines as well will assist you in staying out of trouble. To use your own judgment as a dentist when making the decision as to the classification of a worker, may save thousands of dollars today and cost tens of thousands of dollars tomorrow in payroll taxes, interest, penalties and potential ERISA violation charges.