Issue 11 -August 2004

Ask the attorney
IRS decides contractor status
By: Todd Crabtree, DC, JD, MBA

I want to add a massage therapist to my practice. Should I hire this person as an employee or set him up as an independent contractor?

Hiring a massage therapist as an independent contractor instead of an employee has the obvious advantage of avoiding all the expenses and administrative responsibilities that come with an employment relationship.

As an employer, you are required to withhold income taxes, withhold and pay Social Security and Medicare taxes, pay unemployment tax and pay for workers compensation.

But you should hire him as an employee unless you can fully satisfy the stringent IRS rules for independent contractors.

The critical issue in determining whether your massage therapist will be treated as an employee by the IRS is the amount of control you exert. As a general rule, you have the right to control or direct only the result of the work done by an independent contractor — not the means and methods of accomplishing the result.

Let me explain further. The control you may exert over the “means and methods” of the massage therapist falls into three categories:

• Behavioral,

• Financial and

• Relational.

If you control the scheduling of the massages and/or how the massages are done through instructions, training or other means, then you are exerting behavioral control over the massage therapist.

You may be exerting financial control over the massage therapist if:

• You pay the person’s business expenses;

• The therapist has not invested any money in the equipment or facilities;

• He is not allowed to provide services to non-patients;

• The method of reimbursement and payment are controlled by you; or

• You exert control over the extent to which he incurs profit or loss.

You may be exerting relationship control over the massage therapist if:

• You have a written contract describing a relationship that is not completely independent;

• The massage therapist is not allowed to provide services to patients from other clinics;

• You provide employee-type benefits such as insurance, a pension plan, vacation pay or sick pay;

• The massage therapist is not allowed to substitute another to render the services;

• The termination of the relationship can be accomplished by means similar to firing an at-will employee; or

• The massage therapy is a key aspect of the regular business of the clinic.

If any of the above situations exist, then the IRS may determine your massage therapist to be an employee.

I am aware of very few chiropractic clinics that can satisfy the IRS’s stringent requirements of an inde-pendent contractor. I am, however, aware of clinics that have experienced nightmarish problems by incorrectly designating a massage therapist as an independent contractor.

For example:

• If the massage therapist fails to pay taxes and the IRS determines that he or she was an employee of the clinic, then the IRS will come after you for the unpaid taxes, penalties and interest. Or,

• If the massage therapist is injured while working, the state workers’ compensation agency may pursue the clinic for reimbursement of treatment expenses, wage loss and disability payments.

Fortunately the IRS can help you determine contractor status. On the Web, go to www.irs.gov/taxtopics/tc762.html. Request form SS-8.

Complete the form and send it to the IRS. u

Todd Crabtree, DC, JD, MBA, is the founder of Crabtree Law Firm PA, specializing in personal injury, and Clinic Doctor Inc., an outsource business service provider offering chiropractors customized marketing, practice management consulting, billing and claims denial management. He can be reached at 800-899-5859 or by e-mail at Todd@CrabtreeLawyers.com.

LEGAL DISCLAIMER: This column is provided for educational purposes only. The accuracy or timeliness of the information presented herein is not warranted. The information presented is not intended to be advice as to a specific fact pattern with which you may be presented. Accordingly, please note that the information contained herein is not being presented as legal advice with respect to any matter and that no attorney-client relationship is established.