What you need to know about your relationship with freelance and contracted workers in your practice.
By Mark E. Battersby
As employers begin to cautiously hire again, at least according to the U.S. Department of Labor, a new contingent of the workforce is beginning to emerge. The contract — or freelance — employee is becoming more the rule, rather than the exception. In fact, for many chiropractic practices, contract or freelance workers are more often becoming a permanent solution.
Hiring statistics back up the observed trend. Over the last two years, the employment clearinghouse Monster.com realized a 46 percent increase in contract job openings. Overall job listings rose 32 percent.
From your perspective as the owner of a practice, it is often cheaper to bring in contract workers. You do not have to pay contract workers or freelancers healthcare and other employee benefits. Resizing your workforce is also much easier when your practice has a number of workers on hand who are contractors.
The contract employee
Contract work has moved beyond the arena of low-skilled labor jobs and the construction sector where contract work has long been popular. Now businesses use contract workers in highly skilled positions, such as scientists, engineers, professionals, and managers.
To respond to business demand, many staffing agencies have become increasingly specialized. According to the National Association of Temporary and Staffing Services (NATSS), office and clerical skills still account for only 43 percent of temporary help jobs.
The industrial segment, which includes manufacturing, warehousing, and maintenance, accounts for 30 percent of the business. Professional, technical, and medical segments have been undergoing rapid growth as the demand for more highly skilled jobs continues to rise.
Just one firm, Staff Care, a subsidiary of AMN Healthcare, reportedly matches more than 7,500 temporary physicians each year with hospitals, medical groups, health centers, and clinics across the country.
Companies like Staff Care offer a complete range of temporary physician staffing services: identifying appropriate candidates, arranging for travel and accommodation, and providing assistance with licensure and hospital credentialing. They can also provide malpractice insurance to the independent contractor physicians they match with temporary opportunities.
Today, using a contract worker allows the employer to determine if he or she likes the employee. It also allows the employee to see if they like the practice — and the job.
A chiropractic practice, especially a small one, gains several advantages when hiring contract workers. Employers hiring independent contractors are not, for example, responsible for paying taxes for freelance employees. Moreover, they avoid the high costs of providing health insurance, paid vacation and sick leave, and other benefits granted to regular full-time employees.
Generally, a practice hiring contract employees benefits in three ways — flexibility, cost saving, and up-to-date professional or business knowledge. Employers can also benefit by hiring an individual from a pool of resources based on the specific skills required, the length of time needed to complete the job, the budget earmarked for hiring, and flexibility in the given labor market.
It is up to the recruitment agency (the organizations that many professional practices and businesses rely on) to understand and handle matters related to hiring, setting wages, and other issues. This saves the employer money, effort, and time that would otherwise be spent on human resources and payroll.
What about tax liability?
Not surprisingly, the employer’s tax liability is determined by the employment status of a worker. When a worker is an employee, employers are required to pay state and federal unemployment tax, social security tax, and workers’ compensation/disability premiums to a state insurance fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments.
Should you incorrectly define a worker as an independent contractor, you could find yourself liable for past taxes, including FICA and federal unemployment tax. Fortunately, “safe harbors” in our tax law exist to help combat these penalties, including a “common-law” test that looks at the nature of the working relationship. A “reasonable basis” test is based on how the courts have classified similar workers in your industry in the past.
Handling contract workers
Employers who hire contract workers usually do so to avoid the added cost and responsibility of collecting payroll taxes. The practice also saves money by not having to pay for benefits like medical insurance.
For all intents and purposes, the Internal Revenue Service (IRS) treats a contract worker, often referred to as a 1099 worker or independent contractor, as being self-employed. Instead of receiving a W-2 for tax filing purposes, contract employees receive Form 1099. This is the form submitted along with Form 1040 for filing an individual’s taxes. Unlike employees who have payroll taxes deducted from their paychecks, contract employees are responsible for paying their own taxes.
Generally, an employer sets a contract worker apart from its regular employees. The IRS defines an employee as any person under the direct supervision and control of a business. If a contract employee falls outside of this definition, he or she is treated as an independent worker, separate from such company benefits as medical, disability, and workers’ compensation. In addition, a contract worker does not qualify for unemployment compensation.
PEOs and other staffing options
Today, many professional practices and businesses need help managing increasingly complex employee-related matters such as health benefits, workers’ compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. They often contract with a professional employer organization (PEO) to assume those responsibilities and provide human resources management. This allows the business owner to concentrate on the operational and revenue-producing side of his or her operations.
PEOs do not supply labor to worksites. PEOs supply services and benefits to a small business or practice and its existing workforce. PEOs enter into a long-term co-employment arrangement typically involving all of the client’s existing employees, and they sponsor benefit plans for the workers.
In most cases, the PEO provides access to health insurance, retirement savings plans, and other critical employee benefits for the employees of a small business client. If a PEO relationship is terminated, the workers’ co-employment arrangement with the PEO ceases, but they will continue as employees of the client.
In comparison, a leasing or staffing service supplies new workers, usually on a temporary or project-specific basis. These leased employees return to the staffing service for reassignment after completion of their work with the client/practice.
The IRS has accepted the right of a PEO to withhold and remit federal income and unemployment taxes for worksite employees. In fact, the IRS has promulgated specific guidance confirming the authority of PEOs to provide retirement benefits to workers.
Thus, PEOs assume responsibility and liability for payment of wages and compliance with the rules and regulations governing the reporting and payment of federal and state taxes on wages paid to its employees. PEOs have long established their role in reporting income and handling withholding, FICA, and FUTA.
Who is liable?
Due in large part to a successful, costly litigation involving Microsoft in the 1990s, many businesses with contingent employees placed through staffing or payroll companies began adopting specific — and frequently unnecessary — policies to avoid liability for benefits. Although the IRS ordered Microsoft to reclassify its independent contractors (who performed essentially the same work as its direct employees) as employees, the erroneous belief that employees are automatically entitled to company benefits, or to being hired by the customer after working a certain length of time, began to surface.
The principal law regulating employee benefits is the federal Employee Retirement Income Security Act (ERISA). This law sets rules governing the structure and administration of employer retirement and other benefit plans. It does not, however, require employers to offer benefits, nor does it dictate the level of benefits that are offered.
To hire, employ, or contract
With changing times have come changes in employing full-time workers, with many practices and businesses preferring to hire temporary, skilled labor to save on tax benefits. Today, whether your next hire is an employee or contractor may well depend on where your practice is located, what its needs are, and the projected economic outlook of the industry.
As is the case with any business or professional strategy, there is more than one side to the story. Whether to hire a worker, contract with an independent contractor, join forces with a PEO, or engage a staffing service, is a decision best left to you and your advisers.
Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author located in suburban Philadelphia. He can be reached at 610-789-2480.
DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.