Navigating 1099 versus W2 classification

Hiring and legal experts offer tips for practices, dental professionals

The legal and tax implications of hiring or being an independent contractor versus being an employee can be confusing for both dental practices and dental professional workers.

Stynt, the ADA Member Advantage endorsed company that helps members hire on-demand short-term and permanent staff, and the ADA Division of Legal Affairs have compiled tips for both dental practice owners and dental professionals to help navigate the pros and cons of both types of staff classifications.

Considerations for dental practice owners

Most staff hired by dental practices are defined as employees as determined by Internal Revenue Service rules. According to the ADA resource, Should I Be a Dental Employee or an Independent Contractor, an employee follows an employer’s directions and supervision as to what and how work is to be performed, including what order or sequence to follow when performing the work; when and where to work; procurement of supplies and equipment; what workers to hire or assist with the work; and more.

If team members are hired as employees, the dental practice owner provides them with salary and benefits and, in turn, can direct all aspects of their work. They would be classified as W2 employees, according to IRS rules.

Independent contractors are self-employed professionals who exercise independent judgment and render services as specified in a contract. The independent contractor is able to control the means and methods by which the work is performed. In return, the party who retains the contractor can direct what work is to be performed but does not control when and how the results are accomplished.

Generally, an independent contractor exercises more personal autonomy and carries greater financial and management responsibility than an employee. In general, the independent contractor will have greater control than an employee in terms of hours, fees, personal work routines, appointment book control and treatment and planning. Independent contractors would be classified as 1099 employees, according to IRS rules.

The criteria for determining the relationship between the worker and the practice falls into three general categories:

Behavioral control. Does the dental practice owner have the right to control what, when and how work should be performed? This includes the instruments, equipment, schedule, what order or sequence to follow and who can hire workers to assist with the job. An employee has less behavioral control than an independent contractor and is subject to the engaging entity’s direction.

Financial control. Does the dental practice owner control fees, payment and collection policies? How is the worker compensated for performance and reimbursed for expenses? To what extent will the worker incur a financial profit or loss from his or her activities? An independent contractor generally exercises greater financial responsibility and faces a greater risk of financial loss than an employee.

Nature of the relationship. Are employee-type benefits, such as insurance, vacation or sick pay provided to the worker? Is the worker responsible for securing all of his/her own patients, or are patients provided by the engaging entity?

Dental practice owners should be careful about properly classifying workers. Improper classification could lead to lawsuits by taxing authorities (like the IRS and/or a state department of revenue), as well as lawsuits by workers who have been improperly classified. Misclassified workers can sue on behalf of themselves, and sometimes class actions of many similarly situated workers are formed. Misclassified workers generally sue to recover multiple/punitive damages, including, but not limited to, monies/taxes they claim they should not have had to pay, or for lost employment benefits or other damages, as well as their attorneys’ fees.

Improper classification laws often carry penalties of multiple (sometimes double or triple) damages for each unpaid dollar or for each dollar a misclassified employee had to pay that they should not have, multiplied by each worker in the class. The look-back period to determine damages can go back for years; not to mention what could amount to enormous legal fees to defend this type of lawsuit, and even more money in attorneys’ fees if the defense of this type of lawsuit is unsuccessful because the dental practice may have to pay the legal fees of the improperly classified individuals (or the class) as well.

A caution to practice owners: the law will decide what status the worker has based upon the realities of the situation. A practice owner can choose to use independent contractors, but the practice owner should also know that if they guess wrong based on the facts and circumstances a court will treat the staffer under whatever status the individual should have been called.

Considerations for workers

As a dental professional, it’s essential to be aware of any potential legal implications that come with a job offer, and if you are classified as an independent contractor, whether that classification is legally correct.

Generally, independent contractors are much less expensive for businesses to hire than employees, and independent contractors may have fewer rights under the law than employees. Independent contractors pay their own self-employment tax, whereas employees’ income, Social Security and Medicare taxes are all withheld by the employer. Additionally, when a business classifies a worker as an independent contractor, that business does not have to pay benefits such as: paid time off, overtime, 401k matches or unemployment insurance.

Independent contractors are not entitled to Family and Medical Leave rights, fair employment rights and many other rights and benefits that employees would otherwise have.

Disadvantages of being classified as an independent contractor, or 1099 workers include:

No employee benefits. Businesses do not have to provide independent contractors with employee benefits that W2 employees receive. This may include health insurance coverage, retirement plan benefits such as matching to a 401k, IRA or other plans, sick leave, holidays, and vacation pay/paid time off.

Higher tax obligations. As an independent contractor, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes that total 15.3% of your federal income.  

Fewer legal protections/rights. Independent contractors do not benefit from the same legal protections as employees, including:

• Workers’ compensation benefits.
• Unemployment insurance benefits.
• Fair employment laws like anti-discrimination laws/anti-sexual harassment laws.
• The right to be free from retaliation for engaging in protected activity such as FMLA or paid family medical leave or rights under OSHA.
• The right to be paid overtime.
• Whistleblower protections under employment laws.
• Certain rights to be free from wrongful termination.

Employees that believe they have been improperly classified as an independent contractors might file a complaint with the State Attorney General’s Office or the state Department of Revenue, file a Form SS-8 with the IRS or hire an attorney to seek monetary damages arising out of any potential misclassification.

Conclusion

Dental practice owners must decide what kind of professional relationship they want with their dental team and what level of behavioral and financial control is best for their practice. Workers need to be aware of the increased tax burden, as well as the loss of potential valuable benefits, that could result from being classified as an independent contractor versus an employee.

Ultimately, understanding the nuances between 1099 and W2 work classifications can be complicated for both workers and practice owners alike. Thus, it is important to carefully consider state and federal laws surrounding these issues and get legal advice to ensure that workers are properly classified.

ADA Member Advantage endorses Stynt for short and long-term dental team staffing. Every Stynt professional is a W2 employee, so practice owners don’t need to worry about misclassification. Stynt handles the payroll, taxes, and insurance liabilities and provides their employees benefits like paid time off, workers’ compensation and healthcare coverage. In addition, Stynt checks required licenses, identifications, eligibility to work in the U.S., reference checks and compliance certifications for OSHA & HIPAA, so practice owners can focus on their patients. Learn more about Stynt at stynt.com/ada.

Editor’s note: This is not legal advice and should not be construed as such. If you have questions about classification issues, or any other issues addressed herein, you should consult with an attorney.