When managing a Direct Primary Care (DPC) clinic, you’re constantly balancing priorities. One vital area that often doesn’t get enough attention is worker classification. Misclassifying workers as either 1099 independent contractors or W-2 employees can lead to serious consequences, including IRS penalties, back taxes, and operational disruptions.

Whether you’re hiring a receptionist, a nurse, or even another physician, understanding the difference between worker classifications is vital for staying compliant, treating your workers fairly, and protecting your clinic from costly mistakes.

But don’t worry, we’re here to break it down for you.

Why Worker Classification Matters More Than Ever

The rules surrounding worker classification are evolving, and the scrutiny is increasing. Here are some key trends you need to know:

• IRS Oversight: The IRS has ramped up audits to identify businesses that misclassify workers. Mistakes can lead to fines, back taxes, and penalties adding up to tens of thousands of dollars.
• Growth of the Gig Economy: Many businesses, including DPC clinics, are utilizing 1099 contractors for flexibility, but with that comes a need for crystal-clear classification to ensure compliance.
• State and Federal Complexity: Remote work and varying labor laws add another layer of complexity, as differing state regulations may apply to your workers.
• Worker Awareness: Employees and contractors are becoming more informed about their rights, increasing the likelihood of disputes if misclassification occurs.

The stakes are high, but with the right knowledge, you can avoid these pitfalls.

Understanding the Basics of 1099 vs W-2

The distinction between independent contractors (1099) and employees (W-2) hinges on the degree of control your clinic has over their work. Here are the key factors:

1099 Independent Contractors

• Flexibility: Contractors typically set their own schedules and may work for multiple clients at once.
• Self-Employment Taxes: Contractors manage their own taxes, paying both the employer and employee portions of Social Security and Medicare.
• Limited Benefits: Contractors don’t receive employee benefits like health insurance, PTO, or retirement contributions.
• Control: You can specify the results you want, but have little say in how or when the work is performed.

W-2 Employees

• Controlled Work Environment: For employees, you define schedules, tasks, and processes.
• Tax Withholding: You’re responsible for withholding and paying employment taxes.
• Benefits: Employees may receive health insurance, paid leave, retirement options, and other perks.
• Stability: Employees are typically dedicated to your practice, and fewer legal risks are involved.

For example, if your medical assistant works exclusively for your clinic and you dictate their shifts and duties, they should likely be classified as a W-2 employee. However, if you hire a consultant to revamp your billing system, they could qualify as a 1099 contractor.

The IRS provides a three-part test (behavioral control, financial control, and relationship type) to help you determine classification. Visit the IRS guide for more details.

Common Challenges and Risks in DPC Clinics

Physician Compensation

Should you hire your doctors as W-2 employees or 1099 contractors? While every situation is unique, here are key considerations:

• Hiring physicians as contractors often provides them with greater tax advantages. They can deduct business expenses and control their overall income.
• Physicians as employees, however, provide your practice with tighter control, greater consistency, and often simpler compliance.

Audits and Misclassifications

If the IRS determines a worker was misclassified, your clinic could face fines for unpaid employment taxes. For instance, just one misclassified worker over five years could result in tens of thousands in liabilities.

Additionally, worker disputes can lead to legal challenges. If an independent contractor believes they should have been classified as an employee, they may demand back pay for overtime, benefits, or expenses.

Varying State and Federal Regulations

State laws surrounding classifications can differ significantly from federal standards. For example, California’s ABC Test under AB5 makes it significantly harder for businesses to classify workers as independent contractors. Be aware of your state’s labor laws to avoid compliance issues.

Steps to Proper Classification

Here’s how you can confidently classify workers and avoid potential pitfalls:

1. Evaluate the Role

Consider the nature of the job. Is this person integral to your clinic’s workflow? Do you control how and when they work? If so, they might be a W-2 employee.

2. Understand the IRS Rulebook

Familiarize yourself with the IRS three-factor test:

• Behavioral control
• Financial control
• Relationship type

Use this as your guiding framework.

3. Minimize Risk with 1099 Contractors

If you hire contractors, reduce risk by:

• Limiting benefits (no PTO, health insurance, etc.).
• Avoiding control of working hours.
• Paying their LLC or business entity rather than them as individuals.

4. Use Reliable Payroll Systems

Adopting payroll systems like Gusto or QuickBooks can simplify classifications, track hours, and ensure compliance. Additionally, these systems generate W-2 and 1099 forms, making tax season easier for everyone involved.

5. Consult with Experts

Still unsure? Bring in an accountant, CPA, or labor law expert to guide your decisions. A quick consultation could save you thousands in penalties.

When in Doubt, Err on the Side of Caution

Many industry experts argue that if you’re unsure about how to classify a worker, it’s often safer to classify them as a W-2 employee. This route minimizes risk with regulatory agencies and offers more stability for your practice.

One DPC practice shared their story of an audit that revealed their salaried assistants should have been hourly employees due to their job roles and pay structure. The audit resulted in back pay for workers and significant fines. Lesson learned? When in doubt, take the precaution.

Empower Your DPC Clinic with the Right Choice

Worker classification is complex but essential for protecting your clinic and ensuring fair treatment for your team. By thoroughly understanding the requirements, consulting with professionals, and using modern tools, you can confidently make the right decisions for your DPC practice.

Do you have more questions about payroll, worker classification, or hiring processes for your clinic? Send us an email or visit IRS.gov for more guidance.