This is a topic that gets beat to death. I figured I’d beat it again for the heck of it. Seriously though, for some reason I’m seeing this topic more frequently lately and instead of re-publishing one of our older employee vs independent (EE vs IC) blogs I figured I’d write another one that might be more current.
As new doctors enter the dental world they are hearing about this independent contractor situation for the first time and trying to figure out. Maybe I can shine a light on it for their benefit.
When the issue pops up on the Dentaltown forums board I see some of the same comments as we always see. Comments like; “ICs are illegal”, “an associate can’t be an IC”, “employers are just trying to save payroll taxes and benefits”, and so on. Because the topic gets beat to death I tend not to even comment any more, however, maybe a blog every now and then is just what the topic needs.
Let me address the comment “ICs are illegal” first. That’s completely false! If ICs were illegal, there wouldn’t be tax code sections dealing with it or various forms the IRS wants companies to use to report payments to them, etc. Being and IC is completely legal (Yes, the IRS even has a Form (SS-8) that can be completed by the business or the worker providing services for the business to determine the worker’s status). However, there are situations where employers do try to identify an employee as an IC and that’s where some of these negative comments come from. While it isn’t illegal to attempt to misclassify an employee, if it is done without a reasonable basis, it is wrong. Employers can be held liable (without the opportunity for relief) for payroll taxes, penalties and interest if they get caught. In my opinion that is NOT the same as “illegal”. No one is going to be charged with a crime, there are no court hearings, there’s no jail time, it’s just a mistake that can cost you some money. Using terms like “illegal” is simply an exaggeration in my opinion.
Next, let’s address the notion that “an associate can’t be an IC”. Newsflash, this is also an incorrect statement. I will agree that many times associates are misclassified as ICs when they should be employees. We certainly advise our clients (employers) how they should address the issue depending on the facts and circumstances which will drive the determination of IC vs EE. There are times an IC is the correct classification, and we will advise the client accordingly as their facts and circumstances exist that will allow them to defend a challenge from the feds or a state regarding misclassifications. No doubt some employers are misinformed or ill-advised and will take advantage to save some money. From my perspective these days those employers are few and far between. At least in our client base.
Speaking of saving money, lets address the comment “employers are only trying to save payroll taxes and benefits” when the classify someone as an IC. Well, there’s definitely some truth to that. I’m certain there are employers out there who haven’t been caught with misclassification issues and continue to roll the dice. Some do it for the savings, others do it out of habit, some do it because its simply easier to pay someone as an IC vs EE. Does that make it right? Of course not.
Lastly, let me address some of the benefits of being paid as an IC from an income tax perspective. This seems to go hand-in-hand with the IC discussion and some of the new doctors wonder why an IC MIGHT be better than paid as an EE.
First and foremost, any employee who incurs and pays their own professional expenses like; malpractice insurance, CE, dues, licenses, business travel, business meals, business use of the automobile, business tools, supplies and equipment, business use of a mobile phone and so on, cannot take a tax deduction for those expenses. In some cases this can add up to a LOT of money. Whereas someone paid as an IC can take a dollar-for-dollar tax deduction for every one of these items against their IC income. that can be a HUGE income tax AND payroll tax (also known as self-employment tax or SE tax, for the IC) savings for the IC.
Employees will have half of their payroll tax (or SE tax for an IC) paid by the employer. Some supporters of EEs over ICs tout this as the main reason why an associate should select EE over IC classification. It is certainly a benefit, however, what the employee (or IC) needs to know is that the SE tax is only applied to an ICs NET income, NOT gross IC income. Therefore, if someone is going to “run the numbers” on EE vs IC they need to account for this.
Proponents of employees over IC will also tout employer benefits that an IC can’t benefit from. That’s true, however, many times the employer will pay two to three percentage points more if paying an associate as an IC vs EE to help compensate for those lost benefits AND the extra SE tax. Also, ICs CAN deduct their own health insurance for them and\or their family so that may also negate an employer benefit like health insurance.
ICs will have the option of implementing their own retirement plan as well and enable them to shelter much more of their taxable income compared to an employers 401k\PS plan. Generally an IC will have to make a lot of money as an IC to warrant this, however, it can be a HUGE benefit.
IF the IC is truly an aggressive taxpayer, they may be able to justify placing family members on their payroll as well as taking advantage of many other “fringe” benefits that business owners benefit from.
Then there’s the ability as an IC to create an Scorp and possibly reduce their SE tax even further through Scorp profits\distributions.
All that said, the IC still has to jump through the proper hoops to be classified as an IC, it can be done though and many associates do it and do it properly. My advice if presented with the option of being paid as an EE or an IC is to consult with a knowledgeable CPA to help guide you through the various hurdles you might face when making the decision. I suspect most will want to get paid as an EE as they likely won’t qualify as an IC, however, do NOT assume that’s always the case.