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  • Jacquie Kiefer

contractor to Employee conversion in private practices (and free worksheet!)

Updated: Jun 19, 2023

As a practice owner, there is a constant barrage of information saying you should do one thing or another when it comes to your staff. Salary or hourly, percentage or flat fee, full time, part time, employees or contractors, the list goes on. The answers to these questions are not one size fits all, as practices are incredibly different. It depends largely on the practice specifics as to what the solutions should be. We dive into all of these discussions here at GreenOak Accounting, but specifically today I wanted to address the decision of employees versus contractors and what are some of the things you need to be aware of when choosing between the two.



If you currently have a staff of all contractors, you have lower costs than if you had all W2 employees. However, contractors operate much more independently, and you as the practice owner have a lot less control over how and when they perform their jobs during the week. Most states have independent contractor tests that specify the things they look for to test and see if a worker is really an independent contractor or should be considered an employee. You should check with your specific state (or work with an attorney or HR Professional) to see if how you’re treating your contractor is appropriate for the state.


A few main differences between having contractors and not W2 employees are payroll taxes and workers compensation insurance. Once you decide to make the leap into having W2 employees, you must register for state and local payroll tax accounts. At minimum there are state income tax withholding and unemployment insurance accounts to sign up for. Some states even have local taxing requirements depending on which county or city the employee works. This is especially important if you have remote employees, and you hire in a different state than where your practice is located. You will be required to register for additional payroll accounts based on where the employee is physically located while working.

Additionally, your state may require you to carry workers compensation insurance. Each state has a different requirement threshold for workers compensation and how many employees you can have before it’s required, if at all. Make sure you understand the requirements for your particular state and get workers compensation insurance in place if required, or penalties may apply.


More and more states are requiring companies to provide retirement and paid time off (PTO) options for their employees as well. Many states responded to Covid by creating mandatory PTO policies that have remained in effect, and over the last several years, states have added a retirement plan to the list of requirements for employers as well. The requirements for retirement and PTO vary, as some states have an employee threshold before the requirements kick in. For example, Illinois requires a retirement plan be in place for employers with 16 or more employees. On November first, that requirement will be 5 or more employees.


At this point you’re probably wondering what the benefits are to even having W2 employees since there are so many additional requirements that apply. Employees often are more invested in your company than contractors are. Also, there are fewer issues that can arise to actually prove a contractor is truly operating as a contractor in your practice. There is a large gray area in determining whether a clinician is operating as a contractor or not and can pose additional issues if you’re ever audited and they don’t pass the independence tests.



For some employers, it does not make sense to have W2 employees, and for others it doesn’t make sense to have contractors. Some states, like New York and California have extremely rigid rules surrounding contractors, so it’s extremely important to check with an employment attorney if you have any doubts, to ensure your staff is operating appropriately.


If you decide to make the jump from contractor to employee, we have developed a worksheet that can help you visualize the differences in pay from one type to the other, and is often used to illustrate the changes in your contractor’s pay. To receive a free copy of the Employee vs Contractor worksheet, join our e-mail list! Not only will you receive the editable worksheet, you will also be notified of additional tools and blog posts that can help you develop your practice!


If you’re at a point where you feel like you need additional guidance and are interested in what advice we can offer your practice with our ongoing services, schedule a free consultation with our team today!


 

This article is designed to provide information only and should not be considered legal or tax advice. Because of the complexity of the law and the variables in your own personal tax situation, you can’t rely on our advice specifically related to your unique circumstances. In order to get the best tax savings and legal advice available to you, you should consult with your own accountant, attorney or advisor regarding your particular facts and circumstances. GreenOak Accounting is an accounting firm that specializes in working with counselors and therapists in private practice. We provide monthly accounting & bookkeeping services, 1-time services and online courses. For more information on our specialized services for therapists please visit www.greenoakaccounting.com





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