Hiring is one of the most exciting (and nerve-wracking) parts of growing a private practice. It’s your chance to bring in amazing new team members, grow your impact, and expand your business. But deciding whether to hire therapists as employees or contractors? That can get a little tricky.
Over the years, rules around hiring have shifted, and in 2024, it’s harder than ever to justify hiring therapists as independent contractors. But why? And what does that mean for your practice? Let’s break it all down.
Why Do Practice Owners Like Hiring Contractors?
If you’ve ever thought about hiring therapists as contractors, you’re not alone. For a lot of practice owners, it just feels easier—especially when you’re just starting out or trying to scale your team.
Here’s why contractors are so appealing:
No Payroll Hassles: With contractors, you skip payroll taxes, direct deposit systems, and compliance with payroll laws.
Lower Costs: Contractors don’t get benefits like health insurance, paid time off, or retirement contributions. You pay them for the work they do—no extras.
Minimal Obligations: You don’t owe them vacation time, guarantees, or ongoing perks. If they work, you pay them. If they don’t, you don’t.
Less Admin Work: There’s no need to manage benefits, unemployment insurance, or other employee-related paperwork.
At first glance, hiring contractors might seem like the obvious choice. But as labor laws evolve and penalties for misclassification grow, it’s worth asking: is it really worth the risk?
Independent Contractor vs. Employee: What’s the Difference?
Before you make a decision, it’s important to understand what separates contractors from employees—and why the distinction matters so much.
Classifying workers correctly isn’t about what’s easier for you. It’s about meeting the rules set by three key agencies:
The Department of Labor (DOL): Enforces laws around minimum wage, overtime pay, and worker protections.
The IRS: Determines who pays Social Security and Medicare taxes—the employer or the contractor.
Quick Breakdown: For employees, 7.65% of their wages are withheld for Social Security and Medicare, and you (the employer) match that amount with your own 7.65%. For contractors, they’re responsible for both the employee and employer portions, paying this self-employment tax directly on their personal tax return.
Your State Agency: States often have additional rules about unemployment premiums or benefits like sick leave, and they’re typically the ones to flag misclassification.
DOL vs. IRS: What’s the Difference?
Let’s clarify something: the DOL and IRS aren’t the same thing. They enforce completely different rules!
The DOL: Focuses on how workers are treated. Are they being paid at least minimum wage? Are they eligible for overtime? Earlier this year, the DOL updated its rules about employee vs. contractor classification, but the changes don’t affect most therapy practices directly since most therapists already earn above minimum wage and don’t qualify for overtime by working more than 40 hours per week.
The IRS: Looks at taxes. They care about who’s paying into Social Security and Medicare—whether it’s you, the contractor, or both. They use the Common Law Test to figure out who qualifies as an employee vs. a contractor based on how much control you have over the worker’s behavior, finances, and relationship.
Here’s the key difference: the DOL cares about worker protections, while the IRS cares about tax obligations.
Two Tests You Need to Know
To determine whether a worker is a contractor or an employee, agencies typically use one of two main tests:
1. The Common Law Test
The IRS and many states use the Common Law Test, which focuses on the level of control you have over the worker. Key factors include:
Behavioral Control: Do you dictate how, when, or where the work is done?
Financial Control: Do you provide tools, supplies, or reimbursement for expenses?
Type of Relationship: Does the worker have a long-term commitment or receive benefits like paid leave or health insurance?
If you exercise significant control over the work or provide resources to complete it, the worker is likely an employee.
2. The ABC Test
Some states use the stricter ABC Test, which requires all three conditions to be met for someone to qualify as an independent contractor:
A: The worker is free from the control and direction of the employer.
B: The work performed is outside the usual course of the employer’s business.
C: The worker is engaged in an independently established trade or business.
For therapists, the B factor often makes it nearly impossible to hire contractors in states that follow the ABC Test. Since your primary business is therapy, hiring someone to provide therapy typically fails this requirement.
Why Is It So Hard to Hire Therapists as Contractors?
Even though the DOL's updates don’t directly impact most practices, two big factors make hiring contractors more difficult than ever:
Stricter State Laws: Some states use the ABC Test, which makes it almost impossible to hire therapists as contractors.
Therapist Preferences: Therapists are increasingly looking for the stability and perks of being an employee—like paid time off, health insurance, and consistent hours.
Here’s something else to consider: If you want control over how work is done in your practice, you really need employees. Contractors have more autonomy, and as a result, they’re less “sticky” than employees. Since contractors are already self-employed, it’s easy for them to leave your practice and hang their own shingle. Employees, on the other hand, are more likely to feel loyal and connected to your business.
What Happens If You Misclassify a Worker?
The most common misclassification issues happen at the state level. Here’s how it often plays out:
A worker files for unemployment.
The state conducts an audit and determines the worker was misclassified as a contractor.
You’re on the hook for unemployment premiums, penalties, and interest. You may also owe back pay for benefits like sick leave or paid time off.
Misclassification can also trigger federal issues, like back pay for wages and overtime or tax liabilities with the IRS. The financial and legal risks just aren’t worth it.
Contractor vs. Employee: Breaking It Down
Let’s take a closer look at the differences between contractors and employees.
Independent Contractors
Autonomy: Contractors control how, when, and where they work.
No Benefits: You’re not responsible for health insurance, PTO, or retirement contributions.
Paperwork: You collect a W-9 before making payments and issue a 1099 at year-end.
Examples: Roles like accounting or social media management are great fits for contractors—especially if they run their own businesses and work with multiple clients.
Employees
Control: Employees work on your schedule and follow your procedures.
Additional Costs: You’re responsible for payroll taxes, unemployment insurance, and potentially benefits like health insurance or PTO.
Long-Term Investment: Employees are more connected to your practice and its success.
Example: Think about it. If you hire an accountant to do your business tax return, you provide them with the information they request and review the return when it’s ready. But you’re not telling them how to do their job. They’ve established their own systems, are using their own tax software, and rely on their professional experience to advise you and prepare the return. If they charge you a flat fee but end up spending twice the time they expected on your return, that’s their problem—not yours. That’s a true contractor relationship.
Now compare that to a therapist in your practice who is using your software, your office, and your systems while consulting with you about how to approach clients. In that scenario, it’s hard to argue they’re an independent contractor—they look much more like an employee.
Why Employees Are Often the Better Choice
While hiring contractors might seem simpler, employees offer long-term benefits that can make your practice more successful:
Consistency: Employees are more likely to be loyal to your practice and align with its mission.
Team Culture: Employees feel more connected, which can lead to better client care.
Compliance: You don’t have to worry about audits, misclassification penalties, or legal issues.
Plus, having employees gives you more control over schedules, procedures, and the overall direction of your practice.
Wrap Up
Hiring is one of the biggest decisions you’ll make as a practice owner. And while it might feel easier to hire contractors, the risks are higher than ever.
At GreenOak Accounting, we specialize in helping therapy practices navigate the financial and legal complexities of growing their teams. Whether you’re hiring employees or contractors, we’re here to help you make the right decision for your practice.
Ready to optimize your hiring strategy? Schedule a consultation with us today. Helping practices scale is our specialty, and we’d love to guide you through your next steps.
Want to learn more about therapist compensation? Check out this blog post about Hiring Therapists 101.
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 specializes in working with counselors and therapists in private practice. For more information on our services, visit our website.
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