In this week’s blog/video I wanted to discuss the difference between an employee and an independent contractor.
So this video pertains primarily to US therapists as this covers the legal regulations regarding proper worker classification in the US. If you’re outside the US, be sure to check with your own local governing bodies to ensure you’re abiding by any worker classifications they have set. This is actually an excerpt from one of our classes for members, and while I’ve touched on this topic in a few different formats over time, I thought I’d do a video solely focused on this again to make it very very clear because I continue to get questions about it. If you’ve seen this argument all over the place, because it does crop up all the time, and you really understand the difference, fantastic. But it seems like there are still a ton of therapists out there who don’t understand the difference and some who just don’t care. But this isn’t some suggestion or just a good way to do things. This is federal law. This is the IRS and the Department of Labor requiring something out of a business. And how many of you want to go against the IRS and DOL? Probably nobody. Whether you work for or with someone else, own your own practice and work completely independently, or have people working for you, you need to pay attention to this.
Really, this is just a huge subject in our profession because so many massage therapists are misclassified, and there’s actually a little-followed tax law that means you very well may have independent contractors even if you don’t have someone working “for” you like you might think.
So what’s the difference between an employee and an independent contractor? It all comes down to the relationship between the business owner and the worker. It’s the day-to-day behaviors and expectations of both parties that determines what someone needs to be classified as. Misclassification is a major issue in our industry and others. And I don’t care how good of a contract you think you have, it does not matter. You cannot classify someone as an independent contractor and treat them as an employee. Period. That’s federal law from the IRS and the Department of Labor. No contract, no matter how great a lawyer thinks he or she is, is ever going to negate federal law. Huge companies have gotten in massive trouble for this, including Amazon and Uber. And they thought they had good lawyers and contracts…still didn’t negate federal law.
So let’s break down the difference here. An employee works for someone else while an independent contractor works for themselves. A lot of therapists are labeled as independent contractors, but the relationship between them and the business owner actually indicates they are an employee and need to be classified and paid as such with taxes taken out and all that good stuff. An employee is basically told what, how, and when to work. The business can set the hours that employee has to work, tell them what days and times they need to be there or how many hours they have to work every week, etc. The business provides equipment and supplies for employees. The business sets the fee the employee can charge. The employee provides services to the business that are critical for its main purpose. The employee is hired on a permanent basis, meaning there is no definitive end to the work agreement decided upon. And, here’s a big one, if you’re going to bill insurance for any services someone offers through your business, they need to be classified as an employee. This is something that a lot of medical facilities are guilty of…misclassifying their massage therapists because they’re billing insurance for the massage services, but calling their massage therapists independent contractors. That doesn’t work! That can actually be classified as insurance fraud on top of the tax implications of misclassifying workers. Now, while this isn’t a complete list of what makes someone an employee, this is the big stuff you see in our industry. So if you have someone working for you and you want to control what they do, how they do it, when they do it, and what they charge for it, they need to be classified as an employee…period!
An independent contractor on the other hand is self-employed, they are simply providing a service for a company or through a company, and cannot be controlled by the company in any way. An independent contractor sets their own hours, comes and goes as they please, provides their own equipment and supplies, and charges what they want. Independent contractors also provide services that are not integral to the primary operations of the business; meaning it’s not the main service offered, nor is it the main revenue stream of the business. Independent contractors are also typically hired on a temporary basis, meaning short term or project-based jobs. So, the only time a massage therapist is really an independent contractor is probably when they’re renting a room or filling in on a very short-term basis; like a sick leave or maternity leave.
That’s pretty much it. I’ve put a link in the description if you’re still unsure about the specifics of your situation so you can check out the details the IRS lists out on this classification issue. Now on this note of Independent Contractors – this is something that a lot of business owners screw up without really knowing they are, and this applies to anyone who uses any company for any kind of service for your business – regardless of whether it’s a massage therapist working for you or not. I did an entire video about this quite some time back, but it needs to be stated again…
So let me clarify here…even if you work completely independently, you may very well have independent contractors you need to give a 1099 to come tax time, without even realizing it. Let’s say you hire someone to build your website for you. That person maybe has a business license, maybe not. Doesn’t matter. If they are not officially classified as a “corporation” then they are technically an independent contractor doing a job for you – no different than if you hired a massage therapist to see some clients for your business.
So what does that mean for you? It means you need to give that web designer, and anybody else you use for services for your business, you need to give them each a 1099 come tax time IF and only IF you paid them more than $600 in that year. For example…I got brought in pretty regularly at a few different spas and massage clinics, to teach CE classes for all their therapists. If that business pays me $600 or more in a year to do that, then they have to send me a 1099 when tax time rolls around. Same thing goes for the local print shop I use to print my class and marketing materials. They’re not a corporation, so I have to give them a 1099 for all that money I paid them for printing. I know this seems strange, but it is required by the IRS that you do this as a business owner. And you really don’t want to screw with the IRS, right? Just saying. Essentially, this is the way that the IRS kind of makes us business owners hold each other accountable with reporting income. I’m not a fan of this whole setup at all, but hey…I don’t make the rules. If you decide to forego this and not give out those 1099s like you’re supposed to…well there’s a fine for that of course. And it can range from $30 to $250 PER FORM depending on whether you can claim ignorance or if you just ignored the need to do so. And you can’t truthfully claim innocence now that you’ve watched this video. Sorry about that. And I don’t know about you guys, but I use a lot of different contractors through a year, so that could add up very very quickly. Now there are a few exceptions here, but one of the best ones, is if you pay that contractor with a credit card. When you do that, their payment processing company automatically reports that as part of their income, so you don’t have to worry about the 1099. So the easy way to get around this so you don’t have to worry about all those contractors you may have through the year that you’re paying $600 or more to, is to pay them all with a card. I also strongly advise using a good accountant or at least some really good financial software, like Quickbooks or something, that can easily work all this stuff up for you, so at the end of the year if you need all these 1099s, you can just click a few buttons and have all those official forms that you need printed out and mail them without too much hassle.
I hope this clarifies things for you on the subject, but please feel free to reach out if you have any questions at all. If I don’t know the answer, we’ll find someone who does.
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