The Ins and Outs of 1099 vs. W2: What You Need to Know
What Exactly are 1099 Contractors and W2 Employees?
A 1099 contractor is an independent entity that is hired to complete a specific service for an organization. The contractor agrees to supply their own goods, materials, and equipment to complete the job. The contractor also signs an agreed-upon contract for that set period of time.
A W2 employee works, typically, for one organization, and is subject to the rules and policies of that company. Employees receive a regular hourly wage or a salary. All supplies and employee needs are supplied by the employer.
What is the Difference?
How much control and how much time do you want to put into your practice? Having independent contractors can bring you a lot more freedom. You are asking someone to come in, to provide a service, to provide their own materials to do that, to keep up with their own finances, and all you have to do is give them the clients and they can take it from there.
Whereas with employees, you're a lot more involved in the process and the supervision. Perhaps, some note tracking and some liability involved. But you can do a lot more teaching and have a lot more say in what services are offered.
A Good Way to Think About This is as a Situation When You Hire a Painter to Come Work for You. So, maybe you need to get a new paint job on your house and you have a specific paint color in mind. You go hire a company down the street and say, "Please come paint my house."
Well, they are going to show up when they're going to show up. Whatever works for them. They are going to wear whatever clothes they want to wear and provide their own equipment. They're also going to paint your house in the way they see fit. From top to bottom or side to side, whatever that might be. I'm not a painter.
The Point is: a Contractor Comes and Does a Job for You and then Leaves.
They typically work in multiple places and they determine how they are going to do the work. So, a great way to think of a painter or maybe when you hire someone to mow your yard. They come when they're going to come, they provide their mower, and they do it the way they see fit.
But if it's someone who is an employee, for example, if you had a painter who was your employee, you could have a lot more say in how they paint your house, when they come, when you want it done by. Those are the differences you need to consider when you're a practice owner when deciding if you want to hire 1099s or W2 clinicians.
Which One is Appropriate for My Practice?
No matter which one you select, you can switch to the other one when you hire next. However, there are differences in the way you handle taxes, licensing and liability, and your involvement. These are all important factors to consider when deciding which one is right for your practice.
Licensing and Liability
These are especially important to think about when it comes to independent contractors. It's important just like you when you started your business and you got your LLC, or maybe it's a different listing in your state, you got your own liability license for your company. A contractor needs to do the same. They are their own business.
When you pay them as the business owner, you are going to pay their business, not them personally. The money needs to go through their business and so does their liability insurance. They should need to have a bank account associated with their business. Because a contractor is a separate business. Also, the business license and the liability protect them if they were to get sued.
For an Employee, it is Different in the Sense that They are Under Your Company and Under Your LLC, or Scorp.
The liability comes through you and your company and not through their own business. Employees also tend to work for just you and buy into the mission of your business.
However, a contractor can agree with the work you are doing but may work at different locations. Like a painter, they are going to paint multiple houses, they don't just paint one. A contractor may work for you one day and then work for a practice down the street. We don't see that very often with clinicians but it is of the nature of a contractor relationship.
Taxes
We talk about the financial part of all this. Taxes are a big one. With a contractor, they pay their own taxes and you don't have to pay any of that for them. They also provide their own supplies.
This can be their own computer, their own printer, their paper, all the things they need to do their job, their own marketing materials, their own psychology today profile, and technically, their own websites, and their own phones. All of those things they should be bringing to the table because these are the things they are needing to do their job.
For an employee, you do cover about half the taxes or potentially more depending on your state and your laws. But you will want to make money for that. You also provide the supplies for the employee. You're providing the office space, the computer, the phone, the EHR, or you're providing them a stipend for that. So you're providing all the services the employee needs to do their job.
Involvement and Collaboration
The other thing to consider is the level of involvement with a contractor versus with an employee. Contractors can set their own hours whereas an employee is told when they work. A contractor can wear whatever they want whereas an employee has to follow the dress code of the organization. So, you can see how an employee you are more invested in them. You're more involved in their training, and watching what they are doing. Whereas with a contractor, they have a lot more independence.
The Model of Your Practice and Work Requirements
It's important to think through what kind of model you want to have at your practice. We do find that practices that have 1099s do have a little bit of a higher turnover. Some of that has to do with them having their own LLC and they can go ahead and go out on their own easier than an employee.
Also, With Employees, You Can Provide Benefits.
Now you don't have to provide health insurance but that is definitely a plus. You can provide smaller benefits if you don't have the finances or are not ready for that yet, such as PTO, continuing education, sick time, etc. So some clinicians are more likely to stay because you provide the benefits for them.
Also, the employee does get paid for the administrative time that they work for you. Anything you ask the employee to do, you have to pay them for such as a staff meeting. However, a contractor is not required to do any of those things but has the option to do those things. You do not have to pay them for their time at a staff meeting as it is not a requirement for them, they are choosing to be there.
Retention Between Employees and Contractors
It is much easier to retain an employee than a contractor. We do also see that not only is retention better at a W2 practice, but also better profit margins. We also see a closer company culture. However, not everyone wants a closer company culture. Maybe you have a lot of things going on.
So, you just want to hire these people to do a job and then you have other things you are working on. The business owner with contractors doesn't have to be so involved with what is happening at the practice. This is because the contractors are just doing their own thing.
Researching the Laws in Your State
Another really important thing to think through and talk through with an attorney on is the laws in your state about associate level versus licensed clinician. So in some states, an associate or an intern is someone who has their master's degree but has not got their license yet. They cannot have an LLC, they have to work under someone else.
You would want to check into your state laws if you do decide to hire independent contractors. This is to make sure your state allows you to hire unlicensed people to have an LLC. Now, if you're an insurance-based practice, you are going to want to hire a licensed clinician so you can get them paneled.
Not all insurances will accept unlicensed clinicians, in fact, a lot of them don't. So, that might also dictate the model you are wanting to go with. For example, if you're wanting to hire unlicensed people, if you're a cash-pay practice, it's a little easier. With the W2, if your state says "Oh no, you can't have unlicensed people."
Finances and Tax Benefits
As far as your finances, we'll work the money out. Right? Contractors do tend to make 50-70% of the amount that the client pays to be seen. A W2 employee gets about 40-45% of the revenue because the 55-60% is going to their expenses, their taxes, and their rent. Some of that is also going to you, the practice owner, because as your practice grows, you will see fewer and fewer clients. And you need money to sustain that because you are going to need to spend more time on the practices and less time seeing clients.
That is a little of the financial part. But depending on which one you choose, you can work through how to make the money work on either one. But definitely think through what kind of model you want to create and what's going to be best for you. That will really dictate the next course of action for your practice. Contractors do get contracts, whereas W2 employees get job offer letters and job descriptions. So, check out the handout and any resources that we have to help you while you consider 1099 and W2 employees.
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To learn more about the differences with 1099s and W2s and hear live consulting on selecting the best fit for your practice, check out Episode 12 of the Wise Practice Podcast: Should I Move from 1099s to W2s?
