Are You Misclassifying Your Team Members?

Let’s play a game. The following five scenarios describe commonly seen employment relationships in a practice. Can you guess which team members are “employees” and which ones are “contractors”?

  • You have a receptionist who only comes in on Fridays for about five hours to answer the phones and book patient appointments.
  • Your assistant is going on maternity leave, and you need to find someone to replace her for the eight weeks she will be out. You hire a temporary assistant who is taking over the full schedule for the assistant on leave, but knows she’s only needed for eight weeks.
  • You’ve hired a new treatment coordinator, and tell her that she’s on a 90-day probationary period, at which time you’ll revisit her compensation, pending review of her work.
  • You’re in the process of hiring a new hygienist, and have asked one of the candidates to come in for a compensated “working interview.”
  • You hire an associate to take patients two days per week. They’re currently working at another location, but when they’re working in your office they’re representing themselves as a team member of your practice, complete with practice uniform and using practice-provided tools.

If you answered “employee” to each of these scenarios, you are correct!

Employees vs. Contractors

The litmus test for determining whether a team member is a contractor or employee looks at the type of relationship between the employer and team member, terms of payment, and who controls the behavior of the team member. The amount of time the team member spends working each week or the duration of the time they spend working for you doesn’t really matter – if they’re coming to your office when you tell them to, to provide services related to the work of your practice, using your tools, wearing the required uniform, drawing a paycheck on the same pay cycle as you’ve set for your employees, and performing the work of the practice as a representative of the practice where you control how the work is completed, then that team member is likely an employee. If they’re working on projects for you that aren’t related to the work the practice produces (ex: a web designer creating your site, an IT person setting up your network, a carpenter hanging a door, an anesthesiologist who comes in a few times a month to assist a pediatric dentist with certain procedures, etc.), they have their own business card and email address, provide this type of work or service to other businesses, aren’t wearing your uniform, send you an invoice to bill you for services rendered, you pay them for the results of the work and don’t control the details of how it’s accomplished, and you have an actual written contract with terms of service – that’s a contractor.

Not every employment situation is black and white. However, there isn’t a penalty for classifying a team member as an employee when they could potentially be a contractor. On the flip side, there’s definite potential for liability to your practice if you classify someone who should be an employee as a contractor.

“But what about my contract employee…?”                                                            

Q: What do unicorns and “contract employees” have in common?

A: They don’t exist!

The term “contract employee” is an oxymoron. This designation is frequently used to describe someone who provides a service to a practice – serving in an employee capacity – for a short period of time or on a limited schedule. However, as previously mentioned, the relationship between the employer and the person providing the service to the employer is the controlling factor, not the amount of service they provide. You could have a new assistant for two hours and fire them… they’re still an employee, you still need to have their employment paperwork (W-4 and I-9) filed and pay payroll taxes for them. Unless you want to jeopardize the “at-will” employment status by creating an actual written contract for an employee (unwise, talk to your employment attorney first), this is not a classification you want to use. A service provider to your practice is either a “W-2 Employee” or a “1099 Contractor.” You can’t have it both ways.

What’s the Big Deal?

For starters, did you know that contractors can file unemployment claims? You may not be deemed liable for the chargeback after the hearing, but if a team member you’ve misclassified as a contractor separates from your practice and files for unemployment insurance benefits through the Texas Workforce Commission (TWC), your pay practices may be red-flagged and open to scrutiny via audit if that former team member is found to have been misclassified. You may also be selected for a random TWC or IRS audit, which would uncover these issues and open your practice up to further investigation in addition to fees, fines, and back wages and taxes owed.

What should you do?

If you think you may have misclassified team members as contractors when they should have been categorized as employees, talk with your employment attorney or CPA immediately. If you’re currently employing misclassified team members, the likely course will be to switch their employment status immediately and – depending on how long they have been misclassified – discuss a plan for rectifying your payroll issues.

“But I don’t want these employees to get benefits…” That’s fine! Include limitations in your total compensation policy that state employees who work under a certain number of hours per week are ineligible for benefits. You can also include a statement that requires 90-days of consecutive employment with the practice before employees who qualify with hours worked per week are eligible for other benefits, such as holiday pay or bonuses. This won’t remove your potential liability as an employer in the event of an Unemployment Insurance Claim with TWC, but it’s perfectly reasonable to deny short-term or extremely part-time employees the benefits your full-time, long-term employees enjoy.

Misclassification can be a serious problem that comes with hefty fines, back wages owed, back taxes owed, and audit potential. Talk with an advisor who is well-versed in federal and state payday rules to ensure your payroll system is compliant and you’re accurately classifying your team members.

What We Know About the Tax Cuts & Jobs Act

  • by karakelley
  • Nov 03, 2017
  • 0
  • Category:

Congress recently released the details of the proposed tax plan. While there will likely be some changes made before it is enacted, here is what we know so far…

For starters, on the personal tax side the proposed plan condenses the current tax bracket structure down to four brackets:

12% – $12,000-$45,000 for individuals and $90,000 for married couples

25% – $45,001-$200,000 for individuals and $260,000 for married couples

35% – $200,001-$500,000 for individuals and $1million for married couples

39.6% – $1million or higher for individuals and $1,000,001 or higher for married couples

Though there has been some speculation, the standard deduction will remain. Actually, it would increase to $24,400 for married couples, $12,200 for individuals, and $18,300 for taxpayers claiming Head of Household. However, the additional standard deduction and personal exemptions would be eliminated.

Another elimination that surprised many people is the state and local income tax deductions.

The Alternative Minimum Tax (AMT) will also be eliminated.

The child tax credit is currently at $1,000; under the new tax plan it would increase to $1,600 per child under age 17 and include an additional $300 per parent. This is part of a consolidated family tax credit. The adoption tax credit will no long be available, nor would the Work Opportunity Credit, employer-provided child care credit, or the Lifetime Learning Credit. The Earned Income Tax Credit would still exist under the new rules.

As for the mortgage interest deduction, the proposed plan would grandfather in current mortgages, but mortgages for new homes would be capped at $500,000 for deduction purposes. The property tax deduction, originally up for elimination, will remain; however, it would be capped at $10,000.

You can still get a break on capital gains for the sale of a home, depending on how long you intend on staying. The current rule states that you must have owned and resided in your home for at least two of the last five years to qualify for the exclusion of up to $250,000 in capital gains (doubled for married couples). The new rule would increase the requirement to at least five of the last eight years. Additionally, you would be limited in your use of the exclusion to one sale every five years, which is an increase from the current one-every-two rule.

Regarding retirement savings, as it stands now there will not be any changes to 401k or IRA contribution tax breaks.

The federal estate tax exemption amount will double to $11million per person, and would phase out completely in six years.

If you are uninsured, you’ll still have to pay the Obamacare individual mandate, and the deduction for medical expenses has been eliminated in this version of the plan.

Other deductions that are proposed to be eliminated are the deductions for student loan interest, moving expenses, alimony, unreimbursed employee expenses, and tax prep expenses. The charitable donation deduction remains in place, though it’s proposed to be reworked to index the mileage rate for inflation – which is great, because it’s been at 14 cents per mile for almost twenty years.

Larger corporations would win big under the new plan, given that the proposed bill would lower the corporate tax rate to 20%, down from 35%, though the cut is not permanent. There is a 10-year limit proposed by Congress, to keep costs down. With this, C-Corps would lose the ability to deduct interest expense.

But what about your practice? Well, if the proposed tax plan is enacted as is, sole proprietorships, S Corps, and partnerships would be taxed at a rate of 25%. Certain businesses that provide “professional services” won’t qualify for this reduced rate. Other business owners can choose to categorize 30% of their income as business income (taxed at the aforementioned rate) and 70% as wages, taxed at the individual rate for whichever tax bracket the income qualifies for (a 70/30 rule, for owners who actively participate in their business). Alternatively, they can get an exception to this rule and fix the ratio of wage income to business income based on capital investment, if they can show they’ve made a substantial capital investment. While these changes offer some support for practice owners, they appear to leave many small businesses behind. Most do not earn enough to be taxed higher than 25%.

The proposal also allows all businesses to expense the cost of depreciable assets, rather than writing them off over several years. This feature would expire in five years, and does not apply to structures.

There is still a lot of debating, voting, budget analysis, reconciliation, and tight deadlines to meet before this bill passes. If the bill is enacted, it would be the largest tax reform since 1986. This is definitely something worth paying attention to.

Have You Made a Donation to Disaster Relief Efforts?

In the wake of several natural disasters and national tragedies, there is a huge increase in individuals, groups, and organizations collecting money for the victims of these calamities. While donations are usually made from a philanthropic desire to do some good in this world, sometimes they’re simply made by the desire to reduce one’s tax liability. Either way it’s smart to know the details of where your money is going and how much it’s really going to cost you.

It’s generally a good idea to research the organization you intend to direct your donations to. In past years it’s been easier to spot which groups are considered qualified charitable organizations, but in the era of crowdfunding and misinformation it can be more difficult to determine whether your donation will qualify for a tax deduction.

For example, GoFundMe is a popular platform for raising donations to aid in relief efforts. Scroll through social media after any disaster and you’ll see link after link of individuals who have created a campaign to assist an individual or group that has been affected by tragedy. Some of their pages will incentivize donations by claiming that money contributed toward the campaign is tax deductible. Generally, this is incorrect. According to the GoFundMe website, unless the campaign specifically states that they are a GoFundMe Certified Charity, any donations made will be considered personal gifts and aren’t tax deductible. “Certified” Charities only receive their status if they are a valid, registered 501(c)(3) charitable organization.

Which kinds of organizations qualify?

To be considered a tax-exempt 501(c)(3) charitable organization the organization must be organized and operated exclusively for exempt purposes and none of its earnings should benefit any private shareholder or individual, according to the IRS. Religious and educational organizations, those dedicated to the prevention of cruelty to children and animals, and other forms of non-profit, charitable organizations typically fall under this exemption. If you want to be certain your donation will qualify as a charitable deduction, visit and use the Exempt Organizations Select Check Tool. Enter the name of the organization you intend to send a donation and make sure it has been given 501(c)(3) exemption status.

What if I didn’t send money?

Not all contributions are monetary. When natural disasters occur, generosity often manifests in the form of used clothing, food donations, electronics, vehicles, furniture, etc. The IRS has very specific valuation rules for donations of property for tax filers who itemize their deductions to deduct charitable contributions, but they basically boil down to you being able to deduct the “fair market value” of items that are in good used condition or better for clothing and household items (the most commonly donated items), with special rules for donating vehicles or property of a certain high value.

These donations, of course, must go to a qualified charitable organization, and you need to have documentation for all items donated. The slip of paper from Goodwill is not sufficient documentation. It’s smart to take a picture of any clothing or household item you’re donating to prove the condition of the item, and keep a record of comparable sales prices for items of the same condition that would lend toward supporting fair market value. Review IRS Publication 561 for more details on deducting charitable contributions of property.

Did you donate time?

If you were one of the amazing volunteers who donated their time and personal efforts to aid in disaster relief, there’s good news for you! While you can’t claim a charitable contribution based on market value for your time, you are permitted to deduct any away-from-home travel, fuel, lodging, meals, entertaining expenses, etc. that you paid for to support your volunteer work for a 501(c)(3) charitable organization. One exception to these deductions is for depreciation of a capital asset, such as a vehicle or computer, even when used for charitable purposes. Only actual unreimbursed expenses that can be directly attributed to the services performed for the charitable organization are may be acceptably deducted. For contributions exceeding $250, you will need to substantiate your deduction with a written acknowledgement from the qualifying charitable organization. Maintain detailed records of expenses and submit a statement of expense to the organization to which you volunteered your time.

No matter your reason for making a charitable contribution, it’s usually worth making sure you’re receiving the applicable tax benefits of your donation. Documentation is key, and it’s always smart to check with your CPA about any donations you’ve made that you think will provide you a tax deduction.