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I’ve talked before on this blog about the issue of independent contractor vs. employee, and the problem of calling a worker an “independent contractor.”  I recently found a U.S. Tax Court case the points up an additional concern that might come your way, if you are an independent contractor.  What happens if you are hired as an independent contractor and no one pays the Social Security/Medicare taxes?

Being Hired as an Independent Contractor.  In this case, a worker was hired by a company to do some work over several years.  The company, calling him an “independent contractor,” did not take payroll taxes (Social Security and Medicare) from his checks, nor did they set aside money for the employer portion of these taxes.  Each year, the company gave him a 1099-MISC (reporting income for contractors) instead of a W-2 (reporting income for employees).  He didn’t report this income (somehow figuring the IRS wouldn’t find him), nor did he pay self-employment taxes (the full amount of Social Security and Medicare owed on his income for those years.)

The Tax Court Ruling.  The IRS said he should have been considered an employee, and the Tax Court ruled that he was an employee (you can read more about this case and the Court’s opinion to find out why).  Then the question came up, as it always does:  Who is going to pay the income taxes and self-employment tax?  The worker must pay the income taxes, of course, but he was also required to pay the self-employment taxes for those years.  The employer was not required to pay these taxes.

What Does This Case Mean for You?   You go to work in a chiropractic practice and when you receive your first check, you see there is no withholding for income taxes and no deduction for Social Security and Medicare.  No matter what your contract says, you are being paid as an independent contractor.

Congratulations!  You are now self-employed, in the eyes the IRS, at least.  You should:

1.  Start setting aside money to pay your income taxes, since nothing is being withheld.

2.  Also set aside money to pay the payroll taxes (figure 15.3 percent on your net income from your self-employment as an independent contractor).

3. Start adding up your business expenses so you can lower your income and pay less income tax and payroll tax.  More on this in the next post….

Related posts:

What is an “Associate?” Employee or Independent Contractor?

Associate/Independent Contractor Issues - A Wrap-Up

I sat down a week or so ago with a new DC who was looking at an associate contract.  My question to him: “If you had to live on just the base, could you do it?”  Here is what we did:

Monthly Base                          $2500

Income Tax                              $  375

FICA                                           $192

Student Loan payments          $800

Available                                    $1133

So, can you live on $1133 a month?  What if you had a family?  And your spouse couldn’t work?  This doesn’t seem possible, does it?

But, you say, “I’m going to make lots on incentives/bonuses each month.”  But what if:

(a) The doctor made you work for him while he went on vacation and you couldn’t get your own patients in?

(b) The doctor did everything in her power to keep you from getting the incentive, even if you are seeing new patients and bringing in money (this happens more often than you can imagine)

(c) You have to take time off for a family emergency or you are just not able to bring in new patients one month.

Scary thought, isn’t it?  This young doctor was in the Seattle area, where the cost of living is even higher.  Unless his wife works, it doesn’t seem like this is a good deal for him.  What do you think?

As usual, there’s no “rule” about this.  I’ve seen it both ways.  At one extreme, I have seen contracts in which the hiring doctor required the employee (associate) to have X amount of coverage, with Y malpractice carrier before starting work.  That’s pretty restrictive.  It’s also a reduction in the base pay (assuming there is a base pay), so the take-home pay is less. 

On the other end of the scale, I have seen hiring doctors pay the malpractice insurance for the employee.  That’s great, but what happens when you leave?  If it were my (personal opinion here), I’d choose to pay my own malpractice, and with the company I choose, so I can take it with me when I leave.  The insurance is very cheap for the first couple of years anyway. 

What do you think?  Would you rather pay your own and take it with you or have your employer pay? 

One final comment:  Remember that EVERYTHING IS NEGOTIABLE.  If your hiring doctor demands that you get insurance with his/her malpractice carrier, politely say you’d rather get it from your own company and then be prepared to give up something else, if necessary, to get this concession. 

The contract says, “Associate Agreement.”  What does this mean?

I’ve probably talked about this before, but I saw a discussion on a chiropractic discussion board recently about this subject, so I thought I  would talk about it again.

First, understand that “associate” is not a legal employment term.  That is, the IRS and the states do not recognize this term.  They want to know if the person is an (a) employee or (b) independent contractor.  You can call it what you want, but these are the only two terms that have any meaning.

Second, the IRS assumes that someone is an employee unless there is compelling evidence that they are not (i.e., that the relationship is independent contractor).  This means the worker must (1) have income tax withheld from his/her pay and (2) the worker and employer must share in their contributions to FICA/Medicare. 

The IRS has criteria for determing if a worker is an employee or independent contractor, based on three factors: financial control, behavioral control, and nature of the relationship.  Read IRS Tax Topic 762 for more information. 

Now, I’m not telling you not to sign a contract.  I don’t give legal or accounting advice.  I’m just telling you that you need to be aware of what the doctor thinks it is and what that means to you.  If the doctor is considering you an independent contractor, you will have to pay your own FICA/Medicare (”self-employment taxes”) and you won’t have any withholding to use to pay your federal, state, local income tax. 

If you have questions about this, or you have a contract you want me to take a look at, I would be happy to do that.  Remember, no legal or financial advice. 

When I read an associate or independent contractor contract, I pay close attention to words.  I ask myself, “Is the meaning of this term clear?”  For example, I recently saw a contract that used the term “net collections.”  Do you know what “net collections” means?  Net of what?  Net means something is taken out, but what?

Today I saw an associate contract that used the term “earnings.”  I don’t know what “earnings” means, either.  Is it the amount of earnings (profit) of the practice as a whole?  Or is it (more likely) the collections attributable to a specific associate?  It’s much better to clarify assumptions now than to find out later that something didn’t mean what you thought (assumed) it meant. 

Don’t assume you know what a term means.  ASK.  Remember what “ASSUME” stands for - “ASSUME makes an “A**” out of “U” and “ME.” (sorry for ther terminology, but you get my point)

You know I’ve seen a lot of contracts.  But this wins a prize - for unfairness:

1. It’s a 12 month contract.  If the associate (employee) leave, he/she must pay $2500 a month for every month that’s left on the 12 months.  Bad?  Keep reading….

2.  If the employer fires the employee, the employee STILL must pay the $2500 a month for the rest of the contract.  YIKES!  But that’s not all….

3.  The employer can change the amount paid to the employee at any time.  REALLY bad?  Not enough….

4.  The employer also has a non-solicit and a non-compete, so you can’t work anywhere else in the state after you leave.

So, think about this:

Your employer tells you that you’re getting a pay cut.  But you can’t quit because you’ll have to pay off your “breach of contract (see 1 above).  And you can’t work anywhere else because you’ll get sued breaching the non-compete.  See what I mean? 

So…why would you sign such a contract?  

The answer to that question is:  You can’t!  I know you are very eager/anxious to get going.  You have lots of student loan debt to repay, and you’ve found a great location, and you are chomping at the bit.  But you can’t commit to anything until you have your license IN YOUR HANDS! 

I talked to a couple the other day who wanted to commit to a lease.  They are graduating in October.  Give a month or so to process their license (assuming they have already passed all their boards) and they will be lucky if they can get their licenses by December 1.  I suggested they put a contingency in their lease that said they didn’t have to make a final commitment until they have their licenses.  This probably means the property owner won’t start build-out until then. 

It is far better to be patient for a few months while waiting for your license than to take a chance and have to start paying rent and paying back bank loans without a license to practice and no way to generate income to pay these bills. 

Be patient.  I promise it will all happen in due time.

I was talking with a grad today who was considering an associate contract. He said, “If the doctor won’t bend on this issue (it happened to be on a non-compete), that’s a deal breaker for me.”
I’m always pleased when I hear grads talk about “deal breakers” because it shows that they have thought through the process (whether it’s an associate contract or a practice purchase or something else) and that they know what is acceptable and what isn’t…for them.

Too many young DC’s are afraid to set limits and they are too timid to say, “This is unacceptable to me.” You get what you put up with, so if you don’t set limits on your agreements, you will get walked on, taken advantage of, treated badly.

Decide what your “deal breakers” are and stick to them. Let me know what you think a “deal breaker” is for you.

If you are in the process of looking for an associate position or considering an associate or independent contractor contract, you probably have lots of questions.  Here are some recent blogs and links that might be helpful:

Finding an associate position (from StudentDC.com)

The best way to be paid as an associate

Length of an associate contract

Average associate pay

Leaving an associate position

Signing a non-compete (from StudentDC.com)

If you have questions, feel free to email me (jean@dcpracticesuccess.com) .  Or you can post a question in reply to this blog post and everyone can see my reply.

Let’s say you’re looking at an associate (employment) contract, and it states that your commission percentage is based on collections “attributable” to you. What does that mean?
To me, it means that every patient you see, the ones you chart and adjust and shake hands with at the end of the visit, belong to you. If not, what are you getting paid for?

Here’s an example: You bring in three new patients one day. The fees for those patients are $150 each, so you get $450 for the new patients. The other doctor had to leave early to pick up a sick child, and you were asked to see one of his new patients. If you don’t get the fee for seeing his new patient, you just lost your percentage of $150, and in addition, you lost the time because you couldn’t see one of your own patients during that time.

Now, what about the other doctor seeing your patients? Who gets credit for them? If you get credit, then you and the other doctor are granting “professional courtesy” to each other. If he gets credit for seeing your patient, then the same should work for you.

I hope this makes sense. Either you get credit for every patient you see or you and the other doctor agree that you are granting each other a certain number of instances of professional courtesy. It has to be the same for both of you.

If the contract doesn’t make sense, don’t sign it until the doctor clarifies IN WRITING. Remember, what the doctor says has no legal weight. Only what is in writing matters.

Disclaimer: I’m not an attorney or a CPA. I’m providing general information, not legal or financial advice. Consult with your attorney or CPA on all contracts.