If the IRS or another government agency disagrees with your classification of a veterinary employee, you could be on the hook for major costs.
'This the season ... the season for taxes! And one of the first seasonal reporting requirements to tackle is 2012 payments made for labor. Forms W-2 and 1099-MISC summarize the amounts you've paid to individuals and businesses that have provided services to your veterinary practice. Here we'll focus on labor provided by workers who are not employees, many of whom require 1099-MISC reporting.
Start by evaluating your payment records for 2012. Read through the detail of the payment register, using QuickBooks or similar software. If you sort the software register by payee and print a report, it's easier to see all payees who may require reporting and the grand total payments you made to each of them in 2012.
Check the payee's name against your 2012 financial records—invoices from the worker or business and IRS Form W-9: Request for Taxpayer Identification Number and Certification. Ideally, payee names as recorded on checks exactly match the legal name of the company or person who will be reporting the income. The same holds true for Form W-9.
While reviewing this information, think about the relationship your practice has with each worker. Does she operate her own company? How much did he work for your practice in 2012? Is the self-employed worker starting to look more like an actual employee because of all the hours worked and services provided?
If you answered "yes" to this last question, it may be time to structure a different working relationship, moving the person from contractor status to a formal hire as an employee. Otherwise, ask each contracted service provider to complete a new Form W-9 for you to keep on file for 2013 and also to complete any missing records for 2012.
Ask for completion of the new W-9 regardless of the contractor's form of business (corporation, sole proprietor, limited liability company or partnership). Anyone conducting a legitimate business will willingly comply. Most service providers operating as corporations do not require 1099 reporting, but it's safer for you to have current W-9 documentation in your records, especially for smaller businesses.
Generally, you determine whether someone is an employee vs. an independent contractor when you first choose to engage that individual or business to provide services for your practice. Figuring out the difference is not always simple, but it is critically important. The IRS has published guidelines to help you assess the unique facts and circumstances of each relationship. Review these by going to the IRS website and reading the document titled "Independent Contractor (Self-Employed) or Employee?" (see www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-(Self-Employed)-or-Employee%3F).
First evaluate a worker using the IRS common law rules that discuss how much control your veterinary practice has over the worker. Next check your state government's equivalent guidelines, found through your state department of labor or its equivalent. Often state rules are more restrictive and will tip the balance in favor of employee status. If you're in doubt at all, talk over the facts with your practice CPA and labor law attorney.
Why is this so important? Because despite the proliferation of freelancers in recent years, worker relationships to businesses have come under increased scrutiny lately. New regulations and reporting venues allow workers to claim they were really employees, even if a contracting veterinary practice never agreed to function as an employer.
Plus, once one agency auditor declares a worker to be an employee rather than a contractor, that reclassification will cause all other regulatory bodies with an interest in payroll tax collection to investigate. For better and worse, computers and data exchanges have created a high level of transparency and coordinated effort to snag irregularities that might have been overlooked in the past.
This puts a veterinary practice at high risk. If a worker is reclassified as an employee, your practice may be found to have underpaid workers' compensation, retirement funding, health insurance and payroll taxes. Penalty and interest expense, as well as potential legal and accounting costs, can add up to an unmanageable financial burden in your hands.
There are many regulatory agencies, including the Internal Revenue Service, Federal Department of Labor and many state departments, that have different tests for determining proper classification. The bottom line is that you should be careful to look over guidelines thoroughly and use legal counsel when uncertain.
Dr. Marsha Heinke offers tax, accounting and consulting services for veterinary practices. Projects include practice management consultation, practice valuations, succession planning, HR consultation and more. Visit vpmp.net or call (440) 926-3800 for more information.