Taxes, insurance often overlooked for contractors

In the first part of this series, we identified a number of problem areas that surround the employment relationship when a practice hires (perhaps a better word would be "enlists") a part-time or relief veterinarian.

Primary areas of concern are a number of state and federal taxes andinsurance.

The simplest way to grasp the issues concerning the concept of an independentcontractor (whether he or she be a painter, floor cleaner or veterinarian)is to keep in mind one basic principle: a worker must be protected and itis the clinic's responsibility to make sure that someone is providing therequired protection. The clinic may not be the entity actually having toprovide the protection, but it is always the entity that needs to make certainthe protection is being provided.

Watch areas

Let's review the areas of protection individually. At the end of thefirst installment in this series last month, I alluded to an independentcontractor veterinarian who might be getting a notice from the Social SecurityAdministration that she had failed to remit self-employment tax. How doesthis problem fit into the "protection" concept? It's really verysimple.

Someone has to make sure that this veterinarian (Dr. Z) is protectedfrom becoming an impoverished senior citizen. If she comes to a practicepresenting herself as an independent contractor, she is, in effect, sayingto the clinic: "You pay me the fee that we have agreed to, and I willtake care of everything else." As a service provider, Dr. Z must makecontributions to Social Security for her employees (namely herself).

Her business must pay out of gross revenue all expenses associated withhaving an employee. This includes a contribution of approximately 13 percentof Dr. Z's net earnings as an employee to Social Security.

If Dr. Z is a legitimate independent contractor, she will remit thattax and all is well. She is, in effect, "protected" from havingno money paid into Social Security.

Clinic's job to protect

In a traditional employment relationship, however, it is the clinic'sjob to protect Dr. Z. The clinic is responsible, if it is an employer, forpaying and remitting half the Social Security tax (about 6.5 percent ofgross pay) and withholding and remitting the other 6.5 percent of the employee'spay. But beware: It takes more than a worker's unsubstantiated assurancesthat the tax will be paid to relieve the clinic of its duty to pay, collectand remit the tax.

If later on the tax is not paid, the government will want to know whowas responsible for providing this "protection" to Dr. Z. Andthe party responsible will be liable for both back withholding sums andsubstantial penalties for not having remitted the taxes in the first place.

If the clinic never withheld and paid the tax, it had better have a prettysound reason.

A more serious issue arises concerning the "protection" ofthe relief veterinarian from injuries occurring in the workplace. Occasionally,a veterinarian will roll in off the street and offer to work for a clinica few hours a day at a set rate to be "paid on a 1099" (the IRSform reporting payments made, which are to be taxed to the party receivingthe payment).

Sometimes when such a doctor is hired, the clinic owner or bookkeeperwill decide not to include that "1099" amount as part of the basepay used for determining the clinic's workers' compensation insurance premium.The thinking goes: "Why should we pay comp premiums on Dr. Z; she saysshe's an independent contractor."

The philosophy saves money and seems simple enough until Dr. Z is hospitalizedwith an injury inflicted by a client's animal. As soon as the wheelchairrolls into the emergency room, the question is asked: "Dr. Z, did thishappen at work?" Follow the insurance algorithm below:

The hospital expects someone to pay.

Dr. Z's personal health insurer wants workers' compensation to pay.

The clinic's workers' comp carrier wants Dr. Z's workers' compensationto pay.

Dr. Z has no comp policy, and therefore, Dr. Z wants the clinic compto pay.

The hospital insists that someone pay and since the clinic is more likelyto have money, looks to it to pay after Dr. Z cannot come up with the $50,000to cover the hand and face surgery.

Making a case

So, then, what practical steps can be taken to prevent this type of responsibilitydisaster? In a nutshell, the practice must have convincing evidence thatthe relief or part-time doctor is, in fact, and in law, an "independentcontractor." It is the doctor's responsibility to provide that proof.

By far the most useful step is to require any doctor who does not wishto have withholdings taken from pay to provide proof of having adequateinsurance coverage. If proof is provided and you are not certain of itsadequacy, you should ask your own insurance agent or attorney for an opinion.A copy of the policy notice should be retained in the hospital's files anda note should be made as to its expiration. New proof of coverage shouldbe obtained when the policy expires.

Check licenses

One additional note on the subject of recordkeeping is that I highlyrecommend a clinic have up-to-date records proving that any doctor workingat the practice has a valid current license in the state. As amazing asit may seem, there are relief veterinarians and even job-hunting associatesout there who are not licensed or whose licenses have not been renewed forfailure to pay the filing fee.

Recommendation: get and keep the proof of licensure; you can save a hugeset of potential problems later by doing so.

What else constitutes evidence that a relief or per-diem veterinarianwill indeed be considered legally to be an independent contractor? It isextremely helpful if the veterinarian can be persuaded to sign a brief statementprepared by the clinic stating that the doctor promises to take responsibilityfor withholding and paying federal and state employment taxes attributableto her fees received, including income, Social Security and Medicare taxes.

A word of caution to veterinarians seeking to preserve their independentcontractor status: It is less persuasive in making a case that you are anindependent contractor of any specific clinic if you are claimed as an employeeat others during the same timeframe. Serious questions can arise when asingle practitioner works for some parties as an employee and for othersas an independent contractor. The main issue generally amounts to this:"Doctor, are you in the business of providing relief services or areyou an employee who only has some employers doing withholding?"

It is probably a good idea for a clinic to ask relief veterinarians howthey charge other practices. If the response is that some put the doctoron the payroll and others pay on a 1099, be wary. The best advice: considersuch a veterinarian as an employee, and play it safe.

Moral of the story

Finally, I would be remiss not to mention other categories of employeein this discussion.

Veterinary practices are famous for their failure to attend to detailsof employment law in hiring what might be described as "casual"labor. Such labor might be a neighbor kid who stops by to mow the lawn atthe hospital once in a while and who gets paid by the owner "underthe table." While such a casual employee might be covered for injuryunder the umbrella policy at the veterinarian's home, it is quite possiblethat he will not be covered by the business liability policy at the clinic.Therefore, if he is not covered by workers' compensation, a lawsuit mayensue in the event of an injury.

Moral of the story: if you work at the clinic, you are on the payroll.This isn't the warm and fuzzy 1950s. The kid's dad may look at your practiceto finance college for Johnny if he gets hurt "off the books."

Generally, the same principles discussed in this article apply as wellto painters, roofers, carpenters and others who may come to your practiceto provide "independent contractor" services. Unless it's a companywith an established local reputation that is doing construction work atyour facility, check the contractor's documents. It isn't enough that theYellow Pages ad claims the builder is "fully insured." Check tomake sure.