- Health Care Entities Should Understand New IRS Independent Contractor Test
- October 16, 2006 | Author: Lisa B. Petkun
- Law Firm: Pepper Hamilton LLP - Philadelphia Office
Determining whether an individual engaged to provide health care services to a physician practice or facility is an independent contractor or an employee often stymies the most sophisticated financial or operational health care executive. The determination is important for tax purposes, particularly payroll and other taxes, and withholdings for the workers involved. Knowing the IRS’ view on whether an individual is an independent contractor or employee is equally important to meet certain governmental payors’ billing requirements and to meet appropriate safe harbors and exceptions for anti-kickback and Stark analysis.
Historically, the IRS used the “Twenty Factor” test to determine whether a worker is an independent contractor or an employee. In January 2006, in response to comments by Congress and representatives of labor and business, the IRS attempted to simplify and refine the test. It consolidated the 20 factors into 11 tests, and organized them into three main groups: behavioral control, financial control and the type of relationship between the two parties.
Behavioral control covers facts that show whether the business has a right to direct and control how the work is done through instruction and/or training. Generally, an employee is subject to the business’ instruction regarding when, where and how to work, and is usually trained by the business to perform the task in a particular manner. An independent contractor would not be subject to such control.
Financial control focuses on whether the business has a right to control the business aspects of the worker’s job. Factors examined include 1) the extent to which the worker has unreimbursed business expenses; 2) the extent of the worker’s investment; 3) the extent to which the worker makes his or her services available to the relevant market; 4) how the business pays the worker; and 5) the extent to which the worker can realize a profit or loss. For example, independent contractors are more likely to have unreimbursed expenses, be available to work for others in the relevant market, and make a profit or loss.
The last group focuses on the type of relationship that exists between the worker and the business. Are there written contracts describing the relationship the parties intended to create? Does the business provide the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay? Is there an expectation that the relationship will continue indefinitely rather than for a specific project or period? The group also examines the extent to which services performed by the worker are a key aspect of the regular business of the company. An employee is more likely to have a permanent relationship with a company than an independent contactor, and an employee is more likely to provide services that are a key aspect of the business.
Examination of these factors in the working relationship determines whether a worker is an employee of the business or an independent contractor. The IRS published the new groupings in the 2006 Edition of IRS Publication 15-A. A business or a worker who wants the IRS to determine a worker’s status can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Even though the IRS has organized the tests differently, applying the revised factors to specific individuals performing services is no easier than applying the Twenty Factors test. Since the implications of performing the correct analysis can be key to critical non-tax issues under the anti-kickback and Stark laws, it is especially important to take advantage of all available arguments and procedures offered. Tax counsel can assist organizations in making these difficult assessments.