Getting to the Bottom of Employee vs. Non-Employee Compensation

TIMESHOPS / STOCK.ADOBE.COM

The issue of whether someone hired at the dental office is an employee or an independent contractor is a point of concern among owners. Those who pay that person and advisors who advise whether a person at the office should be paid as either the employee or as an independent subcontractor bring the risk of error into the picture.

During an IRS (Internal Revenue Service) or state payroll tax audit, penalties and interest may run high for those who have made mistakes in their allocations to either. There are of course many benefits for an independent contractor compared to being an employee. There is also at least 1, if not more benefits for those classified as employees.

In the following paragraphs, we will outline the benefits under each scenario to give you an idea of why this question can be such an issue. There are also guidelines issued by the Internal Revenue to assist an employer in determining which approach to take to that the allocation is correct without any change in reporting to the IRS and to the state payroll authorities. We’ll begin by offering some points based on the hire and his or her reporting as an employee.

What are some benefits to be gained by being reported as an employee at the dental office?

There are many monetary benefits for a new hire to be reported as an employee. The dental office as an enterprise has a cost involved when the employee is paid. That cost is the ½ charge for Social Security and Medicare taxes that the employer must pay when compensating someone as an employee.

As an explanation, Social Security taxes and Medicare taxes are divided into 2 halves when an employer pays compensation to an employee. For the year beginning January 1, 2022, the first $147,000 of wages are taxable for Social Security taxes at 6.2% for the employer and 6.2% for the employee. Medicare is taxed at 1.45% for the employer and 1.45% for the employee with no limit on the amount of compensation paid to the employee. If the wage exceeds $200,000, the employer must withhold an additional 0.9% on the excess.

The benefit to the employee is that he or she is paying ½ of the tax while the employer is paying the other half based on certain wage amounts with thresholds at $147,000, $200,000 and so forth. As an employee that person is entitled to the fringe benefit package offered by the employer that would be in place for all employees. This may include a medical coverage plan for a certain amount of premiums to a health insurance carrier such as Blue Cross.

There may be vacation and paid holiday and personal day off payment benefits as well. These benefits would be paid by the employer. Another valuable fringe benefit may be the inclusion in the company retirement plan with no charge to the employee. These are enormous benefits that can include thousands of dollars for the employee and cost the employer those same thousands of dollars.

Potential benefits and costs for an independent contractor

If the legalities are met for classification as an independent contractor, benefits available to him or her include the reporting as a business with no W-2 form and with the ability to write off business expenses that one cannot do as an employee. When the W-2 is issued the employee is under the control of the employer and cannot write off business expenses for which the employer would have entitlement.

All of those items listed under the prior paragraph would not be available from the business for which the independent contractor has engaged in a contract for services. In addition, the independent contractor pays all of the Social Security and Medicare taxes instead of ½. For someone to want to be an independent contractor rather than an employee, that person would have retained an expert to advise him or her about the potential benefits available by operating one’s own business being far in excess of those offered by the employer.

An example may be where the independent contractor may be over age 50 and would have the availability of a sophisticated retirement plan that may offer triple or more benefits compared to the status as an employee. The other costs that the independent contractor may have the ability to write off as tax deductions could be a 100% reimbursement plan for medical, dental, hospitalization, etc. In the event these projected benefits that are IRS write offs exceed the amount available as an employee, he or she would opt for status as an independent contractor.

It is important to understand that an employee is subject to the non-discrimination testing for benefit purposes so that 1 employee cannot have status over another when determining benefits. An independent contractor can design his or own benefit plan and assuming there are no other personnel, all of the benefits would then accrue to the independent contractor.

Summary of employee versus non-employee compensation and costs and benefits for the dental practice hire and for the dental practice

There is the importance of knowing the legalities of what allows dental practice personnel to be classified as an employee or as and independent contractor. Once the classification has been determined, then the above paragraphs would apply to the compensation earned by that person. The costs and benefits are explained for the hire as well as for the dental practice as an enterprise paying the personnel for those services. As payroll tax costs, medical charges and retirement plan changes occur, the independent contractor benefit will increase as will the benefits available as an employee working for the dental practice. The important thing is to compare the costs and benefits of each before determining which classification to choose. Consult with the dental practice owner to see if he or she will even allow a new hire to be treated as an independent contractor and not as an employee.