Employee vs. Contractor: Choosing the Right Model When Hiring an Associate Dentist

What to know before hiring an associate as a W-2 employee.

Why might a practice owner prefer to employ an associate as a W-2 employee? There are four main reasons:

• You may be able to exert more control over their schedule, clinical process, and work performance.
• W-2 employees offer stability and are generally more committed to the practice they join. Employees who are hired as practice staff and not a contractor are more likely to be integrated into your team and help build a positive office culture. Often contract employees are seen as short term and may not mentally buy into the team or practice environment.
• The IRS and state labor departments closely scrutinize the misclassification of employees as independent contractors. By choosing to classify an associate as a W-2 employee, you can mitigate your legal risks.
• Finally, W-2 employees may become eligible for any benefits offered by the practice. In today’s work environment, this incentive can separate your practice from others and can attract higher-quality candidates.

Now let’s discuss the potential downside of bringing on an associate as a W-2 employee. This classification will require the practice to pay the employer’s share of payroll taxes, workers’ compensation, and potentially offer benefits to the employee. There is also an additional element of administrative responsibility with the W-2 associate, such as payroll processing, employee reviews, etc.

Pros and cons of the 1099 independent contractor option.

There may be instances where an incoming associate dentist should be hired as a 1099 independent contractor and not as a W-2 employee. To begin, the practice will not be required to pay the employer’s share of payroll taxes, workers’ compensation, or offer any benefits. This will likely reduce the practice’s overall administrative work for this individual . Also, an independent contractor job status can give the owner more flexibility to hire or fire.

As an independent contractor, the associate would be responsible for their own taxes. However, they would have the flexibility to float to multiple offices to ensure they can work the desired number of days per week, deduct work expenses on their tax return, set up their own benefits, and implement a retirement plan, such as a SEP IRA or Solo 401(k).

Now let’s discuss the potential negatives. First, the practice may have less control over the associate. As a contractor, they will be able to oversee their schedule, clinical methods, and may even work in multiple offices, some of which might be in direct competition with your practice. Next, and perhaps most importantly, if the IRS determines the associate should be classified as an employee, you could face penalties, back taxes, and legal issues. This determination is part of what is known as the control test. In the simplest of definitions, this means as their employer, will you control when, where, and how the associate performs their work? If you answer yes to this question, then the associate should likely be classified as a W-2 employee.

Next steps.

As you make your decision, here are few key points to consider before classifying your associate hire:

• IRS classification rules. If you exert significant control over an associate’s work (hours, equipment used, patient scheduling, clinical methods, etc.), they should likely be classified as a W-2 employee.
• State laws. Some states, like California (AB5 law), have strict guidelines that make it difficult to classify dentists as independent contractors. Consult your attorney to determine if this is appropriate for your situation.
• Practice goals. If you’re looking for a long-term team member invested in your practice, a W-2 arrangement will likely increase the possibility for retention.

In most cases, we believe hiring an associate dentist as a W-2 employee is the more common, safer, and more legally compliant option, especially if they work under your direct supervision, use your equipment, and follow your practice guidelines. A 1099 contractor setup may be acceptable for short-term or part-time work where the associate dentist has more autonomy. If you are wondering which model would make most sense for your practice, our team would love to help. Schedule a conversation with a practice integration advisor today! 

The views in this article are the opinions of the author.

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