Health Care Law Blog

IRS Focusing on Employment Tax Compliance

Recently, health care organizations have been inquiring about employment tax issues, and more specifically, the proper tax classification of their workers.  Questions include whether to classify medical directors, such as hospice medical directors, as employees versus independent contractors.

The recent interest in this area stems from a 2010 Internal Revenue Service ("IRS") initiative.  In 2009, the IRS announced that, beginning in 2010, it would review the federal tax returns of 6,000 companies, at the rate of 2,000 per year.  The IRS then would randomly review these companies' compliance in the areas of: payroll taxes, independent contractor status, fringe benefits, and executive compensation.  It is our understanding that targets of these audits include tax-exempt organizations and that these audits have been ramped up as the IRS has recently hired additional employees to assist with this initiative.

Accordingly, it is a good time for health care organizations to review their employment and professional services agreements to determine whether their workers, including medical directors, are appropriately classified as employees or independent contractors.  Do the contracts align with the workers' actual duties, authority, and hours?  Additionally, employers should review the degree of control they have over a worker, both behaviorally and financially, as well as the type of benefits the worker may be receiving before classifying the individual.  The IRS has also acknowledged that certain individuals can work for the same entity in dual capacities, which may result in the issuance of both a 1099 Form  and a W-2 Form for the individual.

For employers who do discover a worker misclassification, the IRS provides an opportunity to correct the classification.  The IRS' Voluntary Initiative Regarding Worker Reclassification, launched last fall, allows businesses, including tax-exempt organizations, to voluntarily reclassify workers as employees.  To be eligible, an applicant must have:  consistently treated the workers in the past as nonemployees; have filed all required 1099 Forms for the workers for the prior three years; and must not currently be under audit by the IRS, Department of Labor, or a state government agency concerning the classification of workers.  The employer must pay ten percent (10%) of the amount of employment taxes calculated under the reduced rates of Section 3509 of the Internal Revenue Code for the compensation paid for the most recent tax year for those individuals voluntarily reporting.  However, the IRS will not assess interest or penalties.  Health care organizations are urged to consult with counsel, as well as their workers, prior to making any voluntary disclosures.

In addition to the tax issues, improper classification of workers can raise additional issues. For health care organizations, proper classification of workers, particularly medical directors, can reduce issues under the Medicare fraud and abuse regulations, Medicare Conditions of Participation, and corporate practice of medicine laws as well. 

Foster Swift's team of attorneys can provide advice on worker classification issues from both a health care and a tax standpoint.  If you need assistance in determining the correct classification of your workers, please contact a member of the Foster Swift Health Care Practice Group.

Categories: Employment, Tax