Contractors vs. Employees — What You Must Know Before Payroll Season

Contractors vs. Employees — What You Must Know Before Payroll Season

Hiring help is exciting—it means your business is growing. But hiring the wrong way? That could cost you thousands.

Every year, business owners unknowingly misclassify their workers—and the IRS doesn’t take it lightly.

So how do you know if someone should be treated as an independent contractor or a W-2 employee?

And what’s at stake if you get it wrong?

Let’s break it down—especially if you're gearing up for your next payroll season.

What's the Difference?

Independent Contractor (1099):

• Controls how and when they work

• Often brings their own tools

• May work for multiple businesses

• No benefits, unemployment, or tax withholding

  
  

Employee (W-2):

• You control their schedule and tasks

• You provide the tools or equipment

• You cover payroll taxes, unemployment, and possibly benefits

  
  

Bottom line: It’s not about what they do—it’s about how much control you have over how they do it.

The Risks of Misclassification

Misclassifying an employee as a contractor can lead to:

• Back taxes: You’ll owe employer-side FICA, Medicare, and more

• Penalties: From both the IRS and Department of Labor

• Lawsuits: Workers denied benefits or overtime may sue

  
  

For medical professionals, this is especially critical. Many clinics hire front desk staff, techs, and even nurse practitioners. If you’re not classifying correctly, your practice could face audits or fines.

Real-World Example

A small medspa hired a nurse injector as a contractor. She worked 5 days a week using their tools, followed their schedule, and saw only their clients.

Guess what? She met nearly every condition of an employee. That practice ended up owing over $15,000 in penalties.

3 Tests You Can’t Ignore

1. IRS Common Law Test – Who controls how the work is done?

2. Department of Labor “Economic Reality” Test – Is the worker dependent on your business for income?

3. State-Specific Rules – Some states (like California) have stricter guidelines under the ABC test.

The Payroll Preparation Checklist

Before payroll season, ask:

• Have you reviewed all job descriptions?

• Are you issuing 1099s or W-2s correctly?

• Do you have signed agreements and clear policies?

• Are you using payroll software that ensures compliance?

Value-Based Tip: Your Time and Risk Have a Price

Medical professionals and service-based businesses often ask, “Can’t I just pay them as a contractor and avoid payroll taxes?”

Short answer: No—and thinking that way invites legal and financial trouble.

Value-based bookkeeping and CFO support protects you from misclassification by ensuring:

• The right people are paid through the right systems

• Your books and payroll records stay compliant

• You have a strategy that includes risk management—not just recordkeeping

  
  

This isn’t about data entry. It’s about strategic financial operations that safeguard your practice.

Need help cleaning up past misclassifications or setting up a compliant payroll system?

Book a CFO Consultation Today →

In & Out Accounting and Business Services, LLC

Cornerstone Coworking, 279 W. Crogan St., Lawrenceville, GA 30046

Serving clients across Georgia, New York, New Jersey, Pennsylvania, Maryland, the Carolinas, Florida, and along the East Coast.