Employees vs. Independent Contractors: Knowing the Difference

I am super-excited to share another fabulous article by music therapy biz whiz Jamie George. Happy reading…

Congratulations! You just landed a job as a music therapist! Your dreams are coming true!  But your new employer just called you a “sub-contractor”. What does that mean? Are you an employee? What are your responsibilities to the company? And more importantly, what are your responsibilities to the IRS? And if you are the employer, what are your responsibilities to your worker?

As our profession continues to grow and expand into new markets, we are seeing a change in the way music therapists and facilities are hiring and utilizing music therapy services. In addition, increased success with 3rd party reimbursement and state recognition are changing the way our patients, administrators, and interdisciplinary colleagues view the professionalism and validity of music therapy.  It is our never ending job as music therapists to advocate for our profession and continue to move forward as an organization. As others begin to know more about what it is that we do, we are opening ourselves up to the public regarding the moral, ethical and legal implications of our practice. And as the old adage states, “with greater knowledge comes greater responsibility.”

In my communications and consultations with music therapists across the country I am seeing a recurring theme…. music therapists are making the assumption that since it seems that “most” music therapy practices are hiring sub-contractors that must be the way to go!  Without doing the research regarding the differences between employees and independent contractors, many music therapists are jumping right in with questions about how to hire an independent contractor. While there are many practices that have hired contractors appropriately and in fact, are very clear about the contractor relationship, I have also found that there are many practices that have hired or are looking to hire contractors but expect to facilitate an employer/employee relationship. This is a dangerous road and can open up the owner to fraudulent tax practices.  If a business classifies an employee as an independent contractor and has no reasonable basis for doing so, that business may be held liable for employment taxes for that worker and all workers similarly classified during the time period in question (Internal Revenue Code section 3509).

It is my intent to start a conversation among music therapists about what constitutes an employee vs, an independent contractor. Tax code can be challenging and confusing to understand, especially as a small business or employer. I hope that as we continue to grow as a profession, we also continue to grow as an ethical and legally prudent practice. I am in no way an expert on this subject and I am not claiming to be a CPA or other tax professional. I am however, a music therapist that can speak from the experience of working as an independent contractor and a business owner who has hired several employees AND independent contractors. I have also done my due diligence in exploring the options and common law principals regarding the employee vs. independent contractor relationships.

Businesses must weigh several factors when determining whether a worker is an employee or independent contractor. There are 3 categories under which the IRS determines the classification of a worker.

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Common law principles further define independent contractor status by such things as method of compensation, if the worker supplies his or her own equipment, materials and tools, if the worker can be discharged at any time and can choose whether or not to come to work without fear of losing employment, if the worker controls the hours of employment thus indicating they are acting as an independent contractor, whether the work is temporary or permanent, etc. In addition, when work is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that is temporary and non-integral may imply independent contractor status.

In an attempt to interpret provisions of the Fair Labor Standards Act and discern between employee and independent contractor status, some courts and federal agencies have come up with the “economic realities test.” It looks at the dependence of the worker on the business for which he or she works. If a person gains a large portion of their salary from that business, chances are that person qualifies as an employee. The test also factors in such things as level of skill, integral nature of the work, intent of the parties and payment of social security taxes and benefits.

Outside of the Fair Labor Standards Act, courts ask the following questions to determine work relationship in addition to both an economic and an agency test:

• What is the degree of control over work and who exercises that control?
• What is each party’s level of loss in the relationship?
• Who has paid for materials, supplies and/or equipment?
• What type of skill is required for work?
• Is there a degree of permanence?
• Is the worker an integral part of the business?

These courts also use the “right to control” test. When the hiring party controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. If an employer does not have authority over how a party accomplishes his or her work but simply give requests an outline, the relationship between the parties is that of hiring party/independent contractor.

So, what is the cost difference between an employee and an independent contractor?  Well, that’s a loaded question. When a worker is an employee, the employer’s tax liability includes FICA, Medicare and unemployment taxes.  I have found in my research with other private practices and my CPA that a good magic number when attempting to calculate the tax liability of employees is 10% of their wages. This does not include employer share of health premiums, vacation and sick pay, etc, which are discretionary benefits.  Each company would have to develop the additional % based on their human resource policies.  These costs could easily double the magic number. Again, I am not a certified CPA and each business must do their own research including their states tax requirements. When a worker is an independent contractor, the hiring party is not required to make any of these payments. They are only responsible for the hourly wages agreed upon. That means that you, as the sub-contractor, will be responsible for all unpaid state and federal taxes on April 15th! When I worked as an independent contractor, I estimated our (married filing jointly) tax bracket and put a percentage of each paycheck into a high yield savings account until it was time to pay taxes!

I hope that you join me in continuing this conversation at the 2012 American Music Therapy Association National Conference St. Charles, IL! I will be presenting “I’m Ready to Hire a Music Therapist: Employees vs. Independent Contractors and Tax Law” on Sunday, October 14th from 9:15-10:15 am. Bring your questions and comments and I look forward to seeing you there.

About the Author: Jamie George, MM, MT-BC is the Owner and Director for The George Center for Music Therapy, Inc. in the Atlanta metro area, serving clients of all ages and abilities. She also has a contract in the Fulton County School System in Atlanta, serves on the Georgia State Task Force, and is Treasurer and Reimbursement Chair for the Music Therapy Association of Georgia. Want more of Jamie? Be sure to check out her company’s new blog!

Tagged as: employee, employer, Private Practice, self-employed, therapy private practice