[00:00:00] Dr. Anahita Banoo: Welcome to the Therapist Business Growth Podcast, the podcast for therapists who want to grow and scale a group practice [00:00:10] that runs itself so you can make more money, work less, and actually live the life you’re dreaming of. I’m your host, Dr. Anahita, and I am so glad you’re here. Let’s dive [00:00:20] in.

[00:00:24] Welcome back to this week’s episode of the Therapist Business [00:00:30] Growth Podcast. I’m so excited to dive in with you guys. We’re gonna talk all things W2 versus 1099, how to decide which one should actually you should be hiring into your practice. [00:00:40] Um, most people are choosing based off of which one’s cheaper.

[00:00:43] And listen, I get it because we’re business owners, we want to be optimizing profit as much as possible, and also the quote unquote [00:00:50] headache of, uh, managing W2 employees. But when we make decisions based off of, um, what’s cheaper and the headache of it, that is what is going [00:01:00] to lead you to being audited. I have known business owners who have been audited for this, and they were found that their, um, their therapists were misclassified.

[00:01:08] So we’re gonna talk about what it [00:01:10] means to have each of these. Hint, it’s all about the relationship. Um, and so I just wanna preface all of this by saying I am not a lawyer, I am not a tax advisor, I’m not a CPA. Um, and [00:01:20] so this is just kind of my general knowledge of the topic, and I would definitely highly encourage you, if you have questions about it for your specific situation, to reach out to an employment [00:01:30] lawyer or to a tax advisor.

[00:01:31] They can absolutely help you in navigating this. All right, so let’s dive in. So the IRS has what’s called this common law test, and this [00:01:40] common law test, it’s based off of three things: behavioral control, financial control, and the nature of the relationship. We’re gonna dive into all of those things in a little bit, but that is ultimately how they’re deciding are you [00:01:50] classifying your people correctly or not, okay?

[00:01:52] And listen, it’s not about what you want. It’s not about just saying, “I want to hire people as 1099s because I don’t wanna pay payroll taxes. [00:02:00] I don’t wanna figure all of the taxes and all the other, you know, payments I have to make on their behalf,” um, or the simplicity of it, right? Of just like it’s a straight flat amount that I’m going [00:02:10] to pay to them, and I don’t have to classify by, like, how many hours they worked or anything like that.

[00:02:14] Um, but it’s not about that. It is about how you’re treating your people and how they kind of fold into your business. All [00:02:20] right? So if you just have them, like, sign a 1099 contract and just because they have their own business and because they’re setting their own schedule, that does not just mean that they [00:02:30] are a 1099 contractor.

[00:02:31] All right? There are so many other layers and components to this that we really have to look at, especially within a therapy practice, um, that are going to be so [00:02:40] crucial as we are making that d- decision. So listen The blunt version for you is that just because a therapist is running their own independent business [00:02:50] that they’re using and they just happen to be using your, your space does not mean that they are a 1099 contractor.

[00:02:56] All right? You have to kinda… The, the base level question you have to ask [00:03:00] yourself is, and this one’s gonna sting, guys, are they doing your practice’s core service using your systems, seeing your clients, the clients that you [00:03:10] provide to them? If the answer to those questions is yes, they’re a W-2. I hate to break it to you.

[00:03:17] Don’t shoot the messenger, but they [00:03:20] are going to be. They should be W-2, okay? I wanna tell you guys, when I first started my practice, um, I worked with a business coach. I’m never gonna, like, not share [00:03:30] that information with people because it was such a crucial part of my story. So I did work with a business coach.

[00:03:34] Um, and she recommended everybody hire therapists as 1099, okay? Now, she’s [00:03:40] based in Canada, so her What worked for her wasn’t necessarily always gonna work for everybody else, okay? Um, and I just listened to her because I was like, “You’re my business [00:03:50] coach. You’re telling me what to do. Like, this is y- that’s what you did, so that’s what I should do, too.”

[00:03:54] Um, so I did. When I posted an ad, I said it was gonna be a 1099 position, and I’m actually [00:04:00] so grateful for this, but the first person I hired, when she came to me, she was like, “I don’t want a 1099 position. I want to be W2.” And I thought that was so interesting now looking back. I’ve never had anybody else [00:04:10] who has, like, specifically said they wanted one or the other, but, um, she said that because, because of all these layers to it, right?

[00:04:17] She didn’t wanna have to establish her own LLC, and we’ll [00:04:20] talk about all these things, so if you’re like, “What are you talking about?” We’ll talk about it in a second. She didn’t wanna establish her own LLC. She didn’t wanna have to file her o- like, pay her own payroll taxes. Like, she just wanted to be an [00:04:30] employee of a business, which now I, like, totally understand and I appreciate, and I’m so glad that she said that to me, because that led to me hiring her as a W2, not as a [00:04:40] 1099.

[00:04:40] And when I thought about it, honestly, I wanted somebody who wanted to be part of my business, part of my company. I did not want somebody who was, like, running their own entity and they just happened to, like, use [00:04:50] our space or anything like that. So I’m actually, like, really glad that it worked out that way.

[00:04:54] So let’s talk about this common law test that the IRS uses. So we’re talking about behavioral control, [00:05:00] financial control, and then the relationship. So the behavioral control, right? Like, does the practice… Are you directing how the work happens? Are you giving input on, like, [00:05:10] how their notes are being written?

[00:05:11] Are you giving them templates to be, to be using? Are you managing their EHR? Are you telling them they have to use a specific tool? If you do assessments, [00:05:20] are you telling them which assessments they need to, to be using? Are you telling them which EHR they need to be using, right? Are you giving them ongoing training?

[00:05:27] Are you evaluating their work within [00:05:30] your practice? Those things are all behavioral control that indicate W2, all right? Then there’s financial control. This is, [00:05:40] um, again, are they operating as their own independent business where they’re setting their rates? Probably not if they’re working under your practice, right?

[00:05:49] Um, [00:05:50] are they paying for the expenses they- that they have in their business? That can be a write-off for them if they are, and if they are truly 1099 and they’re running their own business. [00:06:00] I’m gonna guess they’re not, though. I’m gonna guess that you are paying for all of the things. Why else would somebody wanna come work for your practice, right?

[00:06:07] So, um, if you’re marketing [00:06:10] for them, if you are providing them clients, if you’re determining what their, you know, their pay rates are, things like that, that is gonna point more towards W2 than 1099. And then the [00:06:20] last one, relationship. All right? What does this ongoing relationship look like? Are they getting benefits through your, through your practice?

[00:06:26] Um, are you overseeing, controlling… [00:06:30] Controlling not in the, like, negative sense of that word, right, but just, like, are you managing the work that they’re doing, and are you a part of their continued work within the practice? Now, we’re [00:06:40] gonna get into, like, some of the nitty-gritty here too, but what I wanna share with you is…

[00:06:44] I give this comparison to, to people in my coaching program all the time. Think about when you hire a plumber. [00:06:50] They are a true contractor, because you are not saying, “Show up at my house at this time. I’m gonna pay you X amount. I’m gonna co-…” Like, “I’ll have all the tools that you need.” [00:07:00] Uh, you know, whatever.

[00:07:01] Like, I don’t know what plumber plumbing tools are. A plunger? I don’t know. But you’re not telling them, “I’m gonna have all of this stuff for you.” You expect that they’re gonna [00:07:10] set their rates, that they’re gonna tell you, “This is the window of time I can come. Like, what works for you?” And that they’re gonna have all their tools, right?

[00:07:16] You’re not gonna be telling them how to do their work. You’re not gonna be [00:07:20] managing the work that they’re doing. That’s a true 1099. So I want you, like, anytime you’re like, “I don’t know if I’m using a W2 or a 1099, um, person in my, [00:07:30] in my practice,” I want you to kinda compare it to that, like, plumber situation, and that’s gonna give you, um, kinda can give you your answer.

[00:07:37] Okay? So let’s get into some of the, the nitty-gritty. Let’s talk [00:07:40] about the differences, um, with all of the different layers of the practice, right? So the first thing is, is taxes. So let’s talk about the differences. 1099 contractors, you are [00:07:50] paying no taxes on their behalf. Literally, if you say, “I’m gonna pay you $50 an hour,” they literally get paid $50 an hour.

[00:07:56] That is the amount that leaves your bank account. That is the amount that gets put [00:08:00] into their bank account, okay? Nothing gets taken out on their end or on your end, which obviously a lot of people really love this, because you’re not paying taxes, so you can [00:08:10] set… You can usually set a higher rate for your contractors, and you can…

[00:08:13] So you can pay them more, and they’re, they’re collecting more, right? If they’re a W-2, you do [00:08:20] have to pay taxes on their behalf. You have to pay payroll taxes. You have to pay into their Social Security, into Medicare, right? And they, at the end of the year, and I’m sure we’ve [00:08:30] all had this experience working as a W-2 employee, they get a W-2 at the end of the year that they use to file their taxes to show, “I have paid taxes this year because it was withdrawn [00:08:40] from my paycheck,” right?

[00:08:42] If you have a 1099, they get what’s called a 1099-NEC at the end of the year that just shares this is how much they were paid, and then [00:08:50] they have to make sure that they have paid taxes on their behalf. All right, so that’s a key difference in, in the financial aspect of 1099 versus W-2. Then we have benefits.

[00:08:59] [00:09:00] 1099s have no benefits, truly zero. They do not get paid for sick time. They do not get paid for PTO. They can’t be eligible for h- for health insurance, for retirement matching, for any [00:09:10] compensation for, like, licensure or CEUs or anything like that. Nothing, okay? W-2s are not required for all of these things.

[00:09:17] Check your state. Again, I’m not, I’m not, [00:09:20] um, a CPA. I don’t know this, or, or an employment lawyer. I don’t know this for every single state. In Colorado, we do have, um Required sick time that we have to pay. So [00:09:30] that, any W2 is required to have sick time. Um, nothing else is required within certain parameters once you have a certain number of people working for you, things [00:09:40] like that.

[00:09:40] But sick time is the bare minimum, and then when we added p- uh, sorry. Cut that, Katie. When we added health insurance, when we added retirement [00:09:50] matching, only the W2 employees were eligible for that. I could not offer that to any 1099s. Same thing with paying for trainings or paying for CEU reimbursement [00:10:00] or licensure or anything like that.

[00:10:01] I cannot do that for 1099s. All right? Then we’re gonna talk about tools and the workspace. So any tools, if they are u- if they’re a play [00:10:10] therapist and they’re using, you know, toys and games and things like that in their work as a therapist, you can’t provide that for them if they are 1099. Can’t. [00:10:20] They have to purchase it.

[00:10:21] They have to bring it. They have to be in charge of that. Okay? Same thing with things like EHR. All right? With consent forms. [00:10:30] Um, with any, any equipment that’s in, in the business, in the office space, they cannot use it. They have to be providing it for [00:10:40] themselves. Again, think about the plumber situation.

[00:10:42] You’re not providing the plunger, whatever tools they need for the plunger. They are bringing it with them. Okay? Same thing here. W2, [00:10:50] yes, you provide all of that stuff for them. Okay? You provide the EHR. You provide the, the play materials and, and things like that. Whatever they need, you can provide it. All right?

[00:10:59] Ugh, [00:11:00] this is m- this is my favorite because I think a lot of times this is, like, the biggest one that people mess up. But it’s the schedule and the caseload. For a 1099, you [00:11:10] cannot stipulate how many clients they’re seeing, when they see those clients, and how much vacation they take. W2 you can. Okay? You can say, um…

[00:11:19] What we did in my [00:11:20] practice was, like, the office space is available during these times. You can pick your shifts. So they did have autonomy in that. Um, but I said, you know, minimum caseload requirement is 15 [00:11:30] clients a week. If they didn’t want that, that was a stipulation of, of employment for me. If they were a 1099 and they said, “I don’t wanna see 15 clients a week,” they could.[00:11:40] 

[00:11:40] And I could do zero things about it. Nothing. Okay? So when you think about schedule, when you think about caseload, you really have to take in, into account, do I wanna stipulate that for, for my people, [00:11:50] or do I want them to have total autonomy of how many people they’re seeing, when they’re seeing them, and how much vacation they’re taking?

[00:11:55] That’s a big one too that we don’t necessarily think about, is how much vacation. [00:12:00] Again, you can’t approve or deny vacation. They can just take it whenever they want if they’re 1099. All right? Who else can they work for? So W2 employees, you can [00:12:10] say, “You can’t work for any other business. You are restricted to working for my company.”

[00:12:15] Okay? 1099, you cannot stipulate any of that. You… They can work wherever, [00:12:20] wherever they want. All right? W2 have a lot more legal protections. All right? There’s minimum wage. They have to be paid for every hour, every minute [00:12:30] that they’re working, they have to be paid for that time. Um, usually you have to pay them for overtime.

[00:12:35] So there’s a lot of stipulations there about the work that they’re completing and how you’re paying them [00:12:40] for it. Um, which again, I see a lot of business owners who are like, “I don’t wanna manage that. I don’t wanna navigate that.” And so they kinda don’t. And they say, “Let’s [00:12:50] just hire a 1099, and then I don’t have to deal with, like, ensuring that every moment that they’re working, I’m paying them for that time.”

[00:12:55] Okay? 1099, you can… It’s a contract, [00:13:00] right? So you can say, like, “This is the amount that you’re getting paid for your work. You are getting paid $50 for every one client you see. It doesn’t matter how long it takes you to write notes. It doesn’t matter how long [00:13:10] it takes you to write a treatment plan. It doesn’t matter if you’re in session with them for thir- three hours or 30 minutes.

[00:13:15] That’s how much you’re getting paid for that client.” Okay? And then [00:13:20] the last part that we’re gonna talk about is expenses and how they’re running their business. So 1099, they’re running their own business. Okay? They have established… They [00:13:30] should have established their own LLC. You are contracting with a business.

[00:13:33] You cannot contract with an individual person, all right? Which means they can deduct [00:13:40] expenses. So if they’re paying for, which they should be, paying for their EHR, paying for their CEUs, right? If they’re paying for those things themselves, they can deduct it. [00:13:50] It’s a business expense for them. If they’re W2, they can’t…

[00:13:53] They don’t have a business, right? They’re not running, operating their own LLC, and so they can’t d- deduct anything from their business [00:14:00] because they don’t have a business. They’re working for you, which is, again, we circle back to the like you’re paying for all of these things for them, so they don’t need anything to be deducting anyway.

[00:14:09] Okay? [00:14:10] So here’s[00:14:20] 

[00:14:29] Okay, [00:14:30] so to recap, W2, you are paying their, paying their taxes on behalf of them. You’re paying for their Medicare, their Social Security, [00:14:40] right? Um, there’s unemployment insurance, there’s workers’ comp that comes into play, there’s benefits. All of these things you need to check your state ’cause it’s gonna vary by state.

[00:14:49] [00:14:50] Um, a lot– I see a lot of therapists, a lot of practice owners hiring people as 1099 because it feels simp- it is simpler. It’s, it’s not that it feels simpler. It is simpler to [00:15:00] hire people as 1099, and it’s more cost-effective for the business owner. You don’t have to pay these taxes and pay all these things for them, right?

[00:15:07] But here’s the thing. If [00:15:10] you actually– If you’re hiring 1099, the IRS audits you, and they find that you misclassified your people as 1089, you are going to have to pay, uh, [00:15:20] your, like, you’re gonna have to back pay employ- employment taxes. There’s gonna be penalties. And a lot of times[00:15:30] 

[00:15:30] So listen, if you are misclassifying your people as 1099 and they should really be W2, what can [00:15:40] happen is the IRS can come and audit you. And how that can happen, it sucks, but, and somebody working for you can actually go to the IRS and be like, “I feel like I’m being [00:15:50] misclassified.” If you are, if you hired them as a 1099 and then you aren’t stipulating when they’re working, how many clients they’re seeing, when they can take vacation, things like that, and they’re mad about it or they’re pissed about it, they can [00:16:00] go to the IRS and say, “I feel like I’m being misclassified.”

[00:16:03] And then the IRS will come and they will audit you. And if they audit you and they find that you are misclassifying your people, you can [00:16:10] owe the employment taxes that you never paid on those people. So you can have to back pay employment taxes, and then there’s usually pen- penalties and fines. All right?

[00:16:18] So there is risk. [00:16:20] If you are hiring 1099 who should not be 1099, there is just inherent risk in doing that. And what-

[00:16:29] There is [00:16:30] just inherent risk in hiring people as 1099 and not W2 if you are misclassifying them. All right? So I want you to be really, really cautious if you’re thinking about 1099. [00:16:40] Something I want to say here too is, and I’ve kind of mentioned it throughout, but, like, it can totally– it’s such a– there can be so many differences between states, right?[00:16:50] 

[00:16:50] California, I’m pretty sure New York too, therapy practices cannot legally hire 1099 therapists to work for you. You can’t. And the biggest [00:17:00] reason is because the work they’re doing is the core component of your business. All right? And that’s honestly, that’s usually the test, like, the question that gets [00:17:10] asked, um, a lot is whether the work that somebody is doing when you hire them is a key part of the business’s regular activity.[00:17:20] 

[00:17:20] Okay? So key part of a therapy practice is see- is providing therapy, right? And so the IRS is gonna say if that’s what they’re doing, if your practice is all [00:17:30] therapy-based and they’re seeing clients, then they’re doing the core work of your business, and so therefore they cannot be classified as 1099. So that’s the biggest one [00:17:40] for California, and so therefore you cannot.

[00:17:42] I’m pretty sure New York is the same. More and more states are, like, kinda cracking down on this, so you just need to check in. There are some states who are still pretty lax. I know I [00:17:50] see, you know, therapists are hiring people as 1099 and it’s working out fine for them. I will say 99% of the time in coaching when people are asking, I’m saying you gotta hire [00:18:00] them as W2.

[00:18:00] It’s not worth the risk, okay? And honestly, it’s protective for you because that kind of ensures that somebody is really folding into the culture of your practice [00:18:10] and, like, wants to be in, in it with you, right? They wanna be part of the team. Um, and another thing, and you’ll hear me throughout this podcast, I will always kind of refer back to [00:18:20] if you ever want to sell your practice.

[00:18:21] You don’t have to, okay? You can, you can create this baby and it can be, like, a family business for you, and that’s amazing. But I really, really the through [00:18:30] thread for all of these episodes is going to be that you are building an asset. All right? You should never walk away from an asset. You should never just, like, let it go, okay?

[00:18:38] You should always [00:18:40] at least get something for it, whether you’re selling it so you’re getting a monetary value or you’re, you’re passing it down within your family so you’re providing for your family in that way. And here’s the thing [00:18:50] If you ever want to sell your practice, buyers want a practice that have W2 employees.

[00:18:55] They don’t want a practice with 1099 contractors. Okay? So let’s talk about, like, how do we [00:19:00] actually decide this? First and foremost, hopefully at this point you’re like, “Well, I should probably just hire W2. Don’t even need to, like, think through a process or ask myself questions. I should probably just go the W2 route.”

[00:19:08] All right? But if you’re [00:19:10] still being like, “Hmm, okay, let me think about this,” the first thing I want you to think about is, like, the nature of the relationship. All right? So what are you actually providing for this person? How much control do you want to have? [00:19:20] Again, control has kind of a negative connotation, and I don’t mean that.

[00:19:23] You can still have W2 employees that you do have high control over, but they also have autonomy within the practice. That’s exactly how my [00:19:30] practice ran. Okay? So high control, so you, um, you know, they just, they, they’re in your business. You’re providing HR, you’re provide, you’re providing the clients, [00:19:40] you’re doing the marketing for them.

[00:19:40] Like, you are providing everything for them. Um, that’s gonna lead you towards W2. If you don’t want that control, we could potentially go in the 1099 route, but still they’re [00:19:50] doing the core, the core work of your business. So that’s something to consider. Okay? Then I want you to think about, like, what does this role look like on a day-to-day basis?

[00:19:58] Do I want them showing up to staff [00:20:00] meetings? Do I want them showing up to supervision? E- even if they’re… Or, like, consultation, let’s say. If they’re not pre-licensed or an intern, you want them showing up to these meetings, to these staff, um, staff happenings, right? [00:20:10] I want them in the office at, at a certain time.

[00:20:12] I want them writing notes in a certain way. I want them to be seeing a certain number of clients, right? Those things, if [00:20:20] that, when you look at how you want this role to be structured, that’s gonna help decide, too. It’s kind of ties back to the control piece, but it’s gonna help you kinda go in one direction of W2 versus [00:20:30] 1099.

[00:20:30] All right? We’re gonna talk… I mean, I talked about it at the beginning, right? The common law test, the financial implications, the behavioral implications, and then the nature of the relationship. Those [00:20:40] three things you have to be asking yourself and be able to really discern whether it’s more in the 1099 route or more in the W2.

[00:20:48] All right? And then last, [00:20:50] like if you’re truly at, like at a stuck point, and I’ve seen people who have said, you know, they talked to an employment lawyer and they told them that because their people are, are providing [00:21:00] assessments in their practice and not doing therapy, and therapy is the core component of their practice, they can hire people to do assessments as 1099.

[00:21:07] Great. You talked to an employment lawyer. So that’s the last thing. [00:21:10] If you’re like stuck, unsure, talk to an employment lawyer. They will give you obviously the best legal advice based off… Come to them with like, “This is how I want this role to be [00:21:20] structured,” and they will give you the insight of how you should structure it.

[00:21:24] Okay? So let’s chat about the biggest mistakes I see therapists making when they [00:21:30] are deciding, group practice owners, I should say, when they are deciding whether to hire somebody as 1099 or W2. Biggest mistake is choosing 1099 simply because it’s [00:21:40] simple and because it saves you money. Okay? That is not a reason to choose one or the other.

[00:21:45] You have to actually look at the role, and that’s gonna, that’s gonna, [00:21:50] um, influence which direction you’re going. Okay? The second mistake I see is people saying, “Oh, well, I had them sign a contractor agreement, so therefore [00:22:00] they’re a contractor. And I have in that contracta- contractor agreement all of, all the ways I’m not controlling them, all the ways that they have freedom.

[00:22:07] They can take vacation when they want. They can see a number of clients they want, [00:22:10] all those things.” The IRS does not care what is, you know, in that contract. They care how you are actually treating that person. And if you are saying on, in paper one thing, but then treating [00:22:20] them a different way, they’re gonna come back and you’re gonna have some fines and some penalties and things like that that you’re gonna have to navigate.

[00:22:26] Okay? The last mistake, not revisiting it [00:22:30] as your practice grows. Maybe when you started, it was you and you had somebody coming in doing assessments, and that was easy because they were a contractor. You owned your business, right? And you could do [00:22:40] it that way. But as you scale, I am going to guess that you’re going, heading more in the direction of a W2 business.

[00:22:49] That’s just the [00:22:50] nature of it. The more people you bring under you who are run– who are doing the, the main operations of your practice, the more likely it is a W2 practice. Now, here’s one thing I will say about [00:23:00] that. That’s for therapists, right? If you’re hiring admin, if you’re hiring, um, billers, they– supervisors, they can [00:23:10] be contractors.

[00:23:11] Okay? Again, you have to run yourself through these questions, and you have to decide how am I treating them? H- like, what control level, level of control do I have over them? You [00:23:20] have to ask yourself those questions. But in admin, you can say, “Hey, you can choose the hours that you’re working.” Right? You can choose where– if you’re coming into the office or if you’re working from [00:23:30] home.

[00:23:30] You have to provide your own computer. Like, you can decide that. Same thing for supervisor, right? For biller. Billers usually are, uh, 1099 anyway, unless you’re hiring in-house, [00:23:40] then you can make them W2. Um, so I don’t want you to think that every single role in your practice has to be W2. It doesn’t. But the core component of your [00:23:50] business, if they are doing the main role of your business, they’re likely a W2 employee.

[00:23:57] All right? So [00:24:00] let’s recap. Basically, I’m like, let’s recap, but basically the recap is if you’re hiring therapists to work for you, they should be W2. They should not be 1099. If [00:24:10] you are confused or have questions about it, I highly recommend, um… What is the word I’m looking for? If you [00:24:20] have questions about it or you’re confused, I highly recommend consulting with a lawyer to get their, you know…

[00:24:25] They can actually look inside your business and see what makes the most sense, and they’ll know based off of your state [00:24:30] too, which is, like that, that can be such a huge differentiator as well. So listen, my DMs are always open if you have questions, if you’re unsure, um, or if you’re like, “I know I want to go in this [00:24:40] direction.

[00:24:40] I would love to hire W2 employees to come work for me because I want to create and foster this, like, really cohesive work environment.” My DMs are open at Dr. Anahita Banoo. Um, [00:24:50] you can also find me on my website, www.dranahitabanoo.com. Please reach out. Um, I love, love, love connecting with therapists and practice owners and people and wanna [00:25:00] be practice owners.

[00:25:01] Um, it’s really me in the DMs, and I look forward to chatting with you. All right? See you in the next episode.