Would Your Practice Survive An Employment Tax Audit? (1099 vs. W-2 part 2)

Does the state tax commission really take the time to audit small private practices? I didn't think so, until my practice was selected for an audit.

A few years ago my clinic was selected for an employment tax audit. Lucky me, right? When the auditor walked into my office suite and saw many offices with different names on the doors, he looked at me pleadingly and said, "Please, please don't tell me that these therapists are all classified as 1099 contractors."

I replied, "I won't. We're all W-2's."

There was a look of relief on his face.He then proceeded to tell me that health and mental health private practitioners are notorious for incorrectly classifying 1099 employees. In his experience many groups are set up as contract workers when they are acting like employees (I'll go over into detail about the the IRS criteria for how to classify  an employee as a 1099 vs. W2 employees in a forthcoming post).

The auditor requested access to all of my financial documents including bank accounts, accounting,  payroll information and tax documents. He asked us questions about any large checks written directly to employees to make sure we were paying our employment taxes. After a brief review of my payroll and tax documents the auditor thanked me for making his job easier and left with a smile. I breathed a huge sigh of relief.

Had I hired the therapists working with me as 1099 I may have been penalized with a hefty fine and required to pay back employment taxes on all of the therapists' income. I was not in a position to shell out thousands and thousands of dollars. Had I been incorrectly classifying employees it may have put my practice in jeopardy.

Do you know the IRS criteria for classifying 1099 contract workers vs. W-2 employees? It isn't based on whether or not you want to pay your therapist's taxes or want to have them pay self-employment taxes. It isn't based on whether they are full-time or part-time workers. It isn't based on whether or not you provide benefits.

There are many misconceptions about classifying employees in private practice. I'll address theses criteria for how to distinguish between hiring 1099 vs. W-2 therapists in upcoming posts.

Watch for the next Therapist Blog Challenge coming next week, too!

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10 Things I Accidentally Did Right In Building My Private Practice

As I reflecting back on 10  years in private practice I did a few things right, mostly by chance.

With a business license, professional license, and big dreams, I opened a private practice ten years ago. Having never taken a business, marketing, or management course, I have learned "on the job" how to be a small business owner. Hopefully, you can learn from what I accidentally did right and intentionally apply them as you build your private practice.

1) Start small, think big

At the time I opened the doors I was a solo practitioner. Those of you in solo practice know that means I was the receptionist, the billing manager, the webmaster, the marketing specialist...Being a "one woman show" for a few years not only taught me what it takes to run a practice, but also how to teach others what I had learned as the practice grew. My vision was to grow my practice into a group with several practitioners and over time, that has happened.

2) Grow slowly

I didn't know it then, but one of the main reasons new businesses fail is because they grow too quickly. As a mother of 3 children at the time, I was fine growing slowly so I could manage the multiple demands on my time. Turns out it was good for business too. Growing slowly allowed me to build a business without loans or going into debt.

3) Charge more than you think you're worth

From my first day in private practice I have always charged a higher fee than I felt I was worth. This forced me to deal with my own money issues, and to learn to value my own services and skills more highly. I came to understand the value of the perceived value of my services as clients assumed that I must be very skilled in order to charge at the high end of the scale for my location.

4) Think like a business owner

My family of origin tends to have an entrepreneurial mindset where self-employment, flexibility, and freedom are highly valued. This framework helped me to be able to think like a business owner and a therapist and to find an emotional place where those two roles weren't mutually exclusive. Although they are occasionally in conflict, I've found that that is a rare occasion. Thinking like a small business owner has helped me to set better therapeutic boundaries with clients as well.

5) Trust your gut

In all areas of practice, from office location, to logo design, to who to hire, to which practice software to purchase, after researching the best options I ultimately followed my intuition in making key decisions for my private practice. While the path hasn't been perfect, I can't think of one decision where I trusted my gut and regretted it.

6) Hire qualified people that you trust with your reputation

One of the scariest things in growing from a solo practitioner to a larger practice is hiring people who have the power to impact  your professional and business reputation. In addition to hiring very qualified staff, also hire people that you'd trust and train them how to present themselves in a way that builds your credibility.

7) Set strong boundaries with money

Whether it's following through with your office policies regarding collections, or saving for those dips in client numbers, I have tried to be consistent with money policies. This also applies when hiring employees. My tendency was to give away a little too much at first, because of my inexperience. I soon learned that there is a cost, emotionally and financially, to having employees, and that I deserve to get paid for management time and for holding all of the liability in the practice setting.

8) Create a home away from home

Creating a comfortable yet professional office space has helped me, and my clients, to feel welcomed and safe. I've found self-expression in my private office environment and decor helps foster a sense of safety and nurturing and creates a space where I feel at ease.

9) Integrate your passions into your practice

I have always integrated current interests and passions into my private practice. If there's a film that I really like, I'll use that with clients. More recently I've become a tech geek, so I've integrated technology into my private practice by launching an online therapy division, moving to electronic records, and building a social media following.

10) Take good care of you

Personal self care has always been high on my priority list. I've known that if my own needs were going to get met it was my job to make it happen. Whether it's scheduling exercise, bringing healthy food to work, making time for social events, or attending my own therapy, I am fiercely committed to making sure I am taking care of me. I think those habits have allowed me to energetically continue investing in my clients, my practice, and my employees without feeling burned out.

What things have you accidentally done right in building your practice? Please share so we can learn from each other!