2 CHOICE A: STARTING YOUR OWN PRACTICE Get a Mentor Often the quickest way to get somewhere is to find someone who has been there before. There are plenty of resources to locate a mentor who has started his or her own business or practice. Appendix 1 contains resources for finding a mentor and questions to ask a potential mentor. Choose the type of business your practice will be There are three basic business models: corporation, sole proprietorship, and partnership. Choosing a business model depends a lot on your particular circumstances. Some considerations are listed below: Corporation Incorporating a healthcare practice, including a physical therapy practice, can provide many benefits. However, it is critical that a physical therapist obtain expert legal and financial advice to decide whether incorporation is appropriate. Essentially, professionals who incorporate do so primarily to protect their personal assets from potential liabilities and the debts of the business while taking advantage of tax benefits not available to sole proprietorships and partnerships. Appendix 2 discusses some of the benefits of incorporating. If incorporating, the only type of corporation a physical therapist can form is a professional physical therapy corporation. The Physical Therapy Board of California has jurisdiction over physical therapy professional corporations. Statutes (Business & Professions Code ) and Regulations (Title 16 California Code of Regulations ) regarding physical therapist professional corporations can be located on the Physical Therapy Board of California Website (www.ptbc.ca.gov) under Laws and Regulations. Sole Proprietorship A sole proprietor is someone who owns an unincorporated business by himself or herself. A practice operated as a sole proprietorship offers no protection for the owner s personal assets. Partnership A partnership is an unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts. Unlike a Limited Liability Company (which physical therapists cannot form in the State of California) or a corporation, in a partnership in which multiple physical therapists are partners, each partner may share equal responsibility for the company's profits and losses, debts, and liabilities depending on how the partnership ownership is defined. A practice operated as a partnership offers no protection for the owner s personal assets. The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax return. Estimated tax payments are also necessary for each partner for the year in progress. Be sure to consult with an accountant or tax advisor.
3 Decide if you will hire employees or utilize independent contractors Hiring Employees The biggest benefit of hiring your own employees is that by definition you control the terms and conditions of their employment (with some limitations). You can hire and fire them at will, assuming you do not do so on a discriminatory basis. Many state and federal laws apply depending on the number of employees you have. Assuming you have between one and fourteen employees, Appendix 3 covers the basic laws or requirements that would apply: Using Independent Contractors Using a true independent contractor can relieve you of the many burdens placed upon you by state and federal employment laws. For instance, independent contractors: Need not be covered by worker s compensation; Do not have employment taxes deducted from their earnings by an employer; Have no rights to employee benefits; Are not employees subject to the Immigration Reform and Control Act (IRCA) of 1986; Are not covered by many state and federal anti discrimination laws; Do not subject you to vicarious liability for their acts; Are not included under Cal/OSHA and federal/osha regulations in an employer s duty to provide a safe and healthy work environment; Are not covered by state and federal wage and hour laws; Are not entitled to unemployment insurance benefits from your accounts; and Are excluded from coverage under the National Labor Relations Act (unions). You must be careful to use a true independent contractor. California administrative agencies and the Internal Revenue Service (IRS) closely scrutinize alleged principal/independent contractor relationships to assure that those relationships are not, in reality, employer/employee relationships. The consequences for claiming you are using an independent contractor but blurring the line can include significant tax, wage, and benefit liabilities, as well as massive fines that may be imposed by the IRS and California s Employment Development Department (EDD). Appendix 4 contains common misconceptions about independent contractors, factors for determining that you are using a true independent contractor and reporting obligations. Comply with Regulatory Agencies You must comply with local, state and federal regulatory agencies. A list of applicable regulatory agencies can be found in Appendix 5. Find a Location You will need to choose a location for your physical therapy practice. Be aware that if you rent space from a physician or anyone who might have a role in referring patients to you or receiving referrals from you, you must pay fair market value for that space. There is a federal anti kickback statute that prohibits the payment of remuneration in exchange for, or in order to induce, the referral of patients or other business, which is reimbursable under Medicare. The anti kickback statute has been construed broadly by the courts and the enforcement agencies. Appendix 6 contains more information about this.
5 Learn what you can outsource There is much to learn when starting any business but you don t have to learn everything. For example, it is a good idea to hire an accountant to look at your books and do your business taxes. You could learn to do it yourself but you should also consider where your time is best spent in building your business. Attorneys can be found by searching or by contacting your county or state bar association. Accountants can be located by searching Some other examples of tasks you can outsource are bookkeeping, billing, and human resource compliance. Ask your mentor and other business owners for recommendations. This guide is not legal advice and is not intended to be a substitute for obtaining legal advice specific to your situation. Consult an attorney to answer any of your legal questions. Attorneys can be found by searching or by contacting your county or state bar association.
6 CHOICE B: BECOMING AN INDEPENDENT CONTRACTOR Converting from an employee to and independent contractor may seem like a logical and easy choice when weighing your options. It allows you to create your own business which offers tax advantages and independence not seen with the employer/employee relationship. However it is also accompanied by a number of inherent risks and responsibilities that were previously assumed by your employer. As an independent contractor you must comply with the IRS Common Law Rules. These rules can be found in Appendix 4. When you change your relationship with the Medical Corporation from an employee to a self employed independent contractor you must make significant adjustments in how your conduct yourself with the contracted entity. If these changes are not made and you simply continue to act as if you are an employee then you will most likely be viewed by outside regulatory agencies as an employee. If this occurs, you and the contracting entity will be subject to severe fines and possible legal action. As you read through the Common Law Rules you will see that a major test will be that your independent contracting occurs with more than one entity. If you simply continue to be contracted for one group for an indeterminate period of time you will most likely be viewed as an employee. The IRS allows you the opportunity to determine if your work situation qualifies as an Independent Contractor relationship. You can fill out Form SS 8 to determine your work status as viewed by the IRS. The process can take a while so you may want to consult with a tax attorney to obtain a more immediate legal opinion. In addition to qualifying under the IRS Common Law Rules there are other business points that must be considered and dealt with before converting to and Independent Contractor. These include: 1. You must obtain your own professional and business liability insurance. You cannot be covered under the Medical Group s policy. 2. You will no longer receive vacation, sick or holiday benefits. You can only be paid for the work you perform so days off will occur without pay. 3. You will have to obtain your own medical insurance. Converting from a group policy under the medical corporation to an individual policy could be very costly and require that you qualify based upon pre existing conditions. 4. You will not longer be eligible for a retirement plan offered by the Medical Group. 5. You will need to pay quarterly estimated taxes on your earnings to avoid end of year penalties. The employer must report to the EDD within 20 days of entering into a contract for $600 or more in any calendar year, or within 20 days of making payments totaling $600 in any calendar year, whichever comes first. Your city will likely expect you to apply for a business license. Refer to the regulatory section in Appendix 3 for other regulatory requirements that may apply. If you are a sole proprietor, the employer or payer will likely ask you to fill out a Form W 9, which will report your first name, last name and social security number to the IRS. The IRS will be informed by the payer how much you have been paid. You should receive a form from the payer in January stating the total amount you have been paid for the prior calendar year (a form referred to as 1099 MISC). For your tax obligations regarding this income, please consult an accountant or tax adviser.
9 Appendix 1: Finding a Mentor Resources: California Physical Therapy Association California Private Practice Group APTA Private Practice Section (Available to APTA Members Only) Micro Mentor SCORE US Small Business Administration It is important to find the right mentor for you. You will want to interview and talk with them to set the expectations for your relationship. You will also want to note what questions they ask you and how interested they are in your specific situation. Mentors are not people you just go to lunch with but people who will tell you the truth and hold you accountable. Think of them as your coaches or physical therapists. They are not there to do the work for you but to help steer you in the right direction. Questions to ask prospective mentors: Have you mentored anyone before? Where are they now? (Experience) What are your expectations for me? (Goals) How often and how long will you be available to meet? (Frequency & Duration) Remember that they are volunteering their time to help you. Ask if there is anything you can do to help them with their business. You may possess skills they don t have or simply be able to donate some of your time back to them. Be careful it doesn t become a taking relationship from your end.
10 Appendix 2: Benefits of Incorporating. 1 Protecting assets from employees bad acts: A corporation can protect the owner/therapist s personal assets in the event an employee is in a car accident, commits malpractice or injures someone in therapy, or otherwise harms some other person. Incorporating a business may also shield the owner from lawsuits brought by employees themselves. Compliance with rules on corporate record keeping is key to maintaining the protection or corporate veil. Protecting retirement funds from creditors: A properly structured and maintained corporation may offer significant asset protection benefits to shareholders. For example, shareholder qualified retirement plans held in the corporation may be protected from the shareholder s creditors, including in bankruptcy. Protecting practice in the event of death or incapacity: Because a corporation as a legal person can survive beyond the life of its owners, it may serve to generate income for its owner or owners beyond their death or incapacity. As noted above, professional corporations have restrictions on ownership and officers and an expert should be consulted. Maximizing tax deductions: Corporate tax law provides numerous incentives for physical therapists to incorporate. Corporations can be further subdivided into C corporations and S corporations, an election which is required to classify a corporation under sub chapter S of the IRS code. Each provides different tax advantages, and there are also differences in how many shareholders (owners) are permitted. There are significant deductions that may be available to corporations that are not available to sole proprietorships and partnerships. 2 A tax adviser familiar with the differences should be consulted. 1 A physical therapist cannot own a professional corporation with non physical therapists. 2 Of course, any professional forming a corporation should consult legal counsel and a tax advisor regarding such an endeavor. But given the above highlighted benefits, incorporating a physical therapy practice may be worth considering.
11 Appendix 3: Employment Laws Assuming you have between one and fourteen employees, here are the basic laws or requirements that would apply: Cal COBRA (health insurance continuation) Child Labor Disability Insurance Discrimination and Foreign Workers Discrimination Laws (State) Employee Safety Fair Employment and Housing Act Immigration Reform and Control Act Military Leave New Employee Reporting Paid Family Leave Posters and Notices Pregnancy Disability Laws Privacy Sexual Harassment Training Smoking in the Workplace Time Off Unemployment Insurance Wage and Hour Laws Worker s Compensation Many of these and other compliance issues can be found at
12 Appendix 4: Independent Contractors Common Misconceptions Many employers operate on the misconception that they will be safe from the significant penalties of misclassification if their relationship meets any of the conditions listed below. This simply is not the case. It is a myth that you are safe just because the worker: Wanted to be treated as an independent contractor; Signed a written contract; Does assignments sporadically, inconsistently or on call; Is paid commission only; Has no supervision; or Performs assignments for more than one company. Independent Contractor (Self Employed) or Employee? It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be An independent contractor An employee (common law employee) A statutory employee A statutory nonemployee In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Common Law Rules Facts that provide evidence of the degree of control and independence fall into three categories: Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 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.) 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? Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no magic or set number of factors that
13 makes the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. Behavioral Control Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done as long as the employer has the right to direct and control the work. The behavioral control factors fall into the categories of: Type of instructions given Degree of instruction Evaluation systems Training 1. Types of Instructions Given An employee is generally subject to the business s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work. When and where to do the work. What tools or equipment to use. What workers to hire or to assist with the work. Where to purchase supplies and services. What work must be performed by a specified individual. What order or sequence to follow when performing the work. 2. Degree of Instruction Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor. Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right. 3. Evaluation System If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
14 4. Training If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on going training about procedures and methods is even stronger evidence of an employer employee relationship. However, independent contractors ordinarily use their own methods. Financial Control Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker s job. The financial control factors fall into the categories of: Significant investment Unreimbursed expenses Opportunity for profit or loss Services available to the market Method of payment 1. Significant investment An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures. 2. Unreimbursed expenses Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business. 3. Opportunity for profit or loss The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). Having the possibility of incurring a loss indicates that the worker is an independent contractor. 4. Services available to the market An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. 5. Method of payment An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job; however, it is common in some professions, such as law, to pay independent contractors hourly.
15 Type of Relationship Type of relationship refers to facts that show how the worker and business perceive their relationship to each other. The factors, for the type of relationship between two parties, generally fall into the categories of: Written contracts Employee benefits Permanency of the relationship Services provided as key activity of the business 1. Written Contracts Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor. 2. Employee Benefits Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor. 3. Permanency of the Relationship If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer employee relationship. 4. Services Provided as Key Activity of the Business If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney s work as its own and would have the right to control or direct that work. This would indicate an employer employee relationship Form SS 8 If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS 8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker s status. Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS 8 (PDF). Employment Tax Obligations Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes. Forms and associated taxes for independent contractors Forms and associated taxes for employees