Should therapists in a group practice be W-2 employees or 1099 contractors?

The answer depends on how your therapists actually work, not on what their contracts say. The IRS and state agencies look at the real working relationship. A signed independent contractor agreement does not make someone a contractor if the practice controls how, when, and where they do their work.

Several signs point toward employee status. The practice sets the therapist’s schedule or required hours. New clients come to them through your intake process. You set the session fees and handle all billing. You provide the office, the EHR, the phone line, and the scheduling system. You require specific clinical protocols, documentation standards, or supervision. The therapist sees clients only through your practice and under your practice’s name. That list describes most group practices. Many groups that call their therapists contractors are running employee relationships in everything except the paperwork.

A 1099 arrangement is easier to defend when the therapist runs an independent practice of their own. They have their own clients, set their own rates, carry their own malpractice coverage, and decide their own hours and methods. They might rent office time from you or take overflow referrals, and they also work with other practices or see clients elsewhere. Even then, the arrangement is not automatically safe. The details still matter.

State rules can be stricter than federal ones. California uses the ABC test, which presumes a worker is an employee unless the business can prove three things. The worker must be free from the practice’s control, the work must fall outside the usual course of the practice’s business, and the worker must have an independently established trade. A therapist providing therapy at a therapy practice fails that second part almost every time. Other states apply their own tests for unemployment insurance and workers’ compensation. If you have clinicians in more than one state, each state’s rules apply to the people working there.

Misclassification gets expensive. You can owe back payroll taxes, including the employer’s share of Social Security and Medicare, plus federal and state unemployment taxes, penalties, and interest. You may also owe unpaid overtime and the value of benefits the clinician should have been eligible for. These problems often surface when a departing therapist files for unemployment or a state agency audits one worker and then looks at everyone else in the same role. The review usually covers several years, not just the current one.

Switching to W-2 does not mean giving up per-session pay. Many group practices pay employed clinicians per session or per unit of production. Overtime rules for per-session employees deserve their own conversation with your attorney, since that pay structure can affect whether a clinician is exempt. Our work with behavioral health group practices includes calculating session-based pay under the compensation agreements a practice already has and running it through payroll each pay period.

We don’t make classification decisions for clients. That call belongs with an employment attorney who can review your agreements, your state’s rules, and how your therapists actually work day to day. What we can do as part of our medical practice bookkeeping and tax services is help you carry out whatever you decide. That includes moving clinicians onto payroll, handling onboarding paperwork, and making sure the books and tax filings reflect the change correctly from the first pay run forward.