Should my associates be W-2 employees or 1099 contractors?

This is the question I hear most from group practice owners, and I want to be straight with you about it. Classification is not a choice you get to make based on what is easier or cheaper. It is decided by the facts of how the person actually works, measured against tests the IRS and your state agencies apply. The arrangement lands where those facts put it.

Those tests look at control and independence. Who sets the schedule. Who brings in the clients and owns the client relationship. Who sets the fee. Whose EHR, office, forms, and phone number get used. Whether the associate is free to build their own caseload elsewhere. Whether required clinical supervision means the practice is directing how the work gets done. In a lot of mental health practices, the associate sees clients the practice brought in, at times the practice scheduled, at rates the practice set, inside the practice’s systems. That combination commonly lands on the employee side.

Contractor relationships that hold up tend to look genuinely different. Think of a supervisor you pay for consultation hours, or a clinician who has their own established practice, their own clients, and their own terms, and who rents time or takes overflow on their own schedule.

Getting it wrong is expensive. Misclassification can mean back payroll taxes, penalties, interest, and wage claims, and it often surfaces years later during an audit or after someone leaves unhappy. Some states apply their own stricter tests, so the answer can differ depending on where the practice and the associate sit. That makes this a decision for an employment attorney together with your tax professional. I do not make that call, and I would not want a bookkeeper who pretended otherwise.

One wrinkle worth knowing so it does not confuse you. The 1099 reporting threshold is scheduled to rise to $2,000 for 2026 payments, up from the old $600 figure, and thresholds and effective dates do shift, so confirm the current rule with your tax professional. That number only decides whether a form gets filed. It says nothing about classification. Someone can be an employee at $60,000 a year and a legitimate contractor at $900, and 1099 preparation is simply the paperwork that follows the answer.

My part comes after the decision. W-2 associates run through payroll with wages, employer taxes, and benefits recorded where they belong, and I process payroll for practices whose payroll system is already up and running. Contractors get a W-9 collected on day one and every payment tracked in one place all year, so January is quiet. Either way, private practice bookkeeping done right shows you what each clinician costs and what each clinician brings in.

If you have associates joining and you want the books and payroll records set up to match what you and your attorney decide, book a consultation with me and we can walk through it together.