Are you treating your home healthcare caregivers as 1099 contractors to save on taxes and payroll costs?
Have you ever wondered if the IRS would agree with that decision?
You're running a home healthcare agency, and you've made what seemed like a smart business decision: treating your caregivers as 1099 contractors instead of W-2 employees. It's easier, cheaper, and your neighbor who runs a similar agency does it the same way.
Unfortunately, you now have a problem: That "convenient" choice is setting you up for a five-figure tax bill and penalties that could seriously hurt your business.
At Patrick Accounting, we've seen the Department of Labor letters, the IRS audits, and the scramble to come up with tens of thousands of dollars in back taxes because someone assumed they could choose how to classify their workers.
Worker classification isn't a choice you get to make based on convenience. There are actual legal tests that determine whether someone is an employee or a contractor, and getting it wrong can be devastating.
In this article, you'll learn how the IRS determines whether someone is a contractor or an employee, what misclassification actually costs your agency, and how to fix it before you face penalties you can't afford.
Why Home Healthcare Agencies Misclassify Workers
So, why do so many home healthcare agencies end up treating employees as contractors? Here are some of the reasons:
- It seems more convenient. No payroll, no withholding, no quarterly reports. Just pay your caregivers and let them handle their own taxes.
- It appears cheaper. No employer payroll taxes, no workers' compensation insurance, no benefits like health insurance or PTO.
- “Everyone else does it this way." Other agency owners treat their workers as 1099 contractors, so it must be fine, right?
- Your workers sometimes prefer it. Some caregivers like being "their own boss" or think they'll save money on taxes.
Unfortunately, none of these reasons matter to the IRS or the Department of Labor. What seems easier or what your worker prefers has zero impact on whether that person is legally an employee or a contractor.
Why the IRS Looks at Control, Not Convenience for Employee Classification
When it comes to classifying your caregivers, it’s not a matter of "What's easier for my business?"
The question the IRS asks is: "How much control do you have over this worker?"
If you're scheduling specific workers to be at specific homes at specific times, that's control. If you're dictating when someone shows up, where they go next, and indicating that they can't send someone else in their place, you have an employee, regardless of what you may call it.
Contractors vs. Employees in Home Healthcare
A legitimate contractor relationship looks like this: You contract with Patrick Rehab Services (a separate therapy agency) who provides therapists from their team. You don't control which therapist shows up or their schedule. You just have an agreement for therapy services.
Patrick Rehab Services is your vendor. Their therapists are employees of Patrick Rehab Services, not your agency.
On the other hand, let's say you hire Sally, an RN. You tell her to be at Mrs. Johnson's house at 8:00 a.m., then at Mr. Smith's at 10:00 a.m., and Ms. Williams' at 2:00 p.m. Sally can't send someone else. Your clients specifically requested her.
That's an employee relationship, even if you're calling Sally a 1099 contractor.
You're controlling when she works, where she works, and the fact that she has to be the one doing the work. Not withholding taxes doesn't change what the relationship actually is.
What Worker Misclassification Costs Your Home Healthcare Business
Since this isn't just a theoretical problem, let’s look at some real numbers.
Back Payroll Taxes (Both Shares)
When the IRS or Department of Labor determines your "contractor" should have been an employee, you're on the hook for payroll taxes, both the employer's share AND the employee's share. That's 15.3% total for Social Security and Medicare taxes alone.
Let's say you paid a caregiver $40,000 last year as a 1099 contractor. If they're reclassified as an employee, you owe approximately $6,120 in back payroll taxes, plus penalties and interest.
And that's just for one worker for one year. If you have five caregivers you've been treating as contractors for three years? You're looking at tens of thousands of dollars.
Overtime Violations You Didn't Track
If you designated them as a contractor, you probably didn't track their hours or pay overtime. But employees are entitled to time-and-a-half for hours over 40 in a week.
If your caregiver regularly worked 50 hours a week, you should have been paying them overtime for those extra 10 hours. Now, you're looking at back overtime pay on top of the back payroll taxes.
Workers’ Compensation Exposure
Another factor is workers' compensation insurance, which typically doesn't cover 1099 contractors. So, if your "contractor" gets injured on the job—maybe they slip and fall at a client's home or throw out their back lifting a patient—and they should have been classified as an employee, you're personally liable for their medical expenses and lost wages.
This alone can run into six figures depending on the severity of the injury.
Benefits You Didn't Provide
If you offer health insurance, retirement contributions, or paid time off to your other employees, but you classified someone as a contractor to avoid giving them those benefits, you'll likely face penalties for that, too.
IRS Administrative Penalties
On top of everything else, there are specific filing penalties:
- $50 for each 1099 form with a missing or incorrect Tax ID number
- $50 for each 1099 not submitted to the IRS
These might sound small, but they add up across multiple workers and multiple years.
Looking at the Big Picture
According to the National Employment Law Project, 10%-30% of employers misclassify their workers as independent contractors. The Department of Labor and IRS have been cracking down specifically because this is such a widespread problem.
And they're not being lenient. They're being aggressive.
The Three Factors the IRS Actually Uses for Worker Classification
So how does the IRS decide if someone is an employee or a contractor? They use these three main factors:
1. Behavioral Control
Do you dictate when, where, and how they work?
If you're setting their schedule, assigning them to specific locations, and telling them what to do and how to do it, that's behavioral control, which points to an employee relationship.
Contractors typically set their own hours, decide how to complete the work, and have the freedom to work for multiple clients.
2. Financial Control
Do they have their own business? Other clients? A business license?
Real contractors usually have:
- A business card
- A business license number issued by their city
- Multiple clients (not just you)
- Their own liability insurance
- The ability to make a profit or loss based on how they manage their work
If your caregiver shows up, does the work, gets paid, and doesn't have any of those things, they're probably an employee.
3. Relationship of the Parties
What kind of relationship exists between you and the worker?
Are you offering benefits? Is this an ongoing, indefinite relationship, or is it project-based? Do you have a written employment contract (even if you called it a "contractor agreement")?
The IRS looks at the reality of the relationship, not what you call it in your paperwork.
3 Real Examples of Employee vs. Contractor
Let's walk through some actual situations to make this concrete:
Scenario 1: Sarah the Physical Therapist – EMPLOYEE
You hire Sarah as your physical therapist. You assign her to specific patients, set her schedule (Tuesdays and Thursdays, 9 a.m. to 3 p.m.), and your clients specifically requested Sarah. She can't send a replacement if she's sick. You need Sarah.
Verdict: Employee.
You're controlling when she works, where she works, and it has to be her specifically.
Scenario 2: ABC Therapy Services – CONTRACTOR
You contract with ABC Therapy Services, a separate therapy agency. They provide physical therapists on a rotating basis to cover your patient needs. You don't control which therapist shows up or their schedules, you just have a service agreement.
Verdict: Legitimate contractor relationship.
ABC Therapy Services is your vendor, and they employ the therapists.
Scenario 3: Your Full-Time Caregiver – EMPLOYEE
Your caregiver works 30 hours per week for you. You set their daily routes, tell them which clients to visit and when, and they use supplies you provide. They don't work for anyone else.
Verdict: Employee.
You're controlling virtually every aspect of how they work.
"But My Worker Wants to Be a 1099!"
This is a pretty common response, actually. But you need to understand that what your worker prefers doesn't change the law.
The IRS doesn't care if you both agreed to the arrangement or if your worker signed a contract saying they're an independent contractor. If the actual working relationship meets the criteria for an employee, it doesn't matter what either of you wanted.
And you're both on the hook if the classification is wrong. You'll owe back taxes and penalties, and your worker might owe back taxes too.
How to Fix Employee Misclassifications Without Panicking
If you're reading this and realizing you might have a misclassification problem, don't panic. Here's what to do:
- Run your current workers through the classification test. Be honest about how much control you have. You can use our sister company, Whirks', free 1099 vs. W-2 Assessment to evaluate each worker.
- Start getting it right going forward. If someone should be an employee, transition them to payroll. Yes, it's more work and could cost more, but it's a lot less expensive than penalties and back taxes.
- Talk to your accountant about past misclassification. If you've been treating employees as contractors for years, you need professional guidance on how to clean that up. You may be able to use voluntary disclosure programs to reduce penalties, but you need to work with your accountant.
- Don't try to justify the unjustifiable. If deep down you know they're employees, but you've been treating them as contractors to save money, stop. The Department of Labor and IRS are not sympathetic to cost-saving measures that violate employment law.
Don't Let Convenience Cost Your Business Thousands
Worker classification isn't a gray area, even though many home healthcare agencies treat it like one. The Department of Labor and IRS have clear tests, and if you fail those tests, the penalties are meant to hurt.
The risk simply isn't worth it. Yes, having employees is more work than paying contractors. Yes, it costs more in payroll taxes and insurance. But it's nothing compared to what you'll pay if you get audited and lose.
At Patrick Accounting, we help home healthcare agencies stay compliant and avoid the costly mistakes that can derail a growing business. We've seen what happens when agencies get worker classification wrong, and we'd much rather help you get it right from the start.
If you're unsure about how your workers should be classified, start with our free 1099 vs. W-2 Assessment Guide. It walks you through the key factors and helps you make the right call.
And if you need someone to review your specific situation and help you clean up any past issues, that's exactly what we're here for. Let's make sure you're protected before the IRS comes knocking.
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