Almost every group practice owner we talk with asks some version of the same question before their next hire: should this therapist be a 1099 contractor or a W-2 employee? It often comes with a second thought: plenty of practices nearby pay part-time clinicians on a 1099, so surely that’s fine.
The honest answer is that the decision 1099 vs W2 therapist is less of a choice than it looks. It’s a facts-and-circumstances test, and the way your practice actually runs day today does most of the deciding. Classification is as much a legal question as a tax one, so the final call belongs with an employment attorney, but the tax side still shapes your costs and your risk.
Is A Therapist A 1099 Contractor Or A W-2 Employee?
It depends on how much control your practice has over the work, not on the job title or whether the person is part-time. The IRS sorts the evidence into three categories: behavioral control, financial control and the type of relationship.
Behavioral control asks whether the practice has the right to direct what the clinician does and how. Financial control looks at who provides the tools, how the clinician is paid and whether expenses get reimbursed. The relationship piece covers contracts, benefits, and whether the work is a key part of your business.
The IRS is clear that there’s no “magic” or set number of factors that decides the answer, and you look at the relationship as a whole. It also suggests documenting each factor behind your decision, a habit worth building before the first offer letter.
The Way Your Practice Runs Usually Answers The Question
The everyday details of a practice tend to point one way quickly. If you set the clinician’s schedule, supervise their clinical work, bill under your group NPI, and have them see clients inside your EHR, that looks a lot like an employee. A stronger contractor case looks more like a clinician who sets their own hours and sees clients for several practices, though you’d still weigh the whole relationship.
One detail we always ask about is malpractice insurance. We spoke with a group practice owner who had every clinician set up on a 1099, and when he looked at how the practice actually operated, he told us, “I pay their malpractice insurance. I’m not sure we pass the test.” Independent contractors often carry their own coverage, so when the practice pays for it, that’s one more detail that can lean toward employee status.
Telehealth doesn’t change much. The IRS says a remote worker can still be your employee under the common-law rules if you can control what will be done and how it will be done, even when the clinician is seeing clients from their own living room. The IRS test only settles the federal tax side, though, and your state may be tougher.
Some States Use A Stricter Test Than The IRS
Passing the IRS test doesn’t settle the question everywhere, because many states apply their own standards for unemployment and wage laws. California is the best-known example. Under its ABC test, a worker is treated as an employee unless the hiring business can show all three conditions, including that the work falls outside the usual course of the business.
That second condition is hard for a therapy practice to meet when the worker is a therapist. California’s own guidance says contracted workers in roles comparable to existing employees will likely be viewed as working in the usual course of the business. The state does list some exemptions from the ABC test, and licensed psychologists are on that list, but not every license type a group practice hires appears there. California also says the exemptions may involve complicated rules and criteria, so we’d get specific advice before leaning on one.
Pre-licensed clinicians add a layer. If you’re bringing on associates or postdocs under your supervision, check with your state licensing board before you settle on a classification, since some boards have their own expectations for supervisees.
What Does Each Model Actually Cost A Group Practice?
A W-2 clinician costs more on paper because the practice pays payroll taxes on top of their pay. You withhold income tax and the employee’s share of Social Security and Medicare, and you also pay the employer share of 6.2% for Social Security and 1.45% for Medicare, plus federal and state unemployment tax. Our guide to the first 90 days after you hire your first W-2 clinician covers the setup and the cash flow dip that follows.
Say you pay a W-2 associate $70,000 in a year, and your share of Social Security and Medicare at the current employer rates comes to about $5,355 before unemployment tax, workers’ comp or benefits. That cost sits on top of the salary you quote, so it belongs in the hiring math from the start.
A 1099 contractor pays their own self-employment tax, which runs 15.3%, and can deduct the employer-equivalent portion when figuring their adjusted gross income. That’s part of why contractors often ask for a higher split, and our break-even analysis for hiring another therapist shows how the split shapes the practice’s side of the math. When a contractor negotiates a higher rate, some of the payroll tax you’d save goes toward paying it.
Contractors still come with paperwork. For tax years beginning after 2025, the threshold for reporting payments on Form 1099-NEC rose to $2,000, and the form is due by January 31, or the next business day when that date lands on a weekend. Even with contractors, we recommend running pay through a payroll platform rather than writing checks or sending Venmo. It formalizes the relationship, the clinician gets a notification on payday, and it signals they’re working with a real business.
Our payroll software roundup compares them. Taxes are the visible cost, but for a practice that’s already short on cash, we’d look just as hard at how the pay is structured.
Switching To W-2 Rarely Fixes A Cash Flow Problem
When a group practice is losing cash, owners often assume the employment structure is the problem, and in our experience it’s usually the split percentage. Switching clinicians from 1099 to W-2 can actually make cash flow worse, because now you’re on the hook for payroll taxes on top of the same compensation.
Commission pay can work for contractors or employees, but with a properly classified contractor there’s more room to tie it to what insurance actually pays. When your contractor agreement spells it out, you can true up their pay as reimbursements come in. If Aetna was supposed to pay $120 for a session and only sends $90, the true-up follows that agreed formula on the next comp cycle, as long as it fits your state’s payment laws. Hourly employees get paid for hours worked either way.
W-2 models can still work well. The ones we’ve seen succeed tie pay to billing codes rather than flat hours. Codes drive reimbursement, so pay built on your payer rates for each code keeps some link to what insurance pays, though we’d still model what happens when a claim pays late or short. Flat fee per session is the structure we’d approach carefully. One practice owner paying her W-2 associates a flat fee told us that when collections slowed, she felt like she was working to pay her clinicians rather than building toward her own goals. A percentage split ties more of a clinician’s pay to collections, though employees still get whatever wages the law requires, so we’d model a slow month first.
What If Your Current 1099 Setup Doesn’t Pass The Test?
Fixing it going forward is far better than hoping nobody notices. Some practices go 1099 mainly to skip payroll taxes, and if the clinician should have been an employee, that exposure can catch up with them. If you treat an employee as a contractor without a reasonable basis, the IRS says you may be held liable for employment taxes for that worker.
There are formal paths worth knowing about. Relief provisions can apply when a business had a reasonable basis for its treatment and filed every required information return consistently with it, among other conditions. When the answer is genuinely unclear, either the practice or the clinician can file Form SS-8 and ask the IRS to decide, though the IRS says a determination can take at least six months.
For practices ready to reclassify, the IRS Voluntary Classification Settlement Program lets eligible businesses treat workers as employees going forward with partial relief from federal employment taxes. One of the conditions is having filed all required Forms 1099 for those workers for the previous three years, which is one more reason clean contractor paperwork matters. That’s a call to make with your CPA and an employment attorney.
Model The Hire Before You Choose A Structure
Once you know which arrangements fit how the clinician will actually work, the clearest way to choose between them is to put those options side by side with your own numbers. We worked with a solo therapist who was turning away clients and wanted to bring on an associate. We turned her payer mix, mostly two commercial carriers, into a projected average session fee.
We modeled revenue at different session volumes, added every new expense she’d pick up, like an extra EHR seat, a Google Voice line, and payroll software, and ran a W-2 hourly, a W-2 commission, and a 1099 commission model side by side. She could see when she’d break even and when the associate would start contributing a profit, and she went with the W-2 commission model with a clear picture of what it would likely cost her.
Get Support From A CPA Who Understands Group Practices
At Traktion, we work exclusively with therapists and mental health practices. Through our financial coaching and CFO services, we build side-by-side hiring models, set up payroll for new clinicians, and report profitability per clinician.
If you’re weighing your next hire or wondering whether your current setup still holds up, we’d be glad to help.
Book a call with us and we’ll look at your numbers together.
About the Authors
Mebea Yohannes is the CEO and co-founder of Traktion, an accounting firm built specifically for therapists and mental health practitioners in private practice. Yeshi Negga, CPA is the co-founder and COO. Together, they help solo and group therapy practice owners across the United States with monthly bookkeeping, year-round tax planning, S-Corp analysis, and owner compensation strategy.