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Why reporting income is so confusing

May 13, 2021
Got a headache from all the tax puzzle pieces? Worker misclassification and income reporting rules can make it confusing for dental hygienists to do their taxes. Here's what you need to know.

There are huge number of misunderstandings when it comes to being paid as clinical dental hygienist. The question is simple. Are clinical dental hygienists classified as employees or independent contractors?1 The answer to this question sets the stage for how we are paid, and that in turn determines how a dental office reports our wages to the Internal Revenue Service (IRS).

The IRS has ruled repeatedly that dental hygienists, working for a dentist in the clinical setting, are employees. Despite these rulings, the practice of being paid as an independent contractor prevails.

This article is focused on how to deal with independent contractor income from a reporting standpoint, not on the legality of improperly classified as an independent contractor.

The role of the IRS

The IRS is responsible for collecting taxes. This is the agency’s mandate. Over the years, the IRS was primary focused on whether the taxes were paid, not on who is actually paying taxes. But now there is an increasing focus on worker classification, which determines who pays which portion of the tax burden. Those classified as employees split the tax payments with the employer, while independent contractors pay all taxes on their earnings.2

Due to the increasing number of workers now employed in the gig economy, both state and federal taxing authorities are taking a closer look at workers’ classification statuses. Quite simply, governments of all sizes are feeling the pinch that comes from improper employee classification and income that is either not reported or underreported.3 And taxing authorities on both the state and federal level are now sharing information about who is paying taxes and who is not.

Which form? W4 or W9?

Dental hygienists are quite familiar with documentation in the clinical setting. The same documentation mindset is important to your work life. This is sound advice whether you are a permanent employee, or even if you are only working for a day as the hygienist du jour. It is smart to create a copy or snap a picture of any paperwork you fill out or any document you sign.

For employment purposes, workers are typically asked to fill out either a W4 or a W9.  Form W4 classifies workers as an employee. The W9 form classifies the worker as an independent contractor, a classification that is not supported by the IRS when we are working in the clinical setting.4

When a worker is classified as an employee, the employer withholds federal income tax at a rate based on the number of deductions and marital status claimed on the W4. The employer also withholds Social Security and Medicare taxes from the wages and these two tax withholdings are matched by the employer. The employee receives a W2 form at the end of the year that details all wages, and the tax contributions made by both the employee and the worker.4

Supervision is the issue

Dental hygienists whose wages come from providing clinical care should be classified as employees and paid as an employee. The classification is based on supervision.5 The basic dental hygiene license requires some level of supervision by a dentist employer. Supervision definitions are detailed in each state’s dental practice act. These are the laws that govern how we practice dental hygiene in a particular state.

Some hygienists hold additional licenses or certifications which allow them to own their own business and provide services that are not supervised. California, Oregon, Washington, and Maine all have provisions that allow hygienists to operate in a different format. The information in this article pertains to reporting wages earned by dental hygienists who are practicing under supervision.

Being paid as a temporary worker

Hygienists that work in the temping world often work by the day. Many want to be paid at the end of the day. On the surface this makes sense. You work for a day, and you want to be paid before you walk out the door. But this type of agreement puts one the risky position of being misclassified as an independent contractor.5 If you want same day pay as an employee, it is important to have a conversation in advance. The tax burden that comes from being paid as an independent contractor can be an unpleasant shock.

While it is commonplace for dental hygienists who work as temporary workers to be paid as independent contractor, this classification is not appropriate, and creates a conundrum when it comes to filing one’s tax return. Independent contractors should be asked to fill out a form W9 prior to receiving wages.4,5  It is not uncommon for this step to be skipped, especially if the assignment is only for a day or two. Every year thousands of dental hygienists are blindsided, and their unhappiness is palpable in online forums.

Paying estimated taxes every quarter

There is a further complication of being classified as an independent contractor.  The IRS expects workers, who earn nonemployee wages, file quarterly estimated tax reports. These 1049-ES filings require the contractor to submit a portion of their earnings, which are held by the US Treasury and applied towards the calculated taxes for the year. The estimated taxes function as a forced savings account and must be paid on time. Late payments can incur penalties.6

The $600 confusion

The IRS has very specific rules regarding reporting income. All income must be reported, period. Here is where the confusion occurs. When a worker is paid more than $600 in any one year by a single business, the business is required by law to send the worker Form 1099-NEC (Non Employee Compensation) at the end of the year. Form 1099-NEC reports all wages paid in any form to the independent contractor in a specific year. The business must also send the IRS a copy of the worker’s Form 1099-NEC.7

Businesses are not required to provide a Form 1099-NEC for workers whose annual cumulative independent contractor wages are less than $600. But the IRS and state taxing authorities expect the worker to report all earned income. This is one of the biggest misunderstandings in our profession. As detailed in another article, there is simply no free money. And this $600 threshold places the accounting burden on the worker to keep track of all wages earned throughout the year.7

Reporting rules and forms—oh my!

Many in our profession assume that the rules are being followed correctly, but word is getting out that what has been done forever may not actually be right, much less legal. It is wise to familiarize yourself with topics like classification and reporting. While topics like this are not thrilling, understanding the laws are a perfect way to prevent tax time headaches.

References

  1. Understanding employee vs. contractor designation. Internal Revenue Service. https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
  2. Understanding employment taxes. Internal Revenue Service https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes
  3. Misclassification of employees as independent contractors. US Department of Labor. https://www.dol.gov/agencies/whd/flsa/misclassification
  4. Difference between a W2, W4, and W9 forms. Compliance Prime. https://www.complianceprime.com/blog/2019/02/26/difference-between-w2-w4-and-w9-forms
  5. Fishman S. Working with independent contractors: Avoiding classification problems. Nolo. https://www.nolo.com/legal-encyclopedia/independent-contractors-avoid-classification-problems-35463.html
  6. Estimated taxes. Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
  7.  Reporting payments to independent contractors. Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/reporting-payments-to-independent-contractors.

ANNE NUGENT GUIGNON, MPH, RDH, CSP, a visionary thinker, has received numerous accolades over four decades for mentoring, research, and guiding her profession.  As an international speaker and prolific author, Anne focuses is on the oral microbiome, erosion, hypersensitivity, salivary dysfunction, ergonomics, and employee law issues. She may be contacted at [email protected].