Can Therapists Be 1099 Independent Contractors?

Can therapists be 1099 contractors? In theory, yes. But in real life, in almost every case I’ve ever seen, the therapist should be classified as an employee and get a W-2.

This is an extremely comprehensive article, so we’ve included links to sections you can jump to (below) based on your current situation. But before jumping around, I think this simple example will be helpful to all readers.

Picture your relationship with an electrician who is fixing lights in your office (bear with me, this will make sense in a second):
 

• The electrician quotes you a price, decides how to do the repair, brings the necessary equipment, and carries his own insurance.
• He has a website, business cards, and a Google Business profile.
• He serves lots of other customers. When your lights are fixed, he moves on to the next job. If you never call again, his business continues.
• And possibly the most important point here: the electrician works in a totally different industry than your private practice. You provide mental health services; he provides electrical services.

Nobody on earth would say the electrician is your employee. This is a textbook case of a business paying an independent contractor.
 

Now picture a private or group mental health practice:
 

• The practice advertises to the public, and a prospective client calls.
• The practice runs intake, picks the therapist (let’s call her “Jen”) who will work with the client, and sets the fee with the client.
• The practice collects the money from the client and provides the EHR.
• The practice pays Jen an agreed amount or percentage set by the practice (not by Jen).
   

Jen might choose her own days, and she might work from home. She might get paid a percentage. She might be part-time. She might even have an LLC, carry her own malpractice insurance, and have signed an agreement calling her an independent contractor.

But the question isn't whether you can find a few things that look independent. We have to look at the relationship between Jen and the practice holistically.

Here's the question I'd hold onto for the rest of this guide: if the practice decided to take away all of Jen’s clients, does her income go to zero? If so, Jen is almost definitely an employee of the practice, not a contractor.

This isn't a legal test. But it’s the quickest way I know to see the relationship clearly, and we'll come back to it as we walk through the rules.
 

Skip to the section(s) relevant to you:

• I’m a practice owner about to make my first hire
• I’m a practice owner who currently has therapists working for me, and they’re classified as 1099 contractors
• I’m a therapist working for a group practice that pays me as a 1099 contractor
• I’m a practice owner wondering about the non-clinical people I pay (admin, billing person, marketing person, etc)
• I’m deep down the rabbit hole on this and want to nerd out on what the government actually says directly
  
   

Each section below is written for one of those situations, so you only need to read yours. After them, you'll find a final section that applies to everyone: how owners pay themselves, how state rules fit in, common questions, and where to go from here.

Hiring your first clinician: should they be a W-2 employee or a 1099 contractor?

If you're about to make your first hire, congratulations. You're also at the best possible moment to get this right, because there's nothing to unwind yet. Every decision you make now becomes the pattern for every clinician you hire after this one.

Here's the short version. If this clinician will see clients who come through your marketing and your intake, at fees you set, in your systems, plan on W-2. That's most first hires. A 1099 arrangement only fits when the person you're bringing on already runs a real practice of their own and you're one source of work among several.

Run your new hire through these 10 questions

Before you make an offer, think through how the job will actually work, not what the agreement will say. The IRS and the Department of Labor both care about the real relationship, and these ten questions cover the facts both agencies weigh most.
 

This isn't a legal test, and you can't add up the answers to get one. It's a way to see the relationship clearly before you choose. If your answers lean heavily toward the right-hand column, you're looking at the kind of relationship that can support a 1099. If most land in the middle column, you're almost certainly hiring an employee.

One question isn't on the list because it has the same answer for every therapy practice: is the clinician's work the thing you sell? It is. The IRS treats work that's a key part of your business as a sign of employment, and some states treat it as close to decisive. That's why I want to see the rest of the list lean clearly toward contractor before I'd be comfortable with a 1099.

Three common setups, and where each one lands

Here's how that plays out for the three hiring situations I see most.
 

The embedded clinician. You market, run intake, and assign clients. You set the fees and the pay, handle billing, and provide the EHR and telehealth. The clinician sees only your clients and has no outside practice, website, or marketing, even if they have an LLC, their own malpractice policy, and a signed contractor agreement. This is an employee.
 

The remote but dependent clinician. Same as above, except they work entirely from home, set their own availability, and you never touch their clinical approach. It feels more independent, and those facts do count. But nearly every client still comes from you, you still set the economics, and the relationship has no end date. Still most likely an employee.
 

The established private practitioner. They already run a practice with their own clients, website, referral sources, systems, office costs, and pricing. They'd take some overflow or specialty referrals from you under a separately negotiated arrangement. This is what a legitimate 1099 relationship looks like. You're one source of revenue inside a business that would carry on without you. That's the electrician.

If you're hiring a psychologist for assessments, the same logic applies. A psychologist with an established assessment practice, their own testing materials and referral sources, who takes occasional evaluations from you on negotiated terms, can be a contractor. A psychologist you recruit to perform your evaluations, with your clients, your pricing, your testing infrastructure, and required availability, is doing the thing your practice sells inside your business. Specialized skill doesn't change that.

If your first hire is pre-licensed

Associates are often a practice's first hire, and this is the clearest answer in the whole topic: plan on W-2.
 

A pre-licensed clinician (an associate, resident, or provisionally licensed therapist) practices under a licensed supervisor who is responsible for their clinical work. That supervision is strong evidence of control, which is what the IRS looks for, although the federal answer still depends on the whole relationship. And some licensing laws settle the question outright:

• California says MFT trainees and associates may work only as employees or volunteers, never as independent contractors. The same rule applies to associate clinical social workers, and associates hand the board their W-2s when they apply for licensure.
• Kentucky's psychology board ruled that 1099 status for psychological associates isn't allowed under its licensing law, and warned the arrangement could be seen as exploitative.
• New Hampshire requires a W-2 relationship when supervised experience happens in a private practice, and a 1099 arrangement doesn't satisfy the rule. Our New Hampshire practice guide covers it in more detail.
   

In states like these, getting it wrong isn't only a tax problem. It can become a licensing problem for you as the supervisor, and it can put your associate's hours toward licensure at risk. Check your board's rules before you post the job.

The contract, the LLC, and the 1099 don't decide it

You'll hear a lot of advice about paperwork: have them form an LLC, carry their own malpractice policy, sign a contractor agreement. Those things can support a relationship that's already independent. They can't create one.
 

A Form 1099 is a reporting form, not a classification election. The IRS says that when an employer-employee relationship exists, the label makes no difference. Two more you'll hear from candidates:

• "I'd rather be a 1099." Their preference doesn't decide it, and neither does yours. Plenty of clinicians ask for 1099 status without realizing it means paying both halves of Social Security and Medicare and giving up unemployment and workers' comp coverage.
• "I'll pay my own taxes." That's what contractors do, but agreeing to it doesn't change what the relationship is.

W-2 doesn't mean full time or rigid

A lot of owners resist W-2 because they picture a nine-to-five job. It doesn't have to be. You can employ someone ten hours a week who works remotely and picks their own appointment blocks. The IRS says it makes no difference whether someone works full time or part time. A flexible employee is still an employee, and an employee can still be flexible.

Designing the pay for a W-2 clinician

Going W-2 doesn't mean giving up productivity-based pay. It does bring in a set of rules you may not have dealt with yet: federal wage and hour law.
 

Exempt or non-exempt. Licensed professionals can be exempt from minimum wage and overtime rules, but the DOL generally requires pay on a salary or fee basis of at least $684 a week, a threshold the DOL confirmed in May 2026. The exception for practitioners of law and medicine doesn't cover therapists, and some states set a higher threshold of their own.
 

Two details trip people up. A "fee basis" means a set fee for a unique job, like a one-time evaluation, not the same payment for the same task repeated all week, so per-session pay often doesn't qualify. And the job itself has to meet the DOL's duties test for learned professionals. Exempt status is a separate question from W-2 status, so check both.
 

That means a clinician paid purely per session or by a straight percentage, with no guaranteed base, may not be exempt. Non-exempt means tracking hours and paying at least minimum wage for all of them, including notes, admin, and meetings, plus overtime past 40 hours.
 

Common structures that work:

• A guaranteed base salary plus productivity pay above a threshold, which can keep the exemption (as long as the duties test and salary rules are met) and keeps the incentive.
• Hourly pay with tracked time, often the simplest route for part-time clinicians. On a salary basis, the $684 isn't prorated, so a clinician working 15 hours a week would still need a guaranteed $684 every week to be exempt.
   

State wage laws can add their own requirements, so I'd have an employment attorney sign off on the pay plan before the first paycheck.
 

What the split looks like on W-2. As the employer, you'll pay 7.65% in Social Security and Medicare on top of wages, plus federal and state unemployment tax and workers' comp. That's why a W-2 split usually sits a few points below a 1099 split. A 60% contractor split and a 60% W-2 split are not the same deal, for you or for the clinician.
 

Here's the math for a clinician who brings in $150,000 a year in collections:

Federal figures only. Assumes the contractor has no business expenses, pay stays under the Social Security wage base, and the practice gets the full federal unemployment credit. Income tax, state payroll taxes, and workers' comp aren't included.
 

At about 56% on W-2, you spend roughly what a 60% contractor split would cost you, and the clinician keeps roughly what they'd keep as a contractor after paying their own self-employment tax. That's because self-employment tax is essentially both halves of Social Security and Medicare. W-2 just splits who pays them.
 

Treat 56% as a starting point, not a formula. State unemployment and workers' comp add a little to your side, and on the clinician's side, income tax, the QBI deduction, and the benefits you offer can shift the comparison. But it's a useful number to have in your head when a candidate compares your W-2 offer to someone else's 1099 offer.

Setting up payroll for your first employee

Here's what changes when you go from no employees to one:

• Choose a payroll provider and register for federal and state payroll tax accounts.
• Have your new hire complete Form W-4 for withholding and Form I-9 to verify they're authorized to work in the U.S.
• Report the new hire to your state's new-hire registry.
• Set up workers' compensation coverage (required in most states) and state unemployment insurance.
• File Form 941 quarterly and Form 940 annually, and issue a W-2 each January. A good payroll provider handles most of this for you.
• Decide whether the role is exempt or non-exempt, and put the pay plan in writing.
• If your clinician works remotely from another state, register there too. Payroll obligations generally follow where the employee works.

Check your retirement plan before the first paycheck

This is the one almost nobody connects to hiring. If you have a solo 401(k), it only works as long as you have no eligible employees other than yourself and a spouse. Once your new hire meets the plan's eligibility requirements, you generally have to include them, and the plan becomes subject to the coverage, testing, and reporting rules for plans with employees. Under newer rules, some long-term part-time employees can become eligible too.
 

If you have a SEP-IRA, whatever percentage of pay you contribute for yourself, every eligible employee is owed the same percentage. Under the standard rules, eligible means at least age 21, three of the last five years of service, and at least $800 of pay in 2026.
 

Neither is a reason not to hire. It's a reason to look at your plan now, while changing it is easy.

If your new hire really is a contractor

If you're bringing on an established practitioner who fits the right-hand column, set the relationship up so the paperwork matches the independence that already exists:

• Collect a Form W-9 before the first payment. If a contractor won't give you a taxpayer ID, you're generally required to apply backup withholding at 24%.
• Pay against invoices, at rates they set or you negotiate for each engagement, rather than through anything that looks like payroll.
• Keep a written agreement that matches reality. It should describe what they're delivering, not how or when they have to work.
• Leave the "how" to them. Don't train them on your procedures, require your schedule, or restrict them from working for others beyond what privacy and confidentiality require.
• File the right 1099 on time. For 2026, you file once you pay a contractor $2,000 or more. For contract clinicians, we generally file Form 1099-NEC, due January 31. (There's a technical argument for Form 1099-MISC instead, which the technical section covers.)
• Review the relationship once a year. Contractors usually drift into employees slowly, one added requirement at a time.

One habit to start now: consistency

Whatever you decide for this hire becomes your pattern. Treat people doing the same job the same way. If you later have two clinicians doing substantially the same work, one on W-2 and one on a 1099, that inconsistency can cost you one of the IRS's most important protections (the technical section explains Section 530 relief if you want the detail).

And remember that your state may have stricter rules than everything above. The final section covers how state rules fit in.
 

Planning your first hire? This is one of my favorite conversations to have with practice owners, because getting the structure right at the start saves so much trouble later. Fill out the form at the bottom of this page and you'll hear back from me personally.

Already paying therapists as 1099 contractors? How to check and how to fix it

If you already have clinicians on 1099s and you're starting to wonder whether that's right, take a breath. You're far from alone. Paying clinicians on 1099s is one of the most common setups I see in group practices, and fixing it on your own terms is usually far cheaper than having it found for you.
 

This section walks you through it in order: where you probably stand, what the exposure actually looks like, how these issues usually come to light, and the step-by-step way to fix it.

First, figure out where you stand

Think about how each clinician's work actually happens day to day, not what their agreement says. If most of these are true, you most likely have an employee:

• Your practice brings in the clients, runs intake, and assigns them.
• You set the client's fee and the clinician's pay or split.
• The clinician works inside your systems: your EHR, your scheduling, your billing.
• They don't market a practice of their own or have meaningful clients outside yours.
• The relationship is ongoing, with no defined end.
• If you stopped sending them clients tomorrow, their income would go to zero.
   

That's the same pattern as Jen at the top of this article. Choosing their own days, working from home, having an LLC, or signing a contractor agreement doesn't change it. If you want a more detailed version, the 10-question checklist in the first-hire section works just as well for clinicians you already have.
 

Two groups deserve your attention first:

• Pre-licensed associates. Their supervision is strong evidence of control, and some states flatly prohibit 1099 arrangements for associates. It can also put their hours toward licensure at risk. If you have associates on 1099s, they're the first ones to fix.
• Clinicians who are treated differently for the same work. If some therapists doing the same job are on W-2 and others are on 1099s, that inconsistency weakens one of your best federal defenses.

What the exposure actually looks like

If the IRS reclassifies a clinician as your employee, the practice owes the employment taxes it should have been paying. For honest mistakes, federal law offers reduced rates under IRC section 3509, as long as you filed the required 1099s:

• 1.5% of wages for income tax withholding
• 20% of the employee's share of Social Security and Medicare
• 100% of the employer's share (7.65%)
   

That works out to about 10.68% of wages. If the 1099s weren't filed, the first two rates rise to 3% and 40%. If the IRS finds intentional disregard, the reduced rates don't apply at all.

Say you have three therapists paid $70,000 a year each, and three years are open:

That's federal employment tax alone. Interest, penalties, and federal unemployment tax come on top, and so do the costs most owners don't see coming:

• Your retirement plan. A solo 401(k) only works if you have no eligible employees other than you and a spouse, so reclassified clinicians can knock it out of solo status. With a SEP-IRA, every eligible employee is owed the same percentage you contribute for yourself, and eligibility is at least age 21, three of the last five years of service, and at least $800 of pay in 2026. A therapist who's been with you three of the last five years may have been eligible all along. Plans can be fixed through the IRS's correction programs, but it costs money and paperwork.
• Headcount laws. Several federal employment laws switch on at a set number of employees: 15 for the main anti-discrimination laws (Title VII and the Americans with Disabilities Act), 20 for age discrimination, 50 for family and medical leave, and 50 full-time and full-time-equivalent employees (generally counted over the prior year) for the Affordable Care Act's employer coverage rules. A practice with eight W-2 staff and ten 1099 clinicians may have been over some of those lines all along.
• Benefits you already offer. If you offer health insurance or other benefits to employees, check whether the plan's terms would have covered reclassified clinicians too.
• The state side. State unemployment contributions, workers' comp, and wage claims are separate from all of the above, and none of the federal fixes reach them.

How it usually comes to light

In practice, the trigger is usually a person, not a random audit. A clinician leaves, files for unemployment, and discovers no one paid into the system for them. States like California tell workers who think they were misclassified to apply anyway and let the agency sort it out.
 

The other route is Form SS-8, which lets a worker ask the IRS to rule on their status. The IRS publishes redacted versions of these rulings, and the therapist cases read like a group practice owner's file. In one ruling, a psychotherapist at an outpatient counseling practice asked for a review after two years of 1099s. She was paid a percentage of the insurance billed, had signed an independent contractor agreement with a non-solicitation clause, and worked at the practice's offices on a varying schedule.
 

The IRS concluded she was an employee. It called the practice's reliance on the contractor agreement "without merit," and noted that the chance to earn more under a commission arrangement isn't the kind of profit or loss a real business has. Notice what didn't save the arrangement: the signed agreement, the varying schedule, and the percentage pay.

"But everyone in my area pays therapists this way"

I hear this all the time, and it carries more legal weight than most people expect. Federal law has a safe harbor, called Section 530 relief, that can protect you from federal employment taxes even if your clinicians turn out to be employees. To qualify, three things all have to be true:

1. You filed the 1099s. Every required 1099 for every year in question.
2. You treated similar workers the same way. If one therapist doing the same job is on W-2 and another is on a 1099, relief is generally off the table. This is where mixed practices get caught.
3. You had a reasonable basis. That can be a court case or IRS ruling on similar facts, a past IRS employment tax audit of your practice that looked at these workers and didn't reclassify them, or a long-standing recognized practice of a significant segment of your industry.
    

That last one is where "everyone does it" comes in. It can work, especially if you can show what practices in your area actually do and that you relied on it at the time. But Section 530 is a defense, not a classification. It doesn't make anyone a contractor going forward, and it doesn't cover federal wage law, state unemployment, workers' comp, or your retirement plan.
 

One point here matters more than people realize: moving clinicians to W-2 going forward doesn't, by itself, cost you Section 530 relief for earlier years. Fixing the future isn't an admission about the past. (The technical section has the statute and the IRS's own guidance if you want it.)

How to fix it, step by step

What I wouldn't do is flip everyone to W-2 on Monday because of something you read online, including this. A sudden switch without a plan can raise more questions than it answers. That doesn't mean waiting is safer, either. Every month on the old setup adds to the exposure, so the goal is a quick plan, not a slow one. Here's the order I'd work in:

1. Write down what actually happens. Who brings in clients, who sets fees and pay, whose systems, what you require, and what independent practice each clinician has. Ignore the labels.
2. Decide clinician by clinician. Some may be genuine contractors. Pre-licensed clinicians almost certainly aren't.
3. Check whether Section 530 relief applies. It can protect you from federal employment taxes for past years, but it's fact-specific, so it's a conversation, not a checkbox. Know where you stand on it before you pick a path.
4. Look at the IRS's Voluntary Classification Settlement Program (VCSP). It exists for exactly this, and it does a different job than Section 530, so weigh the two together with your CPA. If you qualify, you pay 10% of one year's employment tax at the reduced rates, with no interest or penalties, and the IRS won't audit those workers' classification for prior years. You generally need to have treated them consistently as contractors, filed their 1099s for the past three years, and not be under an IRS employment tax audit or a DOL or state audit on classification.
5. Pick a clean start date and give your team notice. The VCSP application should be filed at least 120 days before the date you want to start treating clinicians as employees. For an April 1, 2027 switch, that means filing by early December 2026.
6. Handle the state side separately. VCSP covers federal employment taxes only. State unemployment, workers' comp, and wage rules need their own review.
7. Check your retirement plan. If you have a solo 401(k) or a SEP-IRA, review it with the new headcount before the switch date, not after.
    

With the three therapists from the example above, the contrast is hard to ignore. If you qualify, a VCSP payment would be about $2,240 (10% of one year's $210,000 in wages at 10.68%), compared with roughly $67,300 at the reduced rates if the IRS reclassified all three open years. Keep in mind those are federal employment tax figures only. State unemployment, workers' comp, wage claims, and retirement plan fixes are separate, and VCSP doesn't touch them.

Resetting pay when you switch

Once you're paying the employer's share of payroll taxes, the split usually needs to change. The good news is that it changes less than most owners fear. For a clinician bringing in $150,000 a year, a 60% contractor split and a 56% W-2 split cost the practice about the same, and leave the clinician with about the same money before income tax, because W-2 just splits Social Security and Medicare between you instead of putting it all on them. The full table is in the first-hire section, along with the overtime and exempt-status rules you'll need to follow once they're employees.
 

Resetting a split changes someone's pay, so do it through a new written agreement and a real conversation, not a surprise on a pay stub.

Talking to your clinicians about the change

This is the part owners dread most, and it usually goes better than they expect. In my experience, most clinicians don't love being on a 1099. When you explain the change, these are the points that land:

• Their day-to-day doesn't have to change. Same clients, same flexibility, same schedule if that's what you've agreed.
• With the right split, their take-home can stay close to the same. Show them the math. You're picking up half of the Social Security and Medicare they were paying on their own.
• They gain real protections. Unemployment insurance, workers' comp, and access to any benefits and retirement plan you offer.
• Taxes get simpler. Withholding replaces quarterly estimated payments.
   

If a clinician genuinely runs their own practice and wants to stay a contractor, that's a different conversation, and the checklist is the place to start it.

Switching in the middle of the year

That's fine and common. Pay them as a contractor up to the switch date and through payroll after it. They'll get a 1099 for the contractor payments (if they reach $2,000) and a W-2 for the wages. Just remember that switching going forward doesn't settle whether the earlier payments were classified correctly, so review those too. That's what VCSP and Section 530 are for.
 

Already paying several clinicians as contractors? This is exactly the kind of situation my team and I help practice owners work through, from the tax exposure to the new pay structure. Fill out the form at the bottom of this page and you'll hear back from me personally.

Paid on a 1099 by a group practice? What it means for you as a therapist

If you're a therapist and a group practice pays you as a 1099 contractor, this section is for you. First, you haven't done anything wrong by accepting that arrangement. Classification is the practice's responsibility, not yours, and plenty of owners set it up this way without realizing it may not be right.
 

Here's what being a 1099 contractor means for you, how to tell whether the label fits, and what your options are if it doesn't.

Are you really a contractor?

Look at how your work actually happens, not what your agreement says. Ask yourself:

• Does the practice bring you clients through its own marketing and intake?
• Does the practice set what clients pay and what you get paid?
• Do you work in the practice's EHR, scheduling, and billing systems?
• Is the practice your only real source of clients?
• If the practice stopped sending you clients tomorrow, would your income go to zero?
   

If you answered yes to most of those, you're in the same position as Jen at the top of this article, and you're most likely an employee in the eyes of the IRS, whatever your paperwork says. Picking your own days, working from home, or having your own LLC doesn't change that.
 

If instead you run your own practice, with your own clients, marketing, and systems, and this group is one source of referrals among several, the contractor label probably fits. That's the electrician.

What a 1099 costs you that a W-2 wouldn't

When you're paid on a 1099, you're treated as running your own business, and that shifts several costs onto you:

• Both halves of Social Security and Medicare. As a contractor, you pay self-employment tax of 15.3% on 92.35% of your net profit (the Social Security part stops at the annual wage base), and you can deduct half of it. As an employee, you'd pay 7.65% and the practice would pay the other 7.65%.
• No withholding. Nothing comes out of your checks, so you'll usually need to make quarterly estimated tax payments. Here's our guide to estimated taxes for therapists.
• No unemployment or workers' comp coverage. If the arrangement ends, you generally can't collect unemployment based on that work unless your state decides you were really an employee, and an injury on the job isn't covered.
• Benefits are on you. Health insurance, retirement, malpractice coverage, and continuing education are usually your expense.
   

There are a few things in your favor, too:

• Business deductions. You can deduct ordinary business expenses you actually pay, like licensing fees, malpractice insurance, continuing education, and supervision you pay for yourself.
• The QBI deduction. Self-employment income may qualify for the qualified business income deduction, worth up to 20% of that income, which the 2025 tax law made permanent. Therapy counts as a "specified service" business, so it phases out at higher incomes, but many clinicians fall below that range.
• Your own retirement plan. As a contractor, you can open your own SEP-IRA or solo 401(k), which can let you save more than many employer plans would.

How to compare a 1099 offer with a W-2 offer

Compare offers on total value, not the split. A higher 1099 percentage can leave you with less than a lower W-2 percentage once you account for self-employment tax, benefits, and expenses.
 

Here's a quick example for $150,000 a year in collections. A 60% contractor split pays you $90,000, but after about $12,717 of self-employment tax (assuming no business expenses) you're left with about $77,283 before income tax. A 56% W-2 split pays you $84,000, and after your $6,426 share of Social Security and Medicare, you keep about $77,574. Nearly identical, before you count any benefits, unemployment coverage, or workers' comp the W-2 job comes with.
 

So when a practice offers you 60% on a 1099 and another offers 56% on W-2, they're closer than they look. Ask about benefits, retirement contributions, paid time off, and who pays for CE and malpractice before you decide.

If you're pre-licensed

Be especially careful here. A pre-licensed clinician works under a supervisor who is responsible for their clinical work, which looks like employment to the IRS. Some states go further. California requires MFT and clinical social work associates to work as employees or volunteers, not independent contractors. 
 

Kentucky's psychology board has said 1099 status isn't allowed for psychological associates. New 

Hampshire requires a W-2 relationship for supervised experience in a private practice.
 

The risk for you is concrete: hours earned in the wrong kind of arrangement may not count toward your license. Check your board's rules now, before you put in hundreds more hours.

If you're paid through Headway, Alma, or a similar platform

That's a different situation. Platforms like these handle credentialing and billing and pay you as a contractor of the platform. They're built around clinicians who run their own practices: you set your own schedule, choose which clients to see, and can bring your own clients. You'll get a 1099, nothing is withheld, and for tax purposes you're running your own small business, with estimated payments, deductible expenses, and possibly the QBI deduction.

What you can do if it looks like employment

Start with a conversation. Many owners set up 1099s because someone told them to, not because they thought it through. Raising it doesn't have to be adversarial. You can share this article, ask whether they've looked at it with their CPA, and ask whether a W-2 arrangement with a fair split is possible. A direct conversation is usually the best first step, and it's often all that's needed.
 

If that doesn't resolve it, there are formal options, and you should know what each one involves:

• Form SS-8. You can ask the IRS to decide your status. It isn't anonymous: the IRS will generally send the practice its own Form SS-8 to complete, and it issues the formal determination to the practice, with a copy to you. The determination applies to the worker or class of workers who asked, and it's binding on the IRS as long as the facts and law don't change. It can take a while.
• Form 8919. If you believe you're an employee, Form 8919 lets you pay only the employee's share of Social Security and Medicare on those earnings instead of full self-employment tax. You'll need a qualifying reason, such as having filed an SS-8 and received a determination that you're an employee, or having filed an SS-8 that's still pending.
• Unemployment. If the arrangement ends, you can apply for unemployment in your state even if you were paid on a 1099. The state agency will decide whether you were really an employee.
   

Each of these can change your relationship with the practice, so think about what you want the outcome to be before you start. If you're unsure, a CPA or an employment attorney can help you weigh it.

Thinking about your own practice someday? A lot of the clinicians I talk to eventually open their own. When you do, the owner sections of this article will be waiting for you.

Admin staff, billers, and marketing help: employee or contractor?

Clinicians get all the attention, but most practices pay other people too: a front desk person, someone who handles billing or credentialing, a marketing agency, an IT company, maybe a virtual assistant. The same federal tests apply to every one of them, and the answers come out differently depending on the role.
 

The short version: if someone works set hours for you alone, inside your systems, following your procedures, they're almost certainly an employee. If they run their own business and you're one of several clients, they can be a contractor.

How the common roles usually land

Your front desk person is almost always an employee

This is the most common misstep I see with non-clinical staff. A front desk or intake person works the hours you set, uses your phone system and EHR, follows your scripts and procedures, and has no business of their own. That's an employee, even if they're part-time and even if they asked to be paid on a 1099.
 

And because most front desk and scheduling roles don't meet the federal duties test for the administrative exemption, plan on paying them hourly, tracking their time, and paying overtime past 40 hours in a week. Your state may add its own rules on top of that.

Billers and credentialing help

The difference here is between a person and a business. An individual who does your billing on your schedule, in your systems, as their main job, is usually an employee. A billing or credentialing company that serves many practices, uses its own methods and software, and sends you an invoice is a contractor.

Virtual assistants

Based in the U.S.: run them through the same questions. A VA with their own business, several clients, their own tools, and a price they set can be a contractor. A VA who works set hours for you alone and follows your procedures is almost certainly an employee, whatever the platform or agreement calls them.
 

Based outside the U.S.: a virtual assistant who lives and works entirely outside the country, and isn't a U.S. citizen or resident, is a different question. U.S. payroll taxes generally don't reach work a foreign person does entirely abroad, and instead of a W-9 you'd collect a Form W-8BEN. Their home country's labor rules may still apply. And if they'll see any client information, make sure your privacy safeguards, including a business associate agreement where HIPAA requires one, cover them.

Students and interns

Under federal wage law, an unpaid student isn't your employee when the arrangement is mainly for their education. The DOL uses a "primary beneficiary" test: who benefits more, the student or your practice? A practicum placement tied to a degree program usually passes. Once you start paying a student, or the internship starts to look like a staff position covering your caseload, treat it as employment. Post-degree associates are a different category; they belong on W-2 (the first-hire section explains why).

Paying your spouse or your kids

Plenty of owners have a spouse who helps run the office or kids who pitch in. They can be real employees if they do real work at a reasonable wage, and the IRS has special rules for family employees:

• Your children under 18 who work for your sole proprietorship (or a partnership where each partner is their parent) aren't subject to Social Security and Medicare tax, and their wages aren't subject to federal unemployment tax until they turn 21.
• Your spouse working for your sole proprietorship is subject to income tax withholding and Social Security and Medicare, but not federal unemployment tax.
• If your practice is an S corporation or other corporation, these exceptions don't apply. Family members are paid like any other employee.

Paperwork for the people who really are contractors

For your agency, your IT company, your outside bookkeeper, and anyone else who truly runs their own business:

• Collect a Form W-9 before the first payment. If someone won't give you a taxpayer ID, you're generally required to apply backup withholding at 24%.
• File 1099s once you pay someone $2,000 or more in 2026. Payments to most corporations are exempt (payments for health care services are an exception). Payments you make by credit card or through a payment network like PayPal or Venmo are reported by the payment company instead, so you don't issue a 1099 for those. Zelle and direct bank transfers don't count, so those payments still need a 1099 from you once they reach the threshold.
• Keep the agreement focused on what they deliver, not how or when they work.

The consistency rule

One principle ties all of this together: treat people doing the same job the same way. If two people do substantially the same work and one is on W-2 while the other is on a 1099, that inconsistency can cost you one of the IRS's most important protections if your classification is ever challenged.
 

Not sure how to classify someone on your team? Fill out the form at the bottom of this page and you'll hear back from me personally.

The technical details: what the IRS, the Department of Labor, and the law actually say

Welcome, fellow nerd. This section is the deep end: the regulations, the statutes, the IRS's own guidance, and the mechanics behind everything in the rest of the article. I quote the primary sources directly wherever I can, so you can see the exact language for yourself.

The legal standard, in the government's own words

For federal employment taxes, the test comes from the common law, written into the Treasury regulations. The key sentence is in Treas. Reg. § 31.3121(d)-1(c)(2):

"Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished."
 

The same paragraph adds that the employer doesn't have to use that control: "it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so."
 

That's why a hands-off owner can still be an employer. The question is the right to control, not how much of it you exercise.
 

The same regulation also contains the sentence that makes the electrician example work, and it names professionals specifically:

"physicians, lawyers, dentists, veterinarians, construction contractors, public stenographers, and auctioneers, engaged in the pursuit of an independent trade, business, or profession, in which they offer their services to the public, are independent contractors and not employees."
 

Read it closely. Professionals are contractors when they "offer their services to the public" through "an independent trade, business, or profession." A licensed therapist who runs their own practice fits that description. A therapist seeing a group practice's clients, through the group's intake, at the group's fees, isn't offering services to the public. The group is.
 

On labels, § 31.3121(d)-1(a)(3) is blunt: "If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial."
 

The IRS's plain-language page says the same thing: "Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed." And: "If you have an employer-employee relationship, it makes no difference how it is labeled." And: "It doesn't matter whether the individual is employed full time or part time."

The IRS's three categories, applied to a therapy practice

The IRS organizes the evidence into three categories: behavioral control, financial control, and type of relationship. They aren't three tests to pass. They're buckets of evidence, and no single fact decides the answer.
 

Behavioral control asks whether the practice has the right to direct how the work is done. The IRS looks at the type and detail of instructions, evaluation systems, and training: when and where to work, what tools to use, what order to follow. The IRS also acknowledges that a business may not know enough to instruct a highly specialized professional, so the absence of clinical direction doesn't settle anything. In a therapy practice, the relevant facts are usually outside the session:

• Does the practice require availability on certain days or hours?
• Does it decide where the clinician works and which clients they see?
• Does it require procedures beyond what licensure, ethics, billing, privacy, or the law already demand?
• Does it train the clinician on how the practice wants the work done, or evaluate how they work rather than just the results?

The IRS calls training on how to do the job strong evidence of employment, and ongoing training on procedures even stronger. Monthly in-services and practice-specific protocols count.
 

Financial control looks at five factors: significant investment, unreimbursed expenses, opportunity for profit or loss, whether the worker offers services to the relevant market, and the method of payment. For therapists:

• Who controls the money? If a client pays $200 and the clinician receives $90, who set both numbers? Who bills, collects, and absorbs nonpayment? A percentage split is a compensation formula, not a classification.
• Investment and expenses. The IRS says a significant investment isn't required, since some work doesn't need one. What matters more is whether the clinician carries real, fixed, ongoing costs (office, marketing, systems) whether or not work is coming in.
• Profit or loss. Earning more by seeing more sessions isn't entrepreneurial profit. An independent practitioner makes pricing, marketing, and overhead decisions that can make or lose money.
• Offering services to the market. Contractors generally advertise and keep a visible business presence. For therapists, that's their own practice, website, referral sources, and clients unrelated to the group.
• Method of payment. A guaranteed regular wage points toward employment. A flat fee for a job points toward contracting, though the IRS notes some professionals, like lawyers, are commonly paid hourly as contractors.
   

Type of relationship covers the written agreement, benefits, permanency, and whether the services are a key aspect of the business. The IRS says it isn't required to follow a contract calling someone an independent contractor, that the absence of benefits doesn't make someone a contractor, and that an expectation the relationship will continue indefinitely is generally evidence of employment. On key services, the IRS gives a pointed example: when a law firm hires an attorney, it presents that work as its own and likely has the right to control it. Swap in a therapy practice and a therapist. Providing therapy isn't incidental to a therapy practice. It's the thing the practice sells.
 

One factor specific to our field: whose name is on the insurance panel? When a clinician is credentialed under the group's NPI and tax ID, claims go out under the practice, and the payer pays the practice, the insurer is treating the clinician as part of the practice. When that clinician leaves, the payer contracts stay with the group. An independent practitioner's payer contracts belong to their own business. It isn't decisive on its own (platforms like Alma and Headway credential clinicians and still pay them on 1099s, within a model built around clinicians who run their own practices), but in a group that markets, runs intake, assigns clients, and sets the pay, it adds weight to the employee side.

The IRS's 20 factors (Rev. Rul. 87-41)

Before the three categories, the IRS used a list of 20 factors from Revenue Ruling 87-41. The IRS now groups the evidence into the three categories above and stresses that no factor is decisive. The 20 factors were never a scorecard (you can't count them up to get an answer), but they still show up in court opinions, state rules, and audits, so they're worth knowing. Here's how each one typically reads for a clinician embedded in a group practice:

An established private practitioner taking overflow referrals reads very differently on almost every line.

What an SS-8 ruling is, and what it isn't

Either a business or a worker can file Form SS-8 to ask the IRS to decide a worker's status. According to the SS-8 instructions:

• The IRS doesn't issue determinations for "proposed transactions" or "hypothetical situations." You can't get a ruling on an arrangement you haven't started.
• When a worker files, the IRS generally sends the business its own Form SS-8 to complete, and it "will generally issue a formal determination to the firm or payer," with a copy to the worker.
• "A determination letter applies only to a worker (or a class of workers) requesting it," and "the decision is binding on the IRS if there is no change in the facts or law that form the basis for the ruling."

The IRS publishes redacted rulings, and they're useful for seeing how the agency weighs facts, but they aren't precedent for anyone else. In one ruling involving a psychotherapist at an outpatient counseling practice, the worker had been paid a percentage of the insurance billed for two years, had signed an independent contractor agreement with a non-solicitation clause, and worked at the practice's offices on a varying schedule. The IRS found she was an employee, called the practice's reliance on the contractor agreement "without merit," and said the chance to earn more under a commission arrangement isn't the kind of profit or loss a real business has.
 

A worker who believes they were misclassified can also file Form 8919 to pay only the employee share of Social Security and Medicare. The form lists the qualifying reasons, including: "I filed Form SS-8 and received a determination letter stating that I am an employee of this firm," "I received other correspondence from the IRS stating that I am an employee," and "I filed Form SS-8 with the IRS and haven't received a reply."

The Department of Labor's test, and how it got here

Federal wage law (minimum wage and overtime under the Fair Labor Standards Act) uses a different test from the IRS, and it starts from a broader definition. Under 29 U.S.C. § 203(g), "employ" includes "to suffer or permit to work." Since the Supreme Court's 1947 decision in Rutherford Food Corp. v. McComb, courts have applied an "economic reality" test: is the worker economically dependent on the business, or in business for themselves?
 

The DOL's own interpretation of that test has changed repeatedly:

• 2021 rule. Organized the factors around two "core" factors: control and opportunity for profit or loss.
• 2024 rule (effective March 11, 2024). Replaced it with six factors weighed together, with no factor given predetermined weight, including whether the work is "an integral part" of the business.
• Field Assistance Bulletin 2025-1 (May 1, 2025). Told DOL investigators to stop applying the 2024 rule's analysis in enforcement and go back to the agency's older guidance (Fact Sheet #13 and Opinion Letter FLSA2019-6). The 2024 rule stayed on the books.
• 2026 proposal (announced February 26, 2026). Proposes to rescind the 2024 rule and restore a version of the 2021 framework.
   

According to the DOL's FAQ on the proposal, an employee is someone "economically dependent on the employer for work," and an independent contractor is someone who is, as a matter of economic reality, "in business for themselves." The two core factors are control over the work and opportunity for profit or loss. If both point the same way, there is a "substantial likelihood that is the individual's accurate classification." The additional factors are the amount of skill required, the permanence of the relationship, and whether the work is part of an integrated unit of production. And: "the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible."
 

Where it stands. The White House Office of Information and Regulatory Affairs received the final rule for review in late September 2026, and as of October 15, 2026 it was still under review, the last step before publication. Courts hearing private wage lawsuits apply their own circuit's version of the test, and none of this changes the IRS test.
 

That last row is the one place therapists have a built-in advantage under the DOL test. But skill is a secondary factor, and the DOL says the other factors are highly unlikely to outweigh the two core factors.

Other federal laws use still other tests. Retirement plans under ERISA use the common-law test, per the Supreme Court in Nationwide Mutual Insurance Co. v. Darden (1992), which is why reclassifying a clinician can change who your retirement plan has to cover.

Exempt status under the FLSA, in detail

Classification (employee or contractor) and exemption (whether an employee is owed minimum wage and overtime) are separate questions. A W-2 clinician is exempt only if they meet both a duties test and a pay test.

The duties test. Clinicians would generally fall under the learned professional exemption. Under 29 C.F.R. § 541.301(a), the primary duty test has three elements:

1. "The employee must perform work requiring advanced knowledge;"
2. "The advanced knowledge must be in a field of science or learning; and"
3. "The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction."
    

On the third element, § 541.301(d) says "the best prima facie evidence that an employee meets this requirement is possession of the appropriate academic degree."
 

The pay test. The employee must be paid on a salary basis or a fee basis of at least $684 a week, the level the DOL confirmed in May 2026. The salary must be guaranteed each week the employee works, and it isn't prorated for part-time schedules. The pay test doesn't apply to practitioners of law or medicine, but that exception doesn't reach therapists.
 

The fee basis, precisely. Under 29 C.F.R. § 541.605, an employee is paid on a fee basis "if the employee is paid an agreed sum for a single job regardless of the time required for its completion." The regulation adds that a fee "is paid for the kind of job that is unique rather than for a series of jobs repeated an indefinite number of times and for which payment on an identical basis is made over and over again," and that "payments based on the number of hours or days worked and not on the accomplishment of a given single task are not considered payments on a fee basis." To test the amount, you figure the time the job took and ask whether the fee works out to at least $684 for a 40-hour week. The regulation's example: an artist paid $350 for a picture that took 20 hours would earn $700 at that rate over 40 hours, which clears the threshold.
 

That's why a standard 50-minute session paid at the same rate, again and again, is a shaky fit for the fee basis. A comprehensive psychological evaluation billed as a single job is a better candidate.

Section 3509: how the back-tax math works

When an employer fails to withhold because it treated a worker as a non-employee, IRC § 3509 sets reduced rates for the missed amounts:

• Income tax withholding is figured "as if the amount required to be deducted and withheld were equal to 1.5 percent of the wages."
• The employee share of Social Security and Medicare is figured at "20 percent of the amount imposed."
• The employer's own share (7.65%) is owed in full.
   

If the required 1099s weren't filed (and the failure wasn't "due to reasonable cause and not willful neglect"), the rates become 3% and 40%. And § 3509 doesn't apply at all "if such liability is due to the employer's intentional disregard of the requirement to deduct and withhold such tax."
 

Two provisions in § 3509(d)(1) surprise people. The employee's own tax liability "shall not be affected by the assessment or collection of the tax so determined," and the employer "shall not be entitled to recover from the employee any tax so determined." In other words, you can't go back to the clinician for their share.
 

Which years are open? Employment tax returns (Forms 941) for a calendar year are treated as filed on April 15 of the following year under IRC § 6501(b)(2), even if you filed them earlier. With the normal three-year assessment period, that means the 2023 returns stay open until April 15, 2027. So as of today, 2023, 2024, and 2025 are generally open, plus the current year. Federal unemployment tax (FUTA) is figured separately.

Section 530 relief, in detail

Section 530 of the Revenue Act of 1978 was never put into the Internal Revenue Code itself, but it's still the most important defense in federal worker classification cases. In January 2025 the IRS replaced its 1985 guidance with Rev. Proc. 2025-10, the first major update in 40 years.
 

Relief requires three things: reporting consistency (you filed the required 1099s), substantive consistency (you didn't treat anyone in a substantially similar position as an employee), and a reasonable basis. The statute lists three safe harbors for the reasonable basis:

• "(A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;"
• "(B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment" of workers in substantially similar positions; or
• "(C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged."
   

Section 530(e)(2) limits how much the IRS can demand for the industry-practice safe harbor. The significant segment requirement can't be "construed to require a reasonable showing of the practice of more than 25 percent of the industry," not counting the taxpayer, and the long-standing requirement can't be construed "as requiring the practice to have continued for more than 10 years."
 

Details from Rev. Proc. 2025-10 that matter for therapy practices:

• What counts as your "industry." "An industry generally consists of businesses located in the same geographic or metropolitan area" (section 6.03(3)(b)), which can be widened if there are only a few businesses in the area or the business competes regionally or nationally. For a local group practice, that means practices like yours in your area.
• Other reasonable bases. A taxpayer that doesn't fit a safe harbor can still show it "relied on another reasonable basis for treating the individual as a non-employee" (section 6.04). But there's no reasonable basis if the facts indicate "negligence, intentional disregard of rules and regulations, or fraud" (section 6.06).
• The burden of proof can shift. Under § 530(e)(4), if a taxpayer "establishes a prima facie case that it was reasonable not to treat an individual as an employee" and "has fully cooperated with reasonable requests" from the IRS, the burden shifts to the IRS. That shift applies to the three safe harbors, not to other reasonable bases.
• Filing the wrong 1099 isn't fatal. A taxpayer doesn't fail reporting consistency if it "in good faith, mistakenly files the wrong type of information return" (section 4.05). That matters given the 1099-NEC versus 1099-MISC question below.
• Fixing the future doesn't cost you the past. Treating someone as an employee in a later period "will not cause a taxpayer to fail the substantive consistency requirement for the period under audit" (section 5.04), and § 530(e)(5) separately protects the earlier non-employee status. Entering a CSP or VCSP agreement counts as employee treatment starting on the agreement's effective date (section 5.05).

The settlement programs: VCSP and CSP

The Voluntary Classification Settlement Program (VCSP) is the one you apply for on your own, on Form 8952. You pay 10% of the employment tax liability that would have been due on the workers' compensation for the most recent tax year, figured at the reduced § 3509(a) rates. There's no interest or penalties, and the IRS won't audit those workers' classification for prior years. To be eligible, you generally need to have treated the workers consistently as non-employees, filed their 1099s for the previous three years, and not be under an IRS employment tax audit or a DOL or state classification audit. The IRS recommends filing at least 120 days before the date you want to start treating the workers as employees.
 

The Classification Settlement Program (CSP) is the version an examiner offers during an audit. Under the Internal Revenue Manual, the offer depends on how strong your Section 530 position is:

• 100% offer. You met reporting consistency but clearly can't meet the substantive consistency or reasonable basis test. You pay a full employment tax adjustment for the most recent year under examination.
• 25% offer. You met reporting consistency and have a colorable argument on substantive consistency or reasonable basis. You pay 25% of the most recent audit year's employment tax (FUTA stays at 100%).
• Taxpayer option. You clearly meet all three Section 530 requirements. No adjustment, and if you choose to reclassify, the agreement is prospective only.
• No offer. The workers are properly contractors, or they're employees but the required 1099s weren't filed on time.
   

Every CSP agreement requires you to treat the workers as employees going forward, generally starting the first day of the quarter after the agreement.

Challenging a determination in Tax Court

If an IRS audit ends in a determination that your workers are employees, or that you aren't entitled to Section 530 relief, IRC § 7436 lets the business petition the Tax Court. The petition has to be filed "before the 91st day after the date of such mailing" of the IRS's notice. If the disputed employment taxes are $50,000 or less for each calendar quarter, you can ask for the small case procedure, which the Tax Court has to agree to. And under § 7436(b)(3), changing how you treat the workers while the Tax Court case is pending won't be held against you.

Information reporting: 1099-NEC or 1099-MISC?

This is one place where the IRS instructions pull in two directions for therapy practices. The instructions for Forms 1099-MISC and 1099-NEC tell payers to report in 1099-MISC box 6 "payments of $2,000 or more made in the course of your trade or business to each physician or other supplier or provider of medical or health care services." The same instructions list, as an example of nonemployee compensation for Form 1099-NEC, "Fees paid by one professional to another, such as fee-splitting or referral fees." Neither one squarely addresses a group practice paying a contract therapist a share of collections.
 

Our approach: we generally file Form 1099-NEC for contract therapists, because a percentage split works like the fee-splitting the NEC instructions describe. One wrinkle if the therapist is paid through their own corporation: the instructions say "the exemption from issuing Form 1099-MISC to a corporation does not apply to payments for medical" and health care services. So a form is still required, and 1099-MISC box 6 is where the instructions put it.
 

Whichever form you use, use it consistently, and talk with your CPA about your specific arrangement. A good-faith choice of the wrong form doesn't break Section 530 reporting consistency, but that's a safety net, not a reason to pick at random.
 

The threshold is $2,000 for payments made after December 31, 2025 (previously $600), and it will be adjusted for inflation after 2026.

State tests in more depth

States set their own tests for unemployment insurance, wage laws, and workers' comp, and the strictest is the ABC test, which presumes employment unless the business proves all three prongs: (A) the worker is free from control and direction, (B) the work is outside the usual course of the business, or in some states performed outside all of its places of business, and (C) the worker is customarily engaged in an independently established trade or business.
 

New Jersey uses the ABC test under N.J.S.A. 43:21-19(i)(6), and it governs not just unemployment but also the state's wage and hour, wage payment, earned sick leave, and temporary disability laws. The New Jersey Department of Labor adopted detailed rules at N.J.A.C. 12:11 on May 5, 2026, effective June 1 and operative October 1, 2026. Among the points that matter for practices: the business carries the burden on all three prongs; a worker's own home, where they work remotely, generally isn't one of the business's places of business; and licensure, business registration, insurance, or outside work aren't enough on their own to establish an independent business.
 

California adopted the ABC test through the Dynamex decision (2018) and AB 5 (2019), now in Labor Code § 2775. But § 2783 exempts certain professions, including certain licensed psychologists, which are judged under the older multi-factor Borello test instead. LMFTs, LCSWs, and LPCCs aren't on that list. Separately, Business and Professions Code § 4980.43.3 limits MFT trainees and associates to employee or volunteer status.
 

Other states vary widely. Some use the ABC test only for unemployment insurance, some use the common-law test, and some use their own hybrids. Licensing boards can add rules of their own, like Kentucky's position on psychological associates and New Hampshire's W-2 requirement for supervised experience in private practice.

What applies to everyone

Whichever section brought you here, these last pieces apply to all of you.

How practice owners pay themselves

Here's a question I get from nearly every group practice owner at some point: how should I be paid? The answer depends on how your practice is taxed, and it's a separate question from how your clinicians are paid.

A sole proprietor, or the owner of a single-member LLC, isn’t allowed to be their own employee. The business can have other employees, but the owner pays self-employment tax on the profit instead.

A partner can't be an employee of their own partnership either. The IRS has held that position since Revenue Ruling 69-184. A partner is paid through guaranteed payments, a share of the profits, or both, all reported on their K-1 rather than as wages on a W-2.

An S corporation owner who works in the practice has to be on payroll and paid reasonable compensation for that work. That salary is what makes the S corporation work as a tax strategy, and it's also the rule the IRS watches most closely. If you're weighing which structure fits your practice, we wrote a full guide on LLC vs. S corp for therapists.

Can I make my therapists owners instead?

Every so often an owner asks whether they can skip payroll by giving clinicians a small piece of the practice. I understand the appeal, but it rarely works the way people hope.
 

If your practice is an S-corporation, which most of the established practices I work with are, it doesn't solve anything. A clinician who becomes a shareholder and keeps seeing clients is a shareholder-employee, and the S corporation has to pay them reasonable W-2 wages for that work. You'd end up running payroll anyway, with a co-owner added.
 

If your practice is taxed as a partnership (as most LLCs and PLLCs with more than one owner are, unless they've elected S corporation status), a real partner shares in the profits and losses, usually has some say in the business, and has something at stake. A 1% interest handed out so you don't have to run payroll, with nothing else about the job changing, is the kind of arrangement that invites scrutiny. Even a real partnership interest brings K-1s, self-employment tax for the new partner, and buyout questions you'll have to answer someday. In some states, professional licensing rules also limit who can own a practice.
 

Bringing on a partner can be a great decision. It just needs to be a decision about ownership, not a workaround for payroll.

Do state rules change the answer?

Individual states have their own rules and regulations, which add yet another layer of complexity.
 

Everything in this guide is federal. States run their own tests for unemployment insurance, wage laws, and workers' comp, and many of them are stricter than the IRS or the DOL.
 

The strictest version is called the ABC test. It presumes everyone you pay is an employee unless you prove three things: the worker is free from your control, the work is outside the usual course of your business (some states, New Jersey among them, also accept work done outside all of your places of business), and the worker runs an independently established business of their own. That middle requirement is the hard one for a therapy practice. If your practice sells therapy and the clinician provides therapy in your office, it's very difficult to meet, no matter how the federal analysis comes out.
 

New Jersey, for example, adopted detailed rules for its ABC test that became operative October 1, 2026.

The answer can also depend on the license. California exempts certain licensed psychologists from its ABC test and judges them under an older multi-factor test. LMFTs, LCSWs, and LPCCs aren't on that list. A psychologist and a therapist working on identical terms in the same group can get different answers. Some states use the ABC test only for unemployment insurance, and others use a different standard entirely.
 

So a clean federal answer doesn't settle your state answer. If your clinicians work in a state with stricter rules, talk to a CPA who knows that state and works with practices like yours. Our state-by-state guides for practice owners cover licensing, setup, and other rules that vary by state: [LINK TO STATE ARTICLES SECTION].

What changed in 2026

The IRS's own test didn't change, but several things around it did:

• The DOL proposed a new contractor rule for federal wage law in February 2026. The final version went to the White House for review in late September and was still there as of October 15, 2026. It governs federal wage law only and doesn't change the IRS test or state tests.
• The 1099 filing threshold rose to $2,000 for contractor and health care payments, starting with payments made in 2026.
• The DOL confirmed in May 2026 that the overtime salary threshold stays at $684 a week.
• States updated their own rules, including New Jersey's detailed ABC test rules, operative October 1, 2026.

Common questions

Can therapists be 1099 independent contractors?

Yes, but less often than most group practices assume. A therapist who runs a genuine independent practice, with their own clients, marketing, systems, and expenses, can be a contractor. A therapist who sees a practice's clients through its systems on its terms is usually an employee for federal tax purposes, whatever the agreement or the 1099 says.

Is there such a thing as a "1099 employee"?

Not really. "1099" refers to the form used to report payments to independent contractors, and an employee is someone paid through payroll on a W-2. A worker is one or the other. If someone called a 1099 employee is functioning as an employee, the form doesn't change that.

Can pre-licensed therapists be 1099 contractors?

Rarely, and in some states never. A pre-licensed clinician practices under a supervisor who is responsible for their work, which is the kind of control the IRS associates with employment. California requires MFT associates to be employees or volunteers, Kentucky's psychology board has ruled 1099 status isn't allowed for psychological associates, and New Hampshire requires a W-2 relationship for supervised experience in private practice.

Can I pay a W-2 therapist a percentage split?

Often, but structure it carefully. Under federal wage law, therapists are generally exempt from minimum wage and overtime only if paid on a salary or fee basis of at least $684 a week. Pure per-session or percentage pay with no guaranteed base may mean tracking hours. A base salary plus productivity pay, reviewed by an employment attorney, is a common fix.

Can a W-2 therapist be part-time?

Yes. W-2 doesn't mean full time, and you can employ a clinician for a few hours a week who works remotely and picks their own blocks. Just remember that on a salary basis, the $684 weekly floor for exempt status isn't prorated, so many part-time clinicians are simpler to pay hourly as non-exempt employees.

What should I do if I've been paying therapists as 1099s?

Don't panic, and don't flip everyone overnight. Document how each relationship actually works, decide clinician by clinician, and talk with a CPA about Section 530 relief and the Voluntary Classification Settlement Program. If you qualify, VCSP settles past federal exposure for 10% of one year's employment tax at reduced rates.

Can I switch a therapist from 1099 to W-2 in the middle of the year?

Yes. Pay them as a contractor up to the switch date and through payroll after it. They'll get a 1099 for the contractor payments (if they reach $2,000) and a W-2 for the wages, which is normal in a conversion year. If you're using VCSP, plan the date around its 120-day filing lead time. Switching going forward doesn't settle whether the earlier payments were classified correctly, so review those too.

Can someone be both a W-2 employee and a 1099 contractor for my practice?

Rarely for the same kind of work. If a therapist is your employee, extra sessions, supervision, or admin work they do for you are generally wages too, and belong on the W-2. A truly separate engagement unrelated to their job is a different story, but expect it to be looked at closely.

Do I have to issue a 1099 to a contractor therapist?

Starting with payments made in 2026, you file a 1099 once you pay a contractor $2,000 or more for the year, up from $600. For contract therapists, we generally file Form 1099-NEC, though there's a technical argument for Form 1099-MISC (the technical section covers it). The threshold will be adjusted for inflation after 2026. Collect a W-9 before you pay anyone. The threshold only governs paperwork. It doesn't decide whether the person should be a contractor at all.

Can a therapist be a contractor if they also work somewhere else?

It helps, especially if they run a real practice that markets to the public. But a second job isn't the same as an independent business, and some states, New Jersey among them, say outside work alone isn't enough to show one. The question is still what the relationship with the practice looks like.

Can a practice require a contractor to use its EHR?

It isn't fatal on its own, especially where records and privacy rules make a shared system sensible. But it adds to the control side of the picture, alongside who sets fees, who supplies clients, and what procedures the practice requires. One factor rarely decides it. The overall pattern does.

Can I have a 1099 therapist sign a non-compete?

Be careful. For a contractor, restricting where else they can work is evidence of control, and a non-solicitation clause appears in the IRS ruling described above that found a therapist was an employee. For employees, whether a restrictive covenant holds up is mostly a matter of state law, which varies widely. Have an employment attorney review any non-compete or non-solicitation clause.

Headway and Alma pay therapists on 1099s. Why can't I?

Those platforms are built around clinicians who run their own practices. The clinician sets their own schedule, chooses which clients to see, can bring clients they found themselves, and can leave. The platform handles insurance and billing. If your group works that way, your contractor case is stronger. Most group practices don't: they market, run intake, assign clients, and set the pay.

The bottom line

The electrician example works because his independence is easy to see. He has a business that exists apart from yours. You need something fixed, you hire him, and he moves on to the next customer.

A therapist can absolutely work that way too. The trouble starts when a clinician is woven into a practice: seeing the practice's clients, working in its systems, accepting its pay structure, and doing the very thing the practice sells. A few contractor-style features don't change that.
 

So come back to the question from the top of this guide: if the practice took away all of Jen's clients, would her income go to zero? If it would, Jen is almost definitely an employee, whatever her paperwork says.

Or, put another way: is the practice hiring an independent practice to provide services to it, or is the therapist really working as part of the practice?

Talk it through with us

Helping mental health practice owners with exactly these decisions is a big part of what my team and I do. That covers classification, compensation, payroll, and the tax side of growing a group practice.
 

If you're about to hire your first clinician, or you've built a team of 1099s and want to know where you stand, fill out the form below. You'll hear back from me personally. When the legal classification itself is in doubt, we'll bring employment counsel into the conversation too.
 

This article is general information about federal rules as of October 15, 2026, not legal or tax advice for your situation. Classification depends on your specific facts and your state's laws.

Sources

• IRS: Employee (common-law employee), Behavioral control, Financial control, Type of relationship
• Treasury Regulation § 31.3121(d)-1
• IRS: Voluntary Classification Settlement Program, VCSP FAQs, Rev. Proc. 2025-10, and Internal Revenue Manual 4.23.6 (Classification Settlement Program)
• IRS: About Form SS-8, SS-8 instructions, SS-8 determination for a psychotherapist, and About Form 8919
• Internal Revenue Code: § 3509, § 6501, and § 7436
• IRS: One-participant 401(k) plans, SEP FAQs, and EPCRS overview
• IRS: S corporation compensation, Single-member LLCs, Family help, Backup withholding, and Form W-8BEN
• IRS: Form 1099-NEC and independent contractors and Instructions for Forms 1099-MISC and 1099-NEC
• U.S. Department of Labor: proposed independent contractor rule, FAQ on the 2026 proposal, confirmation of the $684 salary threshold, May 2026, Fact Sheet #17D, Fact Sheet #17G, and Fact Sheet #71 on internships
• Federal regulations and statutes: 29 U.S.C. § 203, 29 C.F.R. § 541.301, and 29 C.F.R. § 541.605
• Ogletree: status of the DOL final rule, October 9, 2026
• California Business and Professions Code section 4980.43.3 and California Labor and Workforce Development Agency: employment status FAQ
• Kentucky Board of Examiners of Psychology ruling on W-2 vs. 1099 status
• New Jersey Department of Labor announcement of its ABC test rules, May 2026