Your new associate is in the office Monday, Wednesday, and Friday. She sees your scheduled patients on your equipment, follows the schedule your front desk built, and uses your EHR system to document every visit. At the end of the month, she emails an invoice and you pay it without withholding a dollar.

The IRS has a word for that arrangement.

It is not "contractor."

The contract calling her an independent contractor does not change the analysis. What the IRS cares about is how the work actually happens, and the scenario above checks nearly every employee box in the agency's standard test.

What the IRS Actually Tests

The agency uses three categories to decide whether a worker is an employee or a contractor. None of them is the label in your agreement.

Behavioral control covers whether you direct how the work gets done. Setting the associate's schedule, assigning her patient panel, requiring her to use your clinical protocols, telling her which exam rooms to use: these are employee indicators. A genuine contractor typically decides how they complete the work, not just what the outcome should be.

Financial control covers the business side of the relationship. A contractor ordinarily has a real investment in their own tools and setup, works for more than one business, and has real financial exposure if their work is slow or goes poorly. If your associate has no patients of her own, depends entirely on your patient base for income, and has no meaningful business overhead she controls, the financial picture looks like employment regardless of what the invoice says.

Type of relationship covers permanency and intent. An ongoing, indefinite arrangement where both sides expect the associate to keep working there as long as the practice runs looks like employment. A defined engagement with a clear endpoint, by someone who has other practices and other patients, looks more like contracting. Benefits matter here too: if the associate receives any benefits through the practice, that strengthens the employee side.

The IRS weighs all three categories together. No single factor controls the outcome, but a consistent pattern of employee indicators across all three is a hard case to make go the other direction.

When Contractor Status Actually Holds Up

Locum tenens is the version that works. An OD who covers your office for two weeks while you are at a conference, who has their own active patient base, who might be covering three other practices the same month, and who brings real independence to the relationship, that arrangement has genuine contractor characteristics.

The difference is not just duration. It is whether the OD is running their own clinical business or whether they are functionally an employee who happens to invoice you instead of receiving a paycheck.

Permanency tends to be the factor that collapses most contractor arrangements in optometry. An associate who has been with you for a year, sees only your patients, and has no independent professional life outside your walls is a difficult contractor argument even with a signed agreement.

What Getting It Wrong Actually Costs

If the IRS reclassifies a contractor as an employee, it can assess the practice for back payroll taxes, interest, and penalties. The exact amounts depend on whether the misclassification was inadvertent, how many years are at issue, and whether any relief provisions apply. In straightforward cases the total can run to several years of unpaid employer payroll taxes plus interest and penalties on top.

There is also the VCSP, the IRS Voluntary Classification Settlement Program, for practices that want to get ahead of this before an audit. The terms under the VCSP are meaningfully better than the terms after an exam starts. Under the VCSP, the practice pays 10% of the employment taxes (at reduced IRC Section 3509(a) rates) attributable to the most recent tax year for the reclassified workers, not taxes for multiple prior years. Interest and penalties on that payment are waived, and the practice treats the workers as employees going forward. The VCSP is not available once an audit is already underway.

State agencies run a parallel analysis and can arrive at a different result. Washington Labor and Industries uses its own workers' compensation classification test that is separate from the IRS standard. A practice that passes the federal analysis can still face a state reclassification for workers' comp or unemployment insurance purposes. States vary significantly on how strictly they apply these tests, and multi-state practices need to check each state they operate in.

Why the Contract Does Not Decide It

A lot of practices hand the associate a contractor agreement, get it signed, and file it away. That is understandable but it is not what the IRS looks at.

The agency examines the actual working relationship. If the reality of how the associate works looks like employment, the contract provides almost no protection from reclassification. The liability for the resulting back taxes falls on the practice, not the associate, which is the piece that surprises most owners when this comes up.

The agreement still matters for documenting the parties' intent and for any dispute resolution between the two parties directly. It just does not control what the IRS concludes.

Once the Decision Is Made: Compensation Structure

If you decide the arrangement warrants W-2 status, the next question is how to structure the pay. Associate OD compensation runs from flat salary to production-based percentages to hybrids of both, and the ranges differ by practice model, geography, and whether you are buying toward ownership or just filling the schedule. We have a separate piece on the compensation numbers if that is where you are: What to Pay an Associate OD.

Employment also means payroll setup: federal and state withholding, employer payroll tax obligations, workers' compensation coverage, and in most states an unemployment insurance account. These are all things a payroll service handles on a routine basis. If your associate has been invoicing you and you want to shift to W-2, the transition is straightforward once you know it is the right call.

A Note on Getting the Analysis Right

The classification question is fact-specific. Two practices with associates who look similar on the surface can have different risk profiles depending on the details of how the arrangement actually works.

Getting this looked at before the arrangement starts costs far less than getting it reclassified after an audit. If the setup is already running and you have not thought through the classification, the VCSP option is worth knowing about.

We work with optometry practices on payroll and the financial side of employment decisions as part of what we do. If the classification question is live for you, the practice management resources on our optometrists page are a good starting point, and our payroll service covers the setup once the W-2 decision is made.

For practices that want a deeper look at the financial metrics that actually move practice value, the KPI white paper on the optometrists page covers what to track monthly, which includes the payroll ratios that shift when you add an associate.

Questions owners ask about this

Can my associate OD and I simply agree she is a contractor?

The written agreement documents the intended relationship, but the IRS looks at how the work actually happens. If the day-to-day arrangement has the characteristics of employment, the contract label will not protect the practice from reclassification. The agency has reclassified workers with contractor agreements in hand.

What is the IRS Voluntary Classification Settlement Program?

The VCSP lets a practice proactively reclassify workers as employees before an audit starts. The practice pays 10% of employment taxes (at reduced IRC Section 3509(a) rates) on compensation paid in the most recent tax year for the reclassified workers. Interest and penalties on that amount are waived. The practice then treats those workers as employees going forward. It is not available once an audit or employment tax examination has already begun.

Does the associate having their own LLC change the analysis?

No. The IRS worker classification test looks at the working relationship, not the business entity. An OD operating through an LLC who works exclusively on your schedule, using your equipment, seeing only your patients still shows employee indicators under the behavioral and financial control tests.

How does the Washington State test differ from the federal one?

Washington uses its own multi-factor analysis for workers' compensation through Labor and Industries, and can reach a different conclusion than the IRS. Clearing the federal test does not mean the state agrees. Other states have their own versions of this. Practices with associates in multiple states should check each state's standard.

When should I bring in an accountant?

Before the arrangement starts, not after. The classification depends on the specific facts of your working relationship, and the cost of reclassification outpaces the cost of a conversation by a wide margin. If you are already running the arrangement and have questions, that conversation still matters, just sooner rather than later.