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A prospective client recently told us they hired a new 1099 therapist and were planning to pay them through Venmo.
We had to take a breath.
1099 contractor compliance for private practice owners is one of the biggest landmines in the industry — and it's almost never discussed proactively. — and it's almost never discussed proactively. Most practice owners don't find out they've been doing it wrong until they're staring down an IRS audit or a misclassification penalty.
Here's what every practice owner needs to know before a contractor's first day.
What Every Private Practice Owner Needs to Know About 1099 Contractor Compliance
Before anything else, you need to answer this question honestly: is this person actually a contractor under IRS guidelines — or are they really an employee?
This matters more than most practice owners realize. The IRS is specific about this. According to IRS guidance, you are not an independent contractor if you perform services that can be controlled by an employer — meaning what will be done and how it will be done. That control is the key word.
Ask yourself:
- Do you set their schedule?
- Do you require them to see clients a certain number of hours per week?
- Do you dictate how they conduct sessions or document notes?
- Are they exclusively working for your practice?
If you answered yes to most of those, there's a real chance this person is an employee — not a contractor — regardless of what your agreement says or what you've been calling them.
You can review the IRS's full contractor definition here.
Most "contractors" we see in private practices are not truly contractors. If you're paying your team as contractors when they're really employees, you're opening yourself up to back taxes, penalties, and audit risk — and in some states, that liability can go back several years.
4 Things to Do Before a Contractor's First Day
If you've done the homework and confirmed this person is genuinely a contractor, here's your compliance checklist:
✅ 1. Verify their contractor status using IRS guidelines
Don't skip this step. Review the IRS definition and apply it honestly to your situation. If you're unsure, this is worth a quick conversation with your accountant before you bring them on.
✅ 2. Collect a completed W-9
Before they see a single client, you need a signed W-9 on file. This gives you their legal name, address, and taxpayer identification number — everything you need to issue a 1099-NEC at year end if you pay them $600 or more. No W-9, no first paycheck. Make this non-negotiable.
✅ 3. Put a written agreement in place
A simple contractor agreement protects both parties. It should outline the scope of work, the pay structure, the payment schedule, and confirm their independent contractor status. This doesn't need to be complex — but it does need to exist. A handshake agreement is not enough.
✅ 4. Pay through a business account — not Venmo, Zelle, or your personal account
This one is critical. Paying contractors through personal payment apps or your personal bank account creates a documentation nightmare and blurs the line between business and personal finances. Use your business checking account. If you want to use a payment platform, use one designed for business payments like Gusto or QuickBooks Payroll — not Venmo.
What Happens If You Get This Wrong?
Misclassifying an employee as a contractor is not a technicality — it's a liability. If the IRS determines your contractor was actually an employee, you could be responsible for:
- Back payroll taxes for both the employer and employee portions
- Penalties and interest
- Potential state-level penalties depending on where you operate
And because therapists in group practices often work under consistent supervision, set schedules, and exclusive arrangements — the IRS scrutinizes this industry closely.
The fix isn't complicated, but it requires being honest about how your practice actually operates — and making changes if needed.
This is why 1099 contractor compliance for private practice owners can't be an afterthought — it needs to be part of your hiring process from day one
Not Sure Where You Stand?
If you're unsure whether your contractors are truly contractors, or you want help figuring out the right way to pay your team, we can help.
Getting your 1099 contractor setup right in private practice protects you, your team, and your business
Schedule a free 30-minute consultation with Navigator Bookkeeping and we'll walk through your specific situation — no jargon, no judgment, just clarity.
