You're running a home healthcare agency. When it comes to hiring caregivers, physical therapists, or nursing staff, you've probably heard other agency owners talk about classifying workers as 1099 contractors. Less paperwork, lower costs, more flexibility, so it sounds like a smart business decision.
But that "convenient" choice could cost you tens of thousands of dollars in penalties, back taxes, and legal fees. Worker classification isn't something you get to decide based on what's easiest or cheapest. There are actual legal tests that determine whether someone is an employee or contractor, and failing those tests can seriously hurt your business.
At Whirks, we've helped hundreds of small businesses handle payroll compliance correctly, and we've seen what happens when home healthcare agencies get worker classification wrong.
- Department of Labor audits.
- IRS penalty notices.
- Five-figure tax bills that come out of nowhere.
These aren't rare occurrences. They're what happens when you treat employee classification as a business preference instead of a legal requirement.
This article will show you how worker classification actually works in home healthcare, what the real risks are when you misclassify workers, and how to make sure you're doing it right before a penalty notice shows up in your mailbox.
Why Home Healthcare Agencies Get Worker Classification Wrong
Let's take a look at why so many home healthcare agencies misclassify their workers. It usually comes down to three reasons:
- It's easier. When you classify someone as a 1099 contractor, you don't have to withhold taxes, worry about benefits, or deal with complex payroll filings. It's just simpler on the front end.
- It's cheaper. You avoid paying the employer portion of payroll taxes, workers' comp insurance, overtime, and benefits. When you're trying to keep your margins healthy in a tight-margin industry, those savings look really attractive.
- You genuinely didn't know better. Maybe the agency down the street does it this way. Maybe your previous employer classified everyone as contractors. Maybe you thought it was just a standard practice in home healthcare—a symptom of deeper hiring and retention issues in the industry.
None of these reasons actually matter when it comes to how the government determines worker classification. What you want, what's convenient, or what your colleague is doing has zero bearing on whether someone should legally be classified as an employee or a contractor.
The Department of Labor and the IRS have specific tests to determine classification, and if you fail those tests, you're going to pay for it. Lliterally.
What Really Determines Contractor vs. Employee?
Most states and the federal government use what's called the "ABC test" to determine worker classification (more on this below). The most important factor in this test is control.
Here's the basic question you need to ask: How much control do you have over when, where, and how this person does their work?
Control Is the Key Factor
If you're telling someone they need to be at Mrs. Miller's house at 8 a.m., then head to Mr. Brown's house at 10 a.m., and it has to be them specifically doing that work, that's an employee. You've controlled when they show up, where they're going, and you've required that specific person to do the work.
Let's look at two different scenarios to make this clearer:
Scenario 1: The Employee Relationship
You hire Jeff to be a physical therapist for your clients. You schedule Jeff specifically to visit patients at certain times. Your clients expect Jeff to show up. Jeff can't send someone else to do the work if he's unavailable. You provide the equipment and tools he needs, and you set his schedule.
This is an employee. You have complete control over when, where, and how Jeff does his work.
Scenario 2: The Legitimate Contractor Relationship
Your agency has a contract with Smith's Rehab Services, a therapy company that employs its own therapists. You tell Smith's Rehab that Mrs. Miller needs physical therapy three times a week. Smith's Rehab decides which of their therapists will visit, what time they'll come, and they handle all the scheduling and management of their own staff. If their usual therapist is sick, they send someone else without asking your permission.
In this case, Smith's Rehab is your vendor. They control their own workers, their own schedule, and their own methods. The therapists working for Smith's Rehab should be employees of Smith's Rehab, not your agency.
Questions to Ask About Control
Here are some practical questions that will help you determine if you have an employee or contractor relationship:
- Do you set the schedule for when this person works?
- Do you dictate which clients they see and when?
- Does the client expect this specific person to show up?
- Can this person send someone else to do the work if they're unavailable?
- Do you provide the equipment, tools, or supplies they use?
- Do you train them on how to do the work your way?
If you answered "yes" to most of these questions, you're likely dealing with an employee, not a contractor.
What Happens When You Get Worker Classification Wrong
Let's talk about the real consequences of misclassification. This isn't just a slap on the wrist or a minor inconvenience. The penalties can genuinely threaten your business.
You'll Owe Back Taxes, For Both Sides
When you classify someone as a 1099 contractor, you don't withhold payroll taxes from their pay. They're supposed to handle their own taxes. But if the Department of Labor or IRS determines that person should have been an employee, you become responsible for all those taxes that should have been withheld.
That means you'll pay:
- The employee's share of Social Security and Medicare taxes (7.65%)
- The employer's share of Social Security and Medicare taxes (another 7.65%)
- Federal unemployment taxes
- State unemployment taxes
- Penalties and interest on top of all of that
Let's say you had five workers you incorrectly classified as contractors, each making $40,000 per year, for three years. You could be looking at $50,000 or more in back taxes and penalties. That's not a small problem.
Workers' Comp and Benefits Exposure
If you classified someone as a contractor, they probably weren't covered by your workers' comp insurance. If that person gets injured on the job and the state determines they should have been an employee, you could be on the hook for all their medical bills and lost wages, without insurance coverage to help.
Similarly, if you offer benefits to your employees but didn't offer them to workers you incorrectly classified as contractors, you could owe back benefits or face additional penalties.
Overtime Violations
You probably weren't tracking hours or paying overtime to your 1099 workers. But employees are entitled to overtime pay when they work more than 40 hours in a week. If someone was misclassified, you could owe them back overtime pay for every week they worked over 40 hours.
The bottom line: This is not an area where you want to cut corners or take risks. The financial penalties are designed to hurt, and they do.
How to Make Sure You're Classifying Workers Correctly
If you're reading this and thinking, "Oh no, I might have this wrong," don't panic. Here's what you need to do:
Step 1: Run Every Worker Through the Classification Test
We have a classification guide that walks you through the ABC test and helps you determine if someone should be an employee or contractor. Go through your current staff and honestly assess whether they pass the test.
Step 2: Have the Conversation
If you determine someone is misclassified, you need to have a conversation with them about switching to employee status. Yes, they might push back. Some workers genuinely prefer contractor status because they think they can deduct more expenses or they like the flexibility.
But you also need to understand that their preference doesn't change the law. If they're legally an employee, they need to be classified as one, regardless of what they want.
Step 3: Get It Right Going Forward
At minimum, make sure all new hires are properly classified from day one. Then, work with your payroll provider or HR team to clean up any historical issues. Missclassification is just one of several common payroll mistakes healthcare agencies make, and it's one of the most expensive.
The Department of Labor and IRS are generally more forgiving when you proactively fix issues rather than waiting until you get audited. Don't wait for a penalty notice to force your hand.
Step 4: Work with Someone Who Knows Home Healthcare
Home healthcare has unique payroll challenges, from shift differentials to overnight shifts, multiple locations, and complex overtime rules. You need a payroll partner who understands your industry and can help you handle classification correctly while managing all the other compliance issues you face.
Get Worker Classification Right the First Time
Most home healthcare workers are employees, not contractors. If you're currently classifying caregivers, nurses, or therapists as 1099 workers, there's a strong chance you need to fix that classification before it costs you.
The convenience and savings you think you're getting from contractor classification disappear fast when you're facing an audit. A single Department of Labor investigation can result in tens of thousands of dollars in back taxes, penalties, and legal fees. And that’s far more than you "saved" by avoiding payroll taxes.
Worker classification mistakes feel like small shortcuts until they turn into big, expensive problems. The good news? They're completely avoidable when you understand the rules and get help from people who know how to apply them correctly.
At Whirks, we help home healthcare agencies handle payroll compliance the right way, including proper worker classification. We've worked with hundreds of small businesses, and we understand how tempting it is to classify workers as contractors, and how devastating the consequences can be when you get it wrong.
Want to know if your classification is correct?
Start with our ABC test guide.
Don't wait for a penalty notice to force your hand. If you're not sure whether your workers are properly classified, or if you just need help fixing classification issues before they become expensive, we can help. Schedule a conversation with our team to protect your home health agency from costly classification penalties.
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