Whether doctors are independent contractors or employees comes down to how much control the hospital, group, or practice has over how the work gets done, not the label on the contract or the way the paycheck is cut. The IRS looks at behavioral control, financial control, and the nature of the relationship, and weighs the whole picture. Most physicians land somewhere on a spectrum, and the answer changes what you owe in taxes, what benefits you get, who pays for malpractice coverage, and what legal protections you can fall back on.
How the IRS Decides
The IRS uses three categories of factors. No single one settles the question, and their weight shifts with specialty and setting.
Behavioral Control
Behavioral control asks whether the facility has the right to direct how you do the work, not just the result. Setting your hours, requiring specific clinical protocols, dictating documentation templates, or walking through the sequence of a procedure all point toward employment. The agency notes that the facility does not have to actually exercise that control day to day; keeping the right to control the details is enough. Ongoing training on the facility’s own methods is a strong employee signal. Independent contractors bring their own expertise and use their own methods.1Internal Revenue Service. Behavioral Control
Compare a hospitalist told when to round, which EHR templates to use, and how to document each encounter to a surgeon who arrives, performs a scheduled case using personal technique, and leaves. Same building, very different classifications.
Financial Control
Financial control looks at who carries the economic risk. The IRS weighs five things: significant investment in equipment, unreimbursed business expenses, opportunity for profit or loss, whether the physician offers services to the open market, and method of payment.2Internal Revenue Service. Financial Control A physician who leases space, buys instruments, hires staff, and bills patients has real exposure to profit and loss. A physician who gets a guaranteed biweekly salary no matter the census does not.
Payment method alone is not decisive, since some contractors are routinely paid hourly. But flat fees per case or per shift, unreimbursed overhead, and marketing services to multiple facilities fit the contractor profile. A W-2 salary with no exposure to business losses does not.2Internal Revenue Service. Financial Control
Type of Relationship
The third category examines the relationship itself: whether there is a written contract, whether the facility provides benefits like health insurance or a retirement plan, whether the arrangement is indefinite or fixed, and whether the physician’s services are a key activity of the business.3Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? A radiologist who has read at the same hospital for twelve years, gets health insurance through it, and performs a core function of the facility is hard to call a contractor regardless of contract language. A locum on a six-week assignment with no benefits and a firm end date fits the contractor mold cleanly.
When classification is genuinely unclear, either party can file IRS Form SS-8 to request a formal determination of worker status for federal employment tax purposes.4Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding The ruling can take months but is binding.
Where Physicians Typically Land
Locum tenens physicians are the clearest contractor case. They fill temporary gaps, carry their own malpractice coverage, keep their own professional identity, and move between assignments. The temporary, facility-to-facility structure makes contractor classification straightforward.
Specialty groups in anesthesiology, radiology, pathology, and emergency medicine often contract with hospitals to staff entire departments. The physicians work inside hospital walls and use hospital equipment, but the group manages, schedules, and pays them. Because the group controls the details of the work, contractor status holds.
Solo practitioners with admitting privileges are the traditional contractor model. They use hospital operating rooms and beds for their patients while remaining financially and operationally independent.
On the other side, employed hospitalists, health-system-employed primary care physicians, and residents generally fit the employee profile: set schedules, institutional protocols, benefits, indefinite terms, and no exposure to business losses.
The Corporate Practice of Medicine Wrinkle
Many states prohibit non-physician-owned corporations from employing doctors or controlling clinical decisions. In states that enforce this doctrine strongly, a hospital system or a private-equity-backed management company cannot hire physicians as W-2 employees the way it hires administrators.
The workaround is a professional corporation or professional LLC owned by physicians. The hospital contracts with the physician-owned entity for medical services. The doctors are employees of their own PC but function as contractors to the hospital. Filing fees to set up a professional corporation generally run between $70 and $300, depending on the state. Enforcement varies significantly across states, so whether this structure is legally required, useful, or ignored depends on where you practice.
What Changes When You’re a Contractor
Self-Employment Tax
The biggest immediate change is tax. Contractors pay the full 15.3% self-employment tax, covering both the employer and employee shares of Social Security (12.4%) and Medicare (2.9%). Employees split that with the employer. On $400,000 of income, the gap runs into tens of thousands of dollars a year. The employer-equivalent half of self-employment tax is deductible when calculating adjusted gross income, which softens the hit.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Some contractor physicians form an S corporation, pay themselves a reasonable salary through payroll, and take the rest as distributions not subject to self-employment tax. The IRS watches this closely. The salary has to genuinely reflect the value of the physician’s personal services, considering training, experience, time devoted to the business, and what comparable practices pay for similar work. A $60,000 salary paired with $350,000 in “profits” will draw scrutiny and possible reclassification of the distributions as wages.6Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
Retirement
Employees get an employer 401(k) match. Contractors don’t, but they can use retirement vehicles with higher ceilings. A solo 401(k) lets a contractor contribute as both employee and employer. For 2026, the employee elective deferral limit is $24,500, with an $8,000 catch-up at age 50 and a higher $11,250 catch-up for ages 60 through 63.7Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits On top of that, the physician can contribute up to 25% of net self-employment income as an employer contribution, with total contributions capped at $72,000 before catch-ups.8Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs A high-earning contractor at age 60 could shelter over $83,000 in a single year.
A SEP IRA is simpler but caps out at 25% of compensation, up to $72,000 for 2026, with no elective deferrals or catch-ups.9Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) Solo 401(k)s generally win for single-physician practices; SEP IRAs suit contractors who want minimal paperwork.
Malpractice Insurance and Tail Coverage
Employees usually get malpractice coverage through the employer. Contractors buy their own. Premiums swing widely by specialty and state, from under $10,000 a year for internal medicine in lower-cost states to six figures for obstetricians and surgeons in high-liability states.
Most physician policies are claims-made, which means the policy has to be active both when the incident happened and when the claim is filed. When a contractor switches carriers or stops practicing, they need an extended reporting endorsement, or “tail coverage,” to cover claims filed later. An unlimited tail typically costs around 175% of the final year’s premium as a one-time fee. For a surgeon paying $80,000 a year, the tail is roughly $140,000. Some contracts stick the departing physician with that cost; others put it on the facility. Know which before signing.
Occurrence-based policies cover any incident during the policy year regardless of when the claim surfaces, so no tail is needed. They cost more upfront but eliminate the tail bill that catches many contractors off guard at exit or retirement.
Benefits and Legal Protections You Lose
The Family and Medical Leave Act protects employees who need unpaid leave for a serious health condition or family caregiving. It excludes independent contractors. Eligibility turns on the economic reality of the relationship, and a physician “engaged in a business of his or her own” does not qualify.10eCFR. Part 825 The Family and Medical Leave Act of 1993 A contractor who gets seriously ill or has a child has no federal right to take leave and return to the same position.
ERISA governs employer-sponsored health, disability, and retirement plans, and its protections extend only to employees participating in covered plans.11U.S. Department of Labor. Employment Law Guide – Employee Benefit Plans A contractor has no ERISA claim if a promised benefit is denied because there is no employer plan to enforce. Contractors also fall outside workers’ compensation in most states and need to carry their own disability policy.
Add it up: the employer half of FICA, malpractice premiums, retirement contributions, health insurance, paid leave. A $450,000 contractor payment can net less than a $350,000 employee salary once all of that comes out of pocket. Run the full comparison before assuming the bigger headline number wins.
Compliance Rules the Contract Has to Meet
Independent contractor arrangements that involve Medicare or Medicaid patients have to satisfy federal fraud and abuse laws. The Stark Law bars a physician from referring patients to an entity for designated health services when the physician has a financial relationship with it, unless the arrangement fits a specific exception. Most contractor deals rely on the personal service arrangements exception, which requires a written agreement signed by both parties, a term of at least one year, and compensation set in advance at fair market value that does not turn on the volume or value of referrals.12eCFR. 42 CFR 411.357 – Exceptions to the Referral Prohibition Related to Compensation Arrangements
The federal Anti-Kickback Statute runs a parallel track. Its personal services safe harbor mirrors the Stark exception in most respects: written, one-year minimum term, services that are reasonable and necessary, compensation not tied to referrals. Missing either the Stark exception or the Anti-Kickback safe harbor can bring civil monetary penalties, exclusion from federal healthcare programs, and criminal exposure. Build the agreement to fit these rules from the start rather than patching later.
If You Think the Classification Is Wrong
Getting it wrong is expensive. When the IRS decides a physician treated as a contractor was really an employee, the facility owes back employment taxes, the employer share of FICA, the income tax it should have withheld, and penalties. The physician may owe self-employment tax they wouldn’t have paid as an employee, and may also gain access to benefits they were denied.
Two safety valves exist for facilities acting in good faith. Section 530 of the Revenue Act of 1978 ends employment tax liability if the facility filed all required 1099s consistently, never treated anyone in a substantially similar role as an employee after 1977, and had a reasonable basis for the classification (industry practice, a prior IRS audit, or judicial precedent).13Internal Revenue Service. Worker Reclassification – Section 530 Relief The IRS reads “reasonable basis” liberally, but the facility must have actually relied on it at the time.
The Voluntary Classification Settlement Program lets a facility proactively reclassify workers as employees going forward with reduced tax liability for prior periods.14Internal Revenue Service. 4.23.20 Voluntary Classification Settlement Program (VCSP) A facility that suspects a classification problem is usually better off entering the VCSP than waiting for an audit to force the question.