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Most group practices we meet have the same org chart: one owner, a few clinicians, and a stack of contractor agreements everyone signed on day one. The agreements say 1099. The calendar, the EHR, and the fee schedule often say something else.
The 1099 or W-2 question for therapists matters more than it looks. It decides who pays which taxes, who handles payroll, what the practice owes if the IRS or the Texas Workforce Commission disagrees with the label, and how much your clinicians need to set aside on their own. It also tends to come up at a bad moment, like when a clinician leaves and files for unemployment.
We’ll walk through why so many practices start with 1099 clinicians, how the control test actually applies to therapy work, what changes when someone moves to W-2, and how to choose a setup that fits the way your practice runs. First, the reason almost everyone starts in the same place.
Most group practices start with 1099 clinicians because it’s the simplest way to add capacity. There’s no payroll to run, no employer taxes to pay, and the pay often looks like a clean split of collections that rises and falls with each therapist’s caseload.
For a new practice, that feels like a sensible way to grow. You bring on a clinician, agree on a percentage, and send one payment a month. Many clinicians like it too, because it feels like more independence and the paycheck looks bigger before taxes come out.
The catch is that neither the agreement nor the pay split decides how a clinician is classified. The IRS says anyone who performs services for you is your employee if you can control what will be done and how it will be done, and what matters is that you have the right to control those details, whether or not you use it.
The Texas Workforce Commission says the same thing in its own words: it doesn’t matter if the worker is called contract labor or an independent contractor when the relationship looks like employment.
So the real question is how much of each clinician’s work your practice controls, and that’s where a therapy practice gets interesting.
The IRS sorts the evidence into three categories: behavioral control, financial control, and the type of relationship, and it weighs all of them together rather than any one fact. In a group practice, those categories usually show up in a few familiar places.
Behavioral control is about who decides when, where, and how the work gets done. If the practice sets office hours, assigns clients from its intake line, requires a certain documentation style in its EHR, or runs mandatory staff meetings, that leans toward employee. Supervising associates who are working toward full licensure is part of good clinical practice, but the more that supervision turns into day-to-day direction, the more it looks like control.
Financial control covers how the clinician is paid, whether expenses are reimbursed, and who provides the tools. When the practice sets the session rate, bills insurance under its own name, provides the office and the software, and pays for continuing education, the clinician doesn’t have much of a business of their own.
Type of relationship looks at contracts, benefits, and how permanent the arrangement is. A clinician who works only for your practice, indefinitely, delivering the core service your practice sells, looks a lot like staff.
Let’s look at an example. A Fort Worth group practice has five therapists on 1099s, each on a 60/40 split. The practice runs intake and assigns clients, sets every rate, books through its scheduling portal, bills under its own insurance contracts, provides the rooms and the EHR, and asks everyone to cover two evening slots a week. Each therapist signed an independent contractor agreement, but almost every fact on the list points to employment.
Now picture a second practice. Its clinicians rent office time, keep their own insurance panels, set their own fees, use their own EHR, and see clients from their own referrals. Those are much easier to defend as contractors. Most practices land somewhere between the two, and if yours sits closer to the first one, here’s what would change.
Once a clinician is W-2, the practice runs them through payroll, which means taxes come out of every check before the clinician gets paid. You withhold federal income tax and the employee’s share of Social Security and Medicare, then pay the employer’s share on top. You also pay federal unemployment tax, which employees don’t pay at all, and file the quarterly and annual employment tax returns that go with it.
That’s real work and real cost, and it usually means rethinking the pay structure. A 60/40 split that made sense when the clinician paid all their own taxes may need to move once the practice is paying the employer share, offering benefits, or covering continuing education. Plenty of practices keep a production-based model for W-2 clinicians, with a base wage plus a percentage of collections.
There are upsides too. You can set schedules, require training, and run the practice the way you want it run without worrying that every new rule makes your contractors look more like staff. Clinicians get taxes withheld for them, which takes one job off their plate.
This is the work our Fort Worth payroll team handles for practices every pay period, from withholding to the quarterly filings. On top of the federal side, Texas has its own tax that hinges on how you classify people.
Texas doesn’t have a personal income tax, but it does have state unemployment tax, which the Texas Workforce Commission collects on employee wages. TWC makes its own call on who counts as an employee, and it doesn’t have to agree with the IRS or with your contractor agreement.
TWC uses what it calls a “direction or control” test, and it has adapted the old IRS twenty-factor list to apply it. The part practice owners tend to miss is that Texas law presumes a worker is an employee and puts the burden of proving otherwise on the employer. In other words, the practice has to show the clinician is independent, not the other way around.
These reviews usually don’t come out of nowhere. According to TWC, one of the main ways a TWC audit starts is a former worker filing an unemployment claim, and those audits get the highest priority. If TWC decides wages weren’t reported, it assesses back taxes and interest.
That’s why the unemployment claim is the moment many practices find out how their setup really looks from the outside. The other side of the 1099 arrangement is what it means for the clinicians themselves.
A 1099 therapist pays both halves of Social Security and Medicare through self-employment tax, so they need to set aside more than a W-2 clinician with the same income. The self-employment tax rate is 15.3% on net earnings, on top of federal income tax. They can deduct the employer-equivalent half of that tax when figuring adjusted gross income, which helps a little.
Nobody is withholding for them, so most 1099 clinicians need to make quarterly estimated payments. The IRS says individuals generally have to pay estimated tax if they expect to owe $1,000 or more when they file. To avoid an underpayment penalty, most people need to pay in at least 90% of this year’s tax or 100% of last year’s, whichever is smaller.
Living in Texas helps, since there’s no state income tax to plan for. The right set-aside still depends on each clinician’s income, deductions, and household, so we’d rather run the real numbers than hand out a single percentage.
If your clinicians are 1099, it’s worth telling them this up front. A therapist who gets surprised by a tax bill in April is more likely to start asking whether they were really a contractor at all. Which brings us to picking the setup you actually want.
The right setup is the one that matches how your practice actually runs. If you want one brand, one intake process, set rates, and a consistent client experience, that’s an employee model, and running payroll is part of the cost of having that control.
If you’d rather run a shared space where clinicians build their own caseloads, set their own fees, and manage their own billing, a contractor model can work well, as long as you really let go of the details. Some practices run a mix, with W-2 clinicians on the core team and a few independent clinicians renting space, which works fine when each group is handled consistently.
If you’re still unsure about a particular role, the IRS has a formal option. Either the practice or the clinician can file Form SS-8 to ask the IRS for an official determination, though it can take months. And if you’ve been treating everyone as contractors, consistency matters: the IRS relief for businesses with a reasonable basis for their classification requires that you file all the required information returns in line with how you treated the worker.
Whatever you choose, put it in writing and make sure day-to-day practice matches the paperwork. Our small business accounting team helps practice owners map out the cost of each option, depending on your situation, before anyone changes a contract.
If you run a salon as well, or just want to see how this plays out in another industry, we also wrote about booth renters vs employees for Texas salon owners.
Not sure which side of the line your clinicians fall on?
Get in touch with us and we’ll walk through how your practice really runs.
