1099 vs W-2 Therapists: Classification Tests and the Contractor Agreement

Start with what turns on the answer.

Genuine independent contractors are not covered by the FLSA's minimum wage and overtime rules, which apply only to employees — so the classification decision decides whether those rules apply to your therapists at all.

Three separate systems ask the question, each for its own purposes, and an arrangement has to hold up under each of them:

• Department of Labor (FLSA wage and hour). Wage-and-hour enforcement asks whether an employment relationship exists under the FLSA; since May 1, 2025, investigators apply the guidance in Fact Sheet #13 rather than the 2024 rule, as covered in the next section.
• IRS (federal employment taxes). The general rule is that a worker is an independent contractor if the business has the right to control or direct only the result of the work — not what will be done and how it will be done. The IRS groups the evidence into three categories: behavioral control, financial control and the type of relationship.
• State law. Wage-law tests are state-specific. California and Massachusetts each use a three-part ABC test whose middle prong — work outside the usual course of the hiring entity's business — is the one that fails when a contractor therapist delivers therapy to a practice's clients, as covered below.

One IRS statement is easy to misread.

The IRS says professionals who are in an independent trade, business or profession in which they offer their services to the general public are generally independent contractors — but it also says status depends on the facts in each case, and the example describes a clinician with their own practice and their own clients.

A therapist whose caseload comes entirely from your practice is serving your clients, not the general public.

This page takes the employer's view.

If you are the therapist evaluating an offer or a contract, the candidate-side comparison — W-2 vs 1099 (clinician side) — is in our career guides.

Since May 1, 2025, under Field Assistance Bulletin 2025-1, the Wage and Hour Division's investigators no longer apply the 2024 independent-contractor rule.

They enforce the FLSA in accordance with Fact Sheet #13 (July 2008), as further informed by Opinion Letter FLSA2019-6.

That switch does not take the 2024 rule off the books.

DOL's bulletin states that the 2024 rule (29 CFR part 795) remains in effect for private lawsuits until further action, and that nothing in the bulletin changes the rights of employees or the responsibilities of employers under the FLSA.

So a worker's status can still be tested under the 2024 rule in a private lawsuit.

Under the 2024 rule, the ultimate question is whether the worker is economically dependent on the business for work or in business for themself.

Six factors are weighed, and none is decisive.

Facts that count toward employee status under that rule include whether the business sets the worker's schedule, supervises the performance of the work, or explicitly limits the worker's ability to work for others.

The rule's next chapter is pending, not settled.

On February 27, 2026, DOL proposed rescinding the 2024 rule and readopting its January 2021 rule with modifications; the comment period closed April 28, 2026.

As of October 7, 2026, the Federal Register lists no final independent-contractor rule.

The 2021 rule DOL proposed to readopt treats two considerations as "core factors": the nature and degree of control over the work, and the worker's opportunity for profit or loss.

The practical read for a practice: the paperwork is in motion, but the facts the competing versions keep weighing — control over the work and who carries the economic risk — are stable.

Build the arrangement for the strictest reading of those facts, not for whichever rulemaking you would prefer to see finalized.

Where a state applies an ABC test, the analysis hardens.

Under California's test (Labor Code 2775), a worker is an employee unless the hiring entity can show all three of these: the worker is free from the entity's control and direction in performing the work; the worker performs work that is outside the usual course of the hiring entity's business; and the worker is customarily engaged in an independently established business of the same kind.

The middle prong is the structural problem for therapy practices.

A group practice sells therapy; a contractor therapist delivers therapy to the practice's clients.

That work is the usual course of the business, so the test fails no matter how independent the clinician is the rest of the week.

Massachusetts' wage-law test (Chapter 149, Section 148B) has the same three-part structure, with the same middle prong: an individual is an employee unless free from control, performing service outside the usual course of the employer's business, and customarily engaged in an independent business of the same nature.

The AB 5 carve-out for health professionals (Labor Code 2783) covers licensed physicians and surgeons, dentists, podiatrists, psychologists and veterinarians — LMFTs, LCSWs, LPCCs, nurse practitioners and BCBAs are not on that list.

A psychologist sits outside the ABC test in California, but the IRS and DOL tests above still apply, and the remaining California analysis is something to confirm with employment counsel.

The business-to-business exemption narrows further.

Under California Labor Code 2776, every one of 12 conditions must hold, including that the contractor provides services directly to the contracting business rather than to customers of the contracting business — which a therapist seeing your clients does not.

New Jersey's unemployment law runs an ABC test whose middle prong can be met two ways: the service is either outside the usual course of the business for which it is performed, or performed outside all of the places of business of the enterprise.

Whether New Jersey applies the same test to its wage laws was not settled by this research — confirm with the New Jersey Department of Labor or employment counsel.

Line up the facts the tests actually weigh against how group practices run, and the same patterns keep appearing:

• You set the schedule and assign the caseload. Under the 2024 rule, control facts include whether the business sets the worker's schedule, supervises the performance of the work, or explicitly limits the worker's ability to work for others. Required shifts, assigned clients and mandatory staffing meetings all sit on the control side of that line.
• You direct how the clinical work is done. The IRS's first evidence category is behavioral control — and the more a therapist's sessions run on your methods, your systems and your review, the stronger that evidence gets.
• You restrict outside work. Explicit limits on working for others are named control facts under the DOL rule. A non-compete-style clause inside a contractor agreement is not just a contract term — it is evidence.
• You lean on the wrong signals. Fact Sheet #13 — the guidance DOL investigators currently use — says a state license, the work location and the lack of a formal agreement have no bearing on the employment determination, and the time or mode of pay does not control it. Under that guidance, the license on the wall, the desk in your suite and the 1099 you file are neutral facts — the time or mode of pay does not control the determination.

Then there is a layer the tax tests never reach: licensing boards.

In California, MFT trainees and associates may perform mental health services only as employees or volunteers, never as independent contractors (Business and Professions Code 4980.43.3, as amended effective January 1, 2026) — and clinical counselor and social work associates have the same rule.

California also requires employed MFT associates to give the board copies of their W-2 forms for each year of experience claimed.

A board rule like that ends the contractor question for associate-level clinicians in those California professions before any tax test gets asked.

Associate-level rules in other states were outside this research, so ask your state licensing board.

One IRS-specific trap compounds it.

The IRS relief provision (section 530) is unavailable if you — or a predecessor — treated any worker holding a substantially similar position as an employee for any period beginning after 1977.

The IRS does not name therapy roles in that rule, but the mixed arrangement is where it bites: on that reading, paying some therapists as W-2 employees while sending 1099s to others doing the same clinical work means a substantially similar position has already been treated as an employee position.

What it can't do: decide the question.

The IRS says a contract may state that the worker is an employee or an independent contractor, but that is not sufficient to determine the worker's status.

DOL's analysis looks at what the parties actually do — its rulemaking states that the actual practices of the parties establish the existence of an employment relationship, and a skillfully drafted agreement does not control when day-to-day practice says employment.

Fact Sheet #13 adds the mirror image: the lack of a formal agreement has no bearing on the determination either.

What it can do: document the commercial relationship you actually intend.

The rate and how it is earned, invoicing and payment mechanics, whose professional liability coverage applies, who pays for supervision, continuing education and licensure, the term, and how either side ends it — those clauses are worth getting right, and none of them converts an employment relationship into a contracting one.

Spend the negotiating effort on the underlying facts, not the label.

If an arrangement is genuinely ambiguous, there is a formal route.

Either the business or the worker can file IRS Form SS-8 for an official determination of worker status.

The IRS cautions that a determination may take at least six months, which rarely fits a hiring timeline — treat the form as a tool for settling an existing arrangement, not for clearing a new hire.

Federal wage-and-hour exposure is the simplest to state.

An employer that violates FLSA minimum wage or overtime rules owes the unpaid wages plus an equal additional amount as liquidated damages, and a lawsuit must be filed within two years — three years if the violation was willful.

Federal tax exposure runs through the IRS.

If you treat an employee as a contractor with no reasonable basis, you are liable for the employment taxes and the IRS relief provision is unavailable.

Under IRC section 3509, a misclassifying employer without intentional disregard owes income tax withholding at 1.5% of wages plus 20% of the employee share of FICA — and those rates double to 3% and 40% if the employer also failed to file required information returns such as Forms 1099.

State penalties stack on top where they exist.

In California, willful misclassification as an independent contractor carries civil penalties of $5,000 to $15,000 per violation, or $10,000 to $25,000 per violation for a pattern or practice.

The planned off-ramp is the IRS Voluntary Classification Settlement Program (VCSP).

A practice that reclassifies its contractors as employees going forward pays 10% of the employment tax liability for the most recent tax year, computed at the reduced section 3509(a) rates.

Two eligibility gates apply: you must have filed all required Forms 1099 for the workers for the previous three years, and you cannot currently be under an IRS employment tax audit or a DOL or state audit of the workers' classification.

The second gate has a scheduling consequence — being under audit disqualifies you — so a practice that suspects a problem should evaluate the program before an inquiry arrives, not after.

If the tests say employee, the durable fix is a W-2 structure, and the classification analysis is only half that decision.

Choosing among the pay structures that work for employed clinicians is covered in our guide to pay models, and the rest of the employer playbook lives in the behavioral health hiring hub.