What changed
For years, a common structure in general practice was for the clinic to provide rooms, administration and billing, and for doctors to work as independent contractors, paying the clinic a service fee out of their billings. On that model, the money the doctor received was not treated as wages, so there was no payroll tax on it.
That assumption has been challenged. In a number of cases, including the well-known Thomas and Naaz matter, state revenue offices and tribunals have found that these service-fee arrangements can amount to relevant contracts, which brings the payments within the payroll tax net as deemed wages. The effect is that practices which never budgeted for payroll tax on their doctors can find they have a liability, sometimes backdated.
How practices got caught
The pattern is consistent. The practice collects patient and Medicare money, takes its service fee, and pays the balance to the doctor. Because the money flows through the practice to the doctor, and the arrangement looks like the doctor is working in and for the practice rather than running a genuinely separate business, it can be treated as a relevant contract. The exact lines are drawn differently in different states, and small differences in contracts and money flow can change the answer, which is precisely why it is so unsettling for owners.
Where a bookkeeper stops and an adviser starts
We need to be clear about lanes, because it matters here. True Tally is a bookkeeper and a registered BAS service provider, not a tax agent or a lawyer. We do not assess your payroll tax liability or advise on how to structure your contractor arrangements. That is the work of your accountant or a payroll tax specialist, and payroll tax is a state tax, so the answer genuinely depends on your state and your specific facts.
What we do is the foundation that makes their advice possible: record how each practitioner is engaged, how the money flows in and out, and how payments are made, accurately and in one place, so your real position can be assessed rather than guessed. When the picture is clean, the advice is faster, cheaper and more reliable.
What to do now
- Get your records clear. Make sure your books accurately show how each doctor is engaged, the service-fee flow, and every payment made, so nothing has to be reconstructed later.
- Review your arrangements with an adviser. Take the clean picture to your accountant or a payroll tax specialist and get a view on your state and your specific contracts.
- Check your state's position and any relief. States have handled this differently, including amnesty and transition measures at various points. An adviser who works in your state will know the current position.
- Keep it current. Once you know where you stand, keep payroll, STP and super recorded correctly each cycle so the position does not drift.
If your medical practice needs the books, Medicare reconciliation and practitioner payroll kept accurate so your adviser has something solid to work from, that is squarely what we do. See our medical practice bookkeeping service, or book a free call.
General information only, not tax or legal advice. Payroll tax is a state and territory tax and the rules differ by state. Confirm your specific position with your accountant or a registered tax agent.