Worker classification
1099 vs. W-2 for Healthcare Workers
How to tell a legitimate contractor from an employee in healthcare, what Arizona is doing about misclassification in 2026, and how to use contractors safely.
General information, not legal or tax advice. Checked October 2026. Sources are listed at the end.
Paying staff on a 1099 can look cheaper on paper: no payroll taxes, no workers' comp, no benefits. But in healthcare, where most workers follow your schedule, your policies, and your clinical protocols, those "contractors" are usually employees, and the savings turn into back taxes, back overtime, penalties, and comp premium at audit.
The quick test
A worker is probably your employee if you:
- Set their schedule or assign their shifts and clients
- Tell them how to do the work through your policies, protocols, and supervision
- Supply the equipment, supplies, EHR access, and workspace
- Pay by the hour, shift, or visit rather than by a negotiated project
- Rely on them as an ongoing part of your staff, even part time or PRN
A legitimate contractor runs their own business: sets their own fees, controls how they do the work, serves other clients, carries their own insurance, and can make or lose money on the engagement.
Where healthcare employers get it wrong
- PRN nurses and aides. Working as needed is a scheduling choice, not a classification. PRN staff who fill your shifts under your supervision are generally employees.
- Home care caregivers. Caregivers an agency recruits, places, schedules, and supervises are generally the agency's employees.
- Therapists and counselors paid per visit. Per-visit pay doesn't make someone a contractor if you assign the patients and control the work.
- Front-desk and billing help. Office staff working your hours with your systems are almost always employees.
Medical directors, consulting physicians, and locum providers placed through an agency are the roles most often set up legitimately as contractors, when they truly control their own work.
The tests the agencies use
- IRS (payroll taxes): the common-law test, which looks at behavioral control, financial control, and the relationship between the parties.
- U.S. Department of Labor (minimum wage and overtime): an "economic reality" test asking whether the worker is in business for themselves or economically dependent on you. The Department stopped enforcing its 2024 rule and in February 2026 proposed returning to a test where control over the work and the opportunity for profit or loss carry the most weight. Check the Department's site for the current status.
- Arizona: state agencies apply their own rules for unemployment insurance, income tax withholding, and workers' comp. A signed Declaration of Independent Business Status under A.R.S. § 23-1601 can support contractor status under state law, but it doesn't settle federal tax or wage questions, and it won't hold up if the actual working relationship looks like employment.
Arizona's 2026 crackdown
On May 20, 2026, Governor Hobbs signed Executive Order 2026-01, directing the Department of Economic Security, the Department of Revenue, the Industrial Commission, and other state agencies to share evidence and jointly enforce worker classification laws. The order names construction, janitorial work, other service sectors, and low-wage occupations as places where misclassification is common. In practice, a problem found in one place, such as an unemployment claim from a former PRN aide or a workers' comp audit, is more likely to reach the others.
What misclassification costs
- Both halves of Social Security and Medicare, plus federal and state unemployment tax, with interest and penalties
- Back overtime for hours over 40, figured on the regular rate including differentials, and federal liquidated damages equal to the back pay
- Arizona paid sick time the worker should have accrued
- Workers' comp premium on the reclassified pay at audit, and exposure if one of those workers is hurt on the job
- Unemployment claims charged to your account when the work ends
If you do use contractors
- A written agreement for each engagement, with scope and fees the contractor helped set
- Proof of their own business: entity, other clients, their own professional liability coverage
- A Form W-9 on file, and a Form 1099-NEC by January 31 for each contractor paid $2,000 or more during 2026 (the threshold was $600 through 2025)
- A review whenever the relationship changes, such as when a contractor starts working your regular shifts
Moving staff onto payroll
Moving workers onto payroll is usually cheaper than defending the classification later. A PEO makes the switch simpler: it runs payroll and payroll taxes, covers your staff under its workers' comp policy (premium billed separately), and handles new-hire paperwork, for a flat administrative fee instead of a stack of new vendors. See how PEO pricing works.
1099 vs. W-2 questions
Can I pay PRN nurses on a 1099?
Usually not. A PRN nurse you schedule, supervise, and fit into your own staffing, using your equipment and following your policies, is generally an employee, even if they work only a few shifts a month. PRN status is about scheduling, not classification.
Are caregivers independent contractors?
Caregivers placed, scheduled, and supervised by a home care agency are generally the agency's employees. Treating them as contractors is one of the most common misclassification problems in home care.
Can a medical director or locum physician be a contractor?
Often, yes. A physician who runs their own practice, serves several organizations, and controls how they perform the work can be a legitimate contractor. The working relationship decides, not the title.
What is the 1099-NEC threshold for 2026?
$2,000. For payments made in 2026, you file a Form 1099-NEC for each nonemployee you paid $2,000 or more, up from $600 through 2025. The threshold is indexed for inflation starting in 2027.
Is Arizona enforcing worker misclassification?
Yes. Executive Order 2026-01, signed May 20, 2026, directs state agencies including the Department of Economic Security, the Department of Revenue, and the Industrial Commission to share evidence and jointly enforce classification laws. It names construction, service sectors, and low-wage occupations.
Moving staff onto payroll?
A PEO through PayMyCareTeam runs payroll, files payroll taxes, and handles the reporting, for a flat $75 per employee per month (subject to provider approval). Free quote, no obligation. Use the quote form