Chapter 10.B.2: Charitable Tax Exemption

For a good practical overview of federal requirements for hospitals and clinics, including a discussion of joint ventures, see the IRS document Health Care Provider Reference Guide. 

Payroll Taxes for Contracting Physicians. General Counsel Memorandum 39862 clarifies that compensation and payment incentives are much less controversial when they are in exchange for tangible services performed by the physician. Then, the only test is one of commercial reasonableness. Arrangements where the hospital bills directly for the services of hospital-based physicians and then compensates them with a portion of the receipts are not as uncommon as the GCM suggests; the reimbursement changes it describes relate only to Medicare, not to private insurance. Indeed, under capitation payment, bundling of hospital and physician services is becoming even more common.

This raises a different tax issue of some importance, however, namely whether as indicated in n.3 of the GCM, these physicians are to be considered employees rather than independent contractors. Hospitals greatly prefer the independent contractor label, not only because they avoid payroll taxes, but also because of vicarious liability and corporate practice of medicine considerations. The IRS, however,  cracked down on this characterization with numerous hospital audits resulting in some very large demands for back taxes. See Tech. Advice Memoranda 9535001-9535002 (1995). These rulings caused great consternation. One went so far as to opine that a radiologist with an independent practice who reads electrocardiograms part time at several different hospitals and is paid piece work could still be classified as a part-time employee at each hospital. The best route to avoiding this result is for a physician to employ herself through a professional corporation which then contracts with the hospitals. It is much harder to characterize a corporation as an employee.