What’s the difference between studios classifying instructors as independent contractors versus employees? How do you properly and legally make that decision? What are the pros and cons of each for studio owners? How about the pros and cons for instructors? In this episode, all of these questions and more are laid out by a Certified Public Accountant that works almost exclusively with fitness studios. This is an important episode to listen to as a studio owner or fitness professional. Learning the difference between the two types of contracts, as well as the other tips in the episode could help save you thousands of dollars.
(07:30) The difference between an independent contractor and an employee
Should you make your instructors independent contractors or employees? It’s a great question, and it’s tricky to answer, but it’s not just up to you as a studio owner to pick one.
The IRS states that you should treat a worker as an employee if you as a business decided what will be done and how it will be done. Control is a major factor in that determination.
Refer to the worksheet that accompanies this episode to determine whether you should consider your instructors independent contractors or employees. Download it above.
(12:00) It’s the studio’s job to determine whether to hire instructors as independent contractors or employees, and it’s also their responsibility to explain to the instructor why they made that decision and what that means.
(16:00) The pros and cons of classifying your instructors as independent contractors vs employees (for studio owners)
If you hire someone as an employee, you have to set up payroll and start withholding taxes. You’re also matching their social security and medicare expenses (roughly 7.5%). You also have to pay for their unemployment (state and federal). Unemployment is generally inexpensive. You have to get a worker’s compensation policy for them and be sure that you have an insurance policy that covers all of them. You may have to match their retirement plan. Depending on what state you’re in and whether an employee is part time or full time, you may have to allow for vacation days and sick leave.
If you’re hiring someone as an independent contractor, none of those expenses exist, you simply pay them their paycheck.
(20:20) The pros and cons of being classified as an independent contractors vs an employee as a fitness professional.
The pros of being an employee is that your taxes are taken out for you. So at the end of the year, all of your taxes are paid, and you might even get a refund.
Whereas, if you’re an independent contractor, you have to take taxes out on your own, and send estimated tax amounts to the IRS throughout the year or wait until the end of the year. Social security and medicare expenses now fall entirely on you (this is what self-employment tax is)
Pros of being an independent contractor are you get a 20% deduction automatically. So if you get paid $1000, you only get taxed on $800. You can also expense everyday activities that are related to business. It’s the #1 way to save on taxes. Those are expenses that are being deducted before being taxed. When you add in your 20% deduction, it can really reduce your tax amount, even if you’re paying for your social security and medicare
Therefore, it’s advantageous for both sides to hire as an independent contractor.
(27:20) How to avoid a tax audit, and even bulletproof yourself against one. (For studio owners and independent contractors)
(35:00) Tax Mistakes and Tax Strategies