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.
What You’ll Learn from this Episode:
- The difference between an independent contractor and an employee
- The Pros and Cons of each- as a studio owner and as an instructor
- Ways to bulletproof yourself against an audit, and tax strategies to save you money every year.
To get a free copy of your INDEPENDENT CONTRACTOR OR EMPLOYEE worksheet, email us at firstname.lastname@example.org!
Here’s the Episode Summary:
(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)
- Have a separate bank account. Even if you don’t have a formal business set up. Run everything business related through that account. If you don’t, the IRS will challenge things that you say are business related when it’s commingled with personal stuff
- Keep great records and receipts. Use something cloud based. Take a photo of your business receipts and upload it to Dropbox or Google Drive. If you get audited and asked about charges, you can show the itemized receipt for that expense. ALSO, write the who, what, when, where, and why! You may get audited well in the future, and it may be hard to remember what the business lunch was all about and who it was with. Write it on your receipt.
- Ditch the cash whether accepting it or using it to pay for something, because it’s so hard to track. When did it come out of your account? If you do pay for something in cash- be sure to keep that receipt! Instead, go to the bank, go to the bank, write a check to yourself for cash, and in the memo line, right what it was for.
- File on time. Whether it’s at the deadline or as an extension. It’s not true that you are “flagged” in any way for extending your return.
(35:00) Tax Mistakes and Tax Strategies
- Tax Mistake #1- Failing to plan. When you go see an accountant, all they are doing is giving information to the IRS- filing that with them. If you give your accountant a box of receipts on April 15th, you are missing out on tax reduction strategies that you could be using throughout the year. There is nothing in the IRS code that says you can’t avoid paying taxes that are legal.
- The S-Corporation. Most businesses are set up as sole-proprietorships or single-member LLCs. They are required to pay self-employment tax on all their income. The S-Corporation is a strategy to eliminate part of the self-employment tax you have to pay. You must run payroll to yourself, and file a business tax return. Every year you will see tax savings. Not all states and cities are friendly to S-Corporations, so be sure to do your research, and refer to the resources Mike has provided below.
Other References in This Episode:
IDEA fitness professional insurance
The Small Business Tax Savings Podcast
JETRO YouTube Channel
FREE Worksheet on Why You Should Create An S-Corp