By Mike Jesowshek, Special AFS Contributor
One of the most confusing and overlooked topics in payroll, is whether your trainers are independent contractors or employees.
As the owner of a fitness studio/gym this is an important topic to learn about to make sure you are classifying your trainers correctly, and in a way that does not put your business at risk and squarely in the cross hairs of the IRS.
To start I want to present two snippets from the IRS definitions for both an employee and independent contractor.
“… anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”
“… The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”
Control – Biggest Determining Factor
As you can tell by reading those two definition snippets, the biggest determination between an independent contractor or employee comes down to control. Do you, as the payer, control what will be done and how it will be done? Here are some questions to help answer that. If you answer yes to these questions, it generally means you do have control and the worker should be classified as an employee.
- Does the studio establish the training programs/design the workouts?
- Do clients pay the studio (not the trainer) for their sessions?
- Does the studio determine the price the clients pay?
- Does the studio set the class times?
- Does the studio pay for training equipment and supplies?
- Do the trainers work under their individual name (not a separate business)?
- Do you intend for your trainer to work at your studio for awhile (not temporary work)?
If you happen to get audited and your trainer is actually an employee, you are the one stuck holding the bag, not the trainer that requested it.
As you can imagine, a typical studio may often answer yes to most of the questions above. A few key characteristics on an independent contractor would be: the worker has their own business and perform services for many different studios, they design their own training programs outside of the studios control, they determine their own schedule and session prices, they bring in their own clients, and they provide their own equipment.
Common Mistakes Studios Make
Instead of focusing on the questions above, many studio owners make the following mistakes which are not acceptable reasons for classification by the IRS or state agencies.
- My friend who is a business owner does it “this way”
- Just because one studio does it a certain way does not mean it is correct. Their answers to the questions above could be different. They could also just be hoping to not get caught.
- I will just “fly under the radar”
- You may think you are just one small studio and you’ll never be found. In reality you do not just have to just fly under the IRS radar but also the state. It only takes one disgruntled trainer that reports it and they will open a case immediately. You may think you are just starting out and small now, but the penalties, fees, and fines will continue to add up as you grow year to year.
- The trainer requested to be classified as an independent contractor
- You may think the trainer requested it, so it is fine. Unfortunately, the law determines who is an independent contractor or employee, not the worker. If you happen to get audited and your trainer is actually an employee, you are the one stuck holding the bag, not the trainer that requested it.
If after reading the facts you feel that your trainers should be classified as independent contractors, definitely take advantage of that and pay them that way. If, however you believe your trainers should be employees but you instead choose to treat them as contractors, consider the risk you are taking and maybe rethink your options. In the event of an audit where the IRS reclassifies your employees, you will be hit with fines, interest, penalties, and fees, on top of the back taxes that will need to be paid. If you are still really unsure on how to classify a worker, you can fill out Form SS-8 and the IRS will decide for you.
If you are interested in learning more about the topic above or any other bookkeeping or tax related items, send me a message, I would be more than happy to chat!
This guidance is for informational purposes and does not constitute legal or tax advice. We also recommend you speak with a professional regarding your specific scenario. JETRO and Associates shall not be responsible for any liability related to the guidance herein.
Mike Jesowshek, CPA is the founder of the accounting firm JETRO and Associates. He has a strong passion for both fitness professionals and technology. He helps provide a digital accounting, bookkeeping, and tax solution for studio and gym owners who are looking to take it to the next level by utilizing modern, cutting edge technology.