Our clients often ask whether to categorize fitness instructors and personal trainers as W-2 employees or independent contractors. I have witnessed first-hand studios who classify their instructors and trainers as employees and those that have a policy of classifying these workers as independent contractors. Is there a right answer you may ask? There is.
It is a common misconception that as an employer you have a choice on how to categorize your workers. In fact, the classification of an employee is a legal matter and there can be serious penalties and other consequences for an employer who makes the wrong decision.
Why Does It Matter?
If a worker is an employee, the employer is required to withhold, deposit, report and pay employment taxes, such as social security, unemployment, and Medicare. The employer is also responsible for compiling payroll reports and providing year-end documentation to the employee. On the other hand, if a worker is an independent contractor, the employer is not required to withhold taxes or make other payments on behalf of the worker as the worker is responsible for paying those costs..
How Do You Know?
The IRS and many states have adopted common law principals to differentiate between employees and independent contractors. Specifically, the federal government uses a 20-factor test to determine a worker’s classification. While no one factor is conclusive, all factors boil down to one common theme – control over the worker and the product/service being provided. Facts that provide evident of the degree of control that an employer has over a worker fall into three categories:
Behavioral – Does the employer have the ability to dictate exactly what the worker does and how the worker does it the job? Does the worker bring their own materials, tools, etc. or does the worker supply their own?
Financial – Are the business aspects of the worker’s job controlled by the employer (does the worker get vacation days/pay or is the worker subject to a bonus plan, etc.). Is the worker doing work for multiple clients that are paying the worker?
Overall Relationship – How does the worker and the employer perceive the relationship? Is the job that the worker performing within the primary business lines of the employer? Think about the electrician that you hired to fix your lighting in the locker rooms vs. the marketing manager that shows up at your office on a daily basis. Clearly, the electrician does not believe that you are their employer.
In reviewing the relationship between a yoga teacher and a studio, these factors could go either way but it may be safer to withhold taxes and treat these workers as employees. On one hand, a yoga instructor works for multiple clients and does not receive vacation days, bonuses, etc. However, on the other hand, yoga instructors typically have a set weekly schedule, use the mats, weights, and bands that belong to the studio and yoga classes fall into the primary business of the studio. As cliché as it may sound, in the realm of employee classification, it is better safe than sorry. For the scenario set forth above, the studio should likely classify the instructor as an employee.
If an employer misclassifies workers as independent contractors that are legally deemed to be employees, the employer will be assessed a penalty which is equal to the federal income tax, social security and Medicare taxes not withheld. In Illinois, a civil penalty of up to $1500 for each violation may also be imposed (which mean $1500 per day, per worker).
Many times what happens is that governmental authorities crack down systematically on a particular industry that they observe frequently misclassifying their workers. This was the case for real estate brokers and is currently happening in Illinois with respect to the trucking industry. There is no telling what industry may be next.
You should consult your attorney, accountant or other tax professional to ensure that you are in compliance with applicable employment rules and regulations. As a quick check, we often recommend taking an online survey, such as the one found at the link below, to get you starting to think about some of the factors that may play into the classification of your employees.