There’s an allure to the flexibility that comes when business owners hire instructors as independent contractors. It’s a relationship in which classes get taught and instructors get paid without the entanglement of taxes and benefits. But, maybe as a business owner, you thrive on leading a team that’s bought into one common goal. Or, maybe you are ill at ease with the freedom an independent contract affords your employee and would rather bring them fully in-house. So, should you offer contract or permanent employment to your instructors?
Before writing off the benefits of one option over the other, it’s important to weigh the differences carefully, especially when it comes to the IRS.
The difference between contracting and employing your instructors
Independent contractors are responsible for paying their own state and federal income taxes after receiving full payment from your studio. When an instructor has employee status, you are required to withhold federal, social security and Medicare tax. You also have to match employee social security and Medicare tax, pay unemployment tax, issue W-2 forms at the end of the year and report all paid wages to the IRS.
Full-time, and sometimes part-time, employees usually receive paid vacation, paid holidays, sick pay, salary or hourly pay, and health insurance benefits.
At first glance, it seems like working with instructors as independent contractors makes the most business sense because your obligations are limited. But, there are other factors that you should consider.
The IRS is skeptical of independent contractors
If you are paying instructors as independent contractors, keep in mind the IRS is notoriously fastidious about them. Employing independent contractors can throw up red flags to the IRS, who may ask you to prove your instructors pass these three qualifications:
- If your studio dictates details such as when, where, how and in what order the work will be performed—and who will assist with the work— then the instructor can be considered an employee, not a contractor.
- If the instructor has expenses not reimbursed by the company and makes investments of his or her own money into training, promotions and gear, then the instructor is operating more like an independent contractor.
- If your studio is paying for or supplying training or instruction to improve the instructor’s performance, the IRS might consider that instructor an employee.
The non-compete factor
Clients are loyal to your studio in large part because they are fans of your instructors. So, if one of your popular instructors is also teaching at a nearby gym or competitor’s studio, it can directly impact how well you fill your classes.
When you commit to employing an instructor, you can ask that instructor to make a commitment to your studio.
As part of the terms of employment, you can ask an instructor to sign a non-compete agreement or an exclusivity contract. By signing this type of contract, you are ensuring that your instructors are unable to teach at a competing studio or gym. The non-compete can also bar your employed instructors from training in clients’ homes or their own homes.
You can—and should—ask your independent contractor instructors to sign a non-disclosure. This contract prohibits the instructor from pursuing your studio’s clients to buy services directly. It also forbids independent contractors from luring other staff members to go work elsewhere. The instructor also is barred from revealing or utilizing any information he or she learned during their time at your studio.
If you like to have a uniform teaching style across all the classes at your studio, you should consider employing the instructors who teach most often. Employees can be instructed on which classes they must teach as well as specific methods and programs they have to use in order to remain employed by your studio.
You can also require that employees attend training sessions. Part-time and full-time employees can be required to attend promotional events at your studio and do client outreach on behalf of your business.
Having employees also gives you greater flexibility to ensure all your classes are covered and that you have substitute instructors at the ready when another instructor is on vacation or out sick. Unless it is specifically included in the contract, independent contractors have the right to refuse class assignments.
A question of resources
Deciding whether to hire an instructor as an independent contractor or an employee may come down to available resources. The bottom line is that it’s often cheaper to pay an instructor per class without the added costs of vacations and payroll taxes.
Legally, it is easier to move an instructor from contractor status to employee status than it is to make the transition the other way around. Consult your accountant, and possibly your employment attorney, to make sure your staffing plan makes sense for your business.