As you build your business, naturally you are going to need personnel.
Perhaps you have brought in colleagues to help run WODs; or maybe you have friends assisting with your marketing and merchandising efforts. Regardless of how many people you bring on board your box, it’s critical that each person’s status be defined as either employee or independent contractor.
The major difference between hiring an employee and engaging a contractor is that as the Affiliate, you must withhold and pay income taxes, social security, Medicare taxes, as well as pay unemployment tax for employees. In general, you do not have this burden when paying contractors. If you hire an employee and he is going to make $3,000 per month, his real cost to the business is closer to $3,500 per month because of the additional taxes you will pay. It’s easy to see that as you grow your business, this can become a large expense that may actually prohibit you from growing your business the way you want. Most of us could come up with a more effective way to invest that $500 in our businesses rather than sending it off to the IRS with nothing in return to show for it.
There are rules as to what determines employee or contractor status. When you consider bringing someone on board you will need to look closely at three key areas – the same areas the IRS will be looking to determine your degree of control and the independence of the contractor
1. Behavioral
Does your box control or have the right to control what the worker does and how the worker does his or her job?
2. Financial
Are expenses reimbursed? Who is providing the tools and supplies? Are the business aspects of the worker’s job controlled by the business owner, or by the contractor? How is the worker paid?(One caveat about tools and supplies: obviously no one expects your trainers to being their own barbells to work every day; but someone working on your website, for example, should have her own computer.)
3. Type of Relationship
Are there written contracts or employee type benefits (health insurance, dental, vacation or sick pay, etc.?) Independent contractors are responsible for their own health insurance, 401k , and the like. Will the relationship continue and is the work performed a key aspect of the business? If you have someone working for you 24-7 you likely have an employee. Even if you both say she’s just a contractor, the IRS may disagree. An employee is provided with a W-2 form. You are responsible for withholding taxes, providing sick or leave time, etc. Usually, but not always, boxes which choose to bring on employees will do so for reception or other positions that require less skill and more supervision.
Each of these factors must be considered. There may be some factors that indicate a person is an employee, and other factors indicating the person is a contractor. No one factor stands out in making this decision.The entire relationship has to be looked at. It’s always good to document how you came up with your decision.
How would the relationship work if you contracted out some of your support roles in your gym?
- You want to have a signed contract stating the person is an independent contractor.
- The contract would also indicate the contractor is responsible for their own insurance.
- You will have a w-9 on file for each contractor, and you will provide a 1099 form so that they can be responsible for their own taxes. (It helps if the contractor has a business entity of their own.)
- The contractor should not be given a set work schedule. It’s very important the contractor can choose when to perform the work he or she has been hired to do.
- The contractor should not have an hourly rate. It’s better to find a way to pay them based on performance or by project. (They are paid per session or class instructed, or by completion of t-shirt design, for example.)
- The contractor should not be spending 40 hours per week working for you on an ongoing basis. This makes them look very much like an employee. They should have enough time, that if they chose to, they could market their services to others. If someone is billing two companies (yours and another), it helps to clarify that this person is indeed a contractor, and not an employee. If you don’t want your independent contractors working for others, be very careful about the wording of your contract.
Often times a business owner could feel like they are giving up too much control in order to engage an independent contractor. Most the time, through proper planning and structuring the relationship the right way, the business owner can maintain the level of control he needs while allowing the contractor enough independence. Communication is essential.
KEEP RECORDS!!!
You may have the fastest “Cindy” time and be a horrible at organizing your paperwork. Well, it’s time to become equally as obsessed with your filing cabinet (the one on your laptop or the one in your office) as you are with your WODs. Keep a file on every contractor or employee. If you have access to legal counsel, have that person review any contracts or agreements. Thoroughness in this area early on will save you much more time and heartache later on, particularly if you are audited by the IRS or questioned by the Bureau of Labor.
John Briggs, CPA is a partner and Affiliate Tax Specialist with Incite Tax. Incite Tax wants to help Affiliate Owners be as healthy financially as they are physically. They are also certified Profit First Professionals that help any business become profitable from day one.