Studio Owners

Studio Biz: Are Your Workers Employees or Contractors? Here's How You Know

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Accountant Jessica Scheitler, founder of Financial Groove, has noticed a recent trend. More and more of her dance-studio-owner clients are being audited because of the way they classify faculty and staff—whether as employees or contractors. "I had four or five audits come in at the same time, all from different states," she says. "That tells me something's going on."

Studio owners tend to first hire faculty as contractors, Scheitler notes, since that's the easiest route. "You cut someone a check, and you don't have to take taxes out," she explains. "But as studios grow, most teachers and staff end up qualifying to be employees in the eyes of the government. And if you're audited and the IRS finds that your staff should be paid as employees, they'll assess back taxes—and interest."

Changing a classification from contractor to employee isn't cheap—Scheitler estimates that the out-of-pocket cost is 12 percent. Though this figure could fluctuate, based on what state you live in, you'll now be responsible for matching your employee's Social Security and Medicare withholdings. You'll also need to pay in to Federal Unemployment Tax and State Unemployment Tax. (Some states require businesses to pay for workers' compensation, too.) The additional expense is offset somewhat because you'll be able to write it off on your business return. It might also afford you peace of mind. "Yes, it's a financial commitment," she says, "but it might also help a studio owner not lose sleep over a potential audit."

But automatically switching everyone over to employee status as a safeguard isn't necessarily the answer. The best way to protect yourself from an audit is to understand the law and decide what strategy fits your business. "Everybody has a specific situation—so we assess it person by person," Scheitler says.

Contractor vs. Employee: What Does It Mean?

In simple terms, if someone working at your studio is classified as a contractor, that means you're not taking any taxes out of their pay—that teacher or staff member is responsible for paying taxes on their own. When someone is an employee, you, as the business owner, are required to withhold local, state and federal taxes from their paychecks and deposit with the IRS on the employees' behalf. You are also required to match their contributions to Social Security and Medicare.

Contractor or Employee? 10 Qs to Help You Figure It Out

Determining whether your faculty and staff are contractors or employees is based on three factors, says accountant Jessica Scheitler: behavior—how the teacher performs her or his job; finances—who controls the salary; and relationship—the length of time someone's been working for you, and if they're working for anyone else.

Answering the questions below can point you in the right direction. But even this method isn't foolproof. "If it ends up being six answers in the contractor column and four in the employee column for the same person, I would say, 'OK, what else can we get in the contractor column?'" Scheitler says. "That way, you feel comfortable with it."

1. How many hours do they work each week? The fewer hours they work at your studio, the more likely they are to be classified as contractors. "If they're working 40 hours a week for you, you're the main gig," says Scheitler—and they are an employee.

2. Did you train them in the style or technique they teach? If you did, they're probably an employee. "But if you brought Debbie in because she has the specific tap style you want to introduce to your students, and you can't find someone to teach this style anywhere else, and you don't know how to do it, that helps to define her as a contractor," says Scheitler.

3. Who sets the schedule? This can be a difficult question to answer. "If you're saying, 'I need someone on Tuesdays at 5:15,'" says Scheitler, "then you're setting the schedule, and they're your employee." Guest choreographers who travel to your studio and come in only for a short period of time, meanwhile, are classic contractors. If a teacher says, for example, that she can only do Fridays at 7, that would also be a contractor classification.

4. How are they paid? "If someone is presenting their rate of pay to you, take it or leave it, then they're a contractor," says Scheitler. "If you say, 'I've got this position, and I can only pay $20 an hour,' that's an employee."

5. Do they have more than one teaching job? An employee would be someone who works exclusively at your studio and earns the majority of their living by teaching for you. If a faculty member is teaching at several other studios, that would indicate they have their own business and are freelancing—therefore qualifying as a contractor.

6. Do they provide their own music? "Most of the time, faculty bring in their own phones or devices," Scheitler says, "so they'd be contractors." If you require your teachers to play specific music—for example, if your baby classes must be taught to tracks you've purchased as part of a curriculum—that would make them employees.

7. Who decides the rate for their services? A contractor would decide her or his rates (though that's not to say you can't negotiate that rate).

8. How do they submit hours to be paid? "Your contractors need to be invoicing you," says Scheitler. "That's not to say that you can't track their hours, or that they can't submit them through your studio management system, but technically they need to present an invoice to you."

9. Do they have a contract? Ideally, a contractor would provide you with a contract stating the parameters of their terms—though Scheitler admits that rarely happens. It's important to note, too, that a contract must stipulate that the contractor is providing their own liability insurance and/or workers' compensation.

10. How often are they paid? "A contractor would give you an invoice that says, 'This is due by the fifth,'" says Scheitler, whereas for an employee, you'd decide when to cut the checks. "Again, there's room for negotiation," she says.

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