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."