As a studio owner, you may hire instructors as independent contractors or as employees. The same goes for yoga instructors; they may choose to work as either. Distinguishing the difference between the two, on both ends, is important not only for tax and hiring purposes, but also to clarify the following question: Are you an employee or a self-employed professional and what are the rules and regulations to determine that?
The nature of the yoga business is that studio owners or health businesses, such as gyms, often hire yoga instructors as part-time employees or they outsource the work to them as independent contractors. Often, teachers have rotating class services in multiple locations and are paid an hourly rate. In the business of yoga, it is rare to find a yoga instructor who works 40 hours per week, as a full-time employee, unless the studio or the franchise is highly profitable and there’s enough demand from the customers to justify it.
The main differences: Employees and independent contractors
Employees, full-time and sometimes part-time, usually receive paid vacation, paid holidays, sick pay, salary or hourly pay and health insurance benefits. Independent yoga contractors often do not receive an employee package, they must also provide a self-purchased insurance when teaching and they are often not reimbursed for mileage, gas or overtime. Ultimately, hiring freelance teachers can be simpler and more convenient for business owners, since they don’t have to worry about social security, unemployment insurance or worker’s compensation. Some yoga instructors prefer to not work as employees, as they enjoy the freedom of a flexible schedule and the choice of whom to work for and when.
IRS guidelines: Employees vs. independent contractors
The determination of a worker’s classification can be complex and is often based on an ad-hoc case-by-case basis. Here are the three basic categories by which the IRS can determine your status as a worker:
1. “Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.”
2 “Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.”
3. “Type of Relationship factor relates to how the workers and the business owner perceive their relationship.”
The IRS also offers tips for business owners. For example:
1. “If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.”
2. “If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.”
3. “Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.”
4. “Workers can avoid higher tax bills and lost benefits if they know their proper status.”
Determining if you are an independent contractor or employee:
To categorize your employment status, there is really one question you should ask yourself: Is the business instructing you on exactly how to perform your job? If the answer is yes, then you are most likely to fall under the category of an employee. You are an independent business owner or contractor when you are hired to provide the services, but the process through which you achieve the results is not controlled.
Also, the IRS 20-factor test basic questions can be a good tool if you’re trying to determine your status or who has control of the work. For example, if you are performing services, such as teaching yoga classes or leading workshops, for a number of unrelated yoga studios or businesses at the same time, you are considered an independent contractor. This is also true if you are making your services available to the general public. On the contrary, the 20 factor-test states that you are most likely to fall under the category of an employee if “control is indicated [when you] are not free to choose [your] own patterns of work but must perform services in the sequences set by the employers.” Also, ”if workers must devote full time to employers’ businesses, employers have control over workers’ time,” thus they are not classified as an independent contractor.
In a regular, full-time job setting, employees may often be trained by management on how to perform certain tasks and services according to the company’s culture and internal policies, whereas independent contractors usually use their own methods of best practices.
Independent contractors invest in their own business and they cover their own expenses, such as transportation costs or use of personal supplies. That means they are often exposed to the risk of money loss. For example, if you are working in different studios and you are traveling from one end of town to the other, you may be accruing more expenses than your earn in revenue. On the other hand, if you are performing the job at the employer’s facility — usually maintained by the employer — and you are provided with the tools or equipment, such as blocks, rugs, mats and the space, then generally this is considered an employer-employee relationship.
Legal obligations for both parties
One piece of advice: have a contract that clearly outlines the nature of the business partnership. It is crucial for studio owners and independent yoga instructors to understand the common rules that distinguish employees vs. independent contractors, for legal reasons. The IRS will look at many factors to classify a worker, however, there are consequences to misclassifying an employee as an independent contractor, and if determined so, parties may be held liable. If you believe you are a worker who has been improperly classified as an independent contractor by your employer, you can file form 8919 (uncollected Social Security and Medicare tax on wages.) For businesses, if you believe a worker shouldn’t be treated as an employee, then you must file a federal form of explanation and supporting evidence that would relive you of paying employment taxes, often referred to as “relief provision.” Overall, being knowledgeable about the law and knowing the rules can save both parties unnecessary difficulties.
Understanding the rules
The process of determining an employee’s status can be complex, but being knowledgeable will save you time and hassle, while making good business decisions for your yoga teachers and your business.
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