If the time has come to hire additional people for your dance studio, you may want to consider whether you need a full-time/part-time employee or an independent contractor.
What is an independent contractor?
Independent contractors (ICs) are workers who are considered to be in business for themselves. They may use a number of different terms to describe their employment situation, such as freelancers, consultants, self-employed workers or entrepreneurs. Regardless of the name they use, there is one important thing that a dance sruido owner should keep in mind: ICs don't have the same legal status as employees. Many studios hire teachers as independent contractors because they may teach only one day a week at the studio and may teach for other schools also. Independent contractors should provide invoices for their completed work.
The legal issues
When deciding whether to add a full-time staff member to your studio or opt for an IC, remember that independent contractors are treated differently from a tax standpoint than employees. With ICs, employers pay fewer taxes, an aspect that may appear very attractive to a small business owner.
However, you should know that if you wrongly categorize an employee as an independent contractor, you will be required to pay hefty fees, as well as reimbursing them for wages that should have been paid under the Fair Labor Standards Act. You will also have to pay the government all of the back taxes that were due on a federal and state level, as well as Social Security, Medicare and unemployment. And once this door is opened and you have other IC's working for you, they will be looking at them as well.
Employee vs. independent contractor
The IRS provides three categories that help business owners determine whether their workers are employees or independent contractors. However, you may want to contact your accountant or lawyer for more information because State statute supersede IRS rules. In other words, you may pass the IRS test but fail your own state labor laws.
Behavioral. How much control does the worker have over how they do their job? Employees are generally controlled by their employers in terms of when, where and how they work, what equipment they use, and what training needs to be completed to do the job. ICs set their own hours and generally decide what method they use to complete a task.
Financial. If your business controls how a worker is paid, whether expenses are reimbursed and whether they can seek out business opportunities, they are likely to be an employee rather than a contractor. ICs can advertise freely, take on multiple clients, and set their own fees. That also means they are free to work at the studio down the street from you.
Type of relationship. If the job done by the worker is a key aspect of the business and it is expected the relationship will continue indefinitely, they are probably an employee. Alternatively, businesses that hire ICs expect the relationship will end when a job is completed like a special master class.
Why hire an independent contractor?
Cost savings. This may be one of the most compelling reasons to hire an IC, as long as the position meets all of the criteria set out by the IRS. When you hire a contractor, you don't have to pay for employee benefits, equipment, insurance or payroll taxes.
Reduced liability. With an independent contractor, you are not as vulnerable to being sued for job discrimination or wrongful termination.
The teacher would like more control over their work. As an IC they will retain all rights to their choreographic works. They will also be able to take many more expense deductions that employees are not eligible for.
What if you get audited?
I have researched this and yes IRS has audited dance studios and I have seen several cases where the studio has fought the reclassification and has won. However, if that happens you will need to hire a tax attorney and that will be pricey and you may not win in your case. Furthermore, if you lose you will be liable for back taxes up to 3 years.
My suggestion is to get together with you accountant and review all state and federal labor laws. The last thing you want to have happen is to have the IRS or State labor force show up at your door and you are caught completely flatfooted.
