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Employee vs Independent Contractor
I've worked for both types of pole studios- previously I was an Independent Contractor and with my current studio I'm an Employee. This is such a gray area for me, does anyone have any information regarding the pros and cons of each that they'd like to share with everyone else? Is this a trend that studios are moving towards in the pole industry? I guess my main concern is my instructor insurance as being an Employee, I'm now covered under the studio's policy- should I still get my own insurance like I always have before? Thanks for all input on this topic. https://www.studioveena.com/img/smilies/icon_heart1.gif
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21 Replies
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Charley resently posted something regarding this. Let me see if I can find it…..
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There are a few threads here too regarding this and I want to say there are some in the bogs.
https://www.studioveena.com/forums/view/question_for_instructors_20110930015553
https://www.studioveena.com/forums/view/Independant_Teaching_20111204115251
https://www.studioveena.com/forums/view/Instructors_I_need_advice_20110616105333
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Ha ha, Kobajo, I just had the same idea. And I just shelled out for an insurance policy for 2012. I will keep the insurance, it doesn't hurt to have a little extra protection from liability. And you have been teaching for a while, you will want that insurance to teach workshops at different locations.
Empyrean mentioned that the difference between an IC and an employee is tied to curriculum. If you are teaching your own curriculum you are an IC if you are teaching a studio's program you are an employee.
Can any studio owners speak to the differences from your perspective? Which is easier? Cheaper? Limits liability, ect?
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Here is the IRS's view.
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
There are pros and cons to each type for both studio owner's and instructors. Bottom line is, follow the IRS guidelines. States usually have their own guidelines as well.
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Nice link, LindaLu!
"Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed."
In essesnce, if you are an IC, your boss can't tell you how to do your job.
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Some differences to consider:
IC: pays full amount of Social Security and Medicare
Employee: Pays half and employer pays other half plus employer pays unemployment comp/insuranceIC: not entitled to unemployment comp
IC: carries their own insurance – employer CANNOT insure them
Employee…covered by the employer's insurance – may always choose additional insurance of their own if they want.IC: Collects payment for services and pays owner of business
Employee: Is page wagesIC: Determines schedule, class format, names of classes, etc
Employee: is subject to the rules the employer sets forth and teaches according to the employer's policy and class guidelinesAnother note: A spouse cannot be an independent contractor and neither can your offspring.
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From Empyrean: "IC: Collects payment for services and pays owner of business"
While an IC relationship can work as described above, that is not the only way they can legally "get paid" and still fall under the IC banner. From the IRS: "An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly."
"A spouse cannot be an independent contractor and neither can your offspring."
This is not the case, at least in Kentucky. Your spouse can work for you as an IC but they must truly fit the guidelines or you will pay very heavy fines. AND if they determine that your spouse is actually doing work that classifies them as a co-owner while you've been filing taxes that say differently you are in major trouble.
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Rikki…do you do taxes? The federal law cannot be overridden by state laws and it is absolute that the federal law does not allow a spouse to be an independent contractor.
A lot of states have laws that were on the books prior to federal employement laws being in existance and they have not bothered taking them off the books. The law itself states that the federal law will supercede the state laws…or that you must abide by the stricter of the two.
So if this law actually is on the books, it's the federal law is in control. Anyone with whom you file a combined return or whom you co-habit with is considered "under your control" and then will not qualify under federal law as an IC.
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I forgot to address the hourly concept…
There are many more points considered in addition to how someone is paid. The "hourly" rate is affected by the type of work one does and whether the IC meets the other twenty points which the IRS generally looks at.
For example when a traveling pro comes to our studio to teach a workshop they are paid BY us as we collected the money for the workshop and they are paid an hourly rate. Clearly they are not our employee and are not following our instructions on how to teach the class and are not under our direct control.
The point here is that anyone who is running a business should consult a knowledgeable attorney or tax preparer and not try to interpret the laws themselves.
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FYI for the rest of the members reading this…here are two good sources:
http://www.irs.gov/pub/irs-pdf/p15a.pdf (pages 6-9)
and
http://www.twc.state.tx.us/news/efte/appx_d_irs_ic_test.html
Obviously it's really confusing and that's the whole point. Be certain of how you classify yourself or people who work for/with you. This is something we run into often so we have dealt with it a lot through our other business as financial consultants and tax preparers.
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"Rikki…do you do taxes? The federal law cannot be overridden by state laws and it is absolute that the federal law does not allow a spouse to be an independent contractor."
No, I do not do taxes. I can find absolutely no mention of spouse as contractor on the IRS website but have found several tax law websites that mention the handling of such a case. Can you point me to your source that says it is illegal? Not trying to be contrary – this is just an important issue for me!
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LOL…I can only point you to my husband who has a degree in tax law and has prepared taxes for over 30 years. Not single client of his has ever been fined for misinterpretation of the law. He authored my response.
Another important point is that no one should try to interpret tax law (or any law for that matter) based on what you read online even from the source (IRS) itself. If it was that easy no one would need a degree or license to prepare taxes and we'd have no need for tax law attorneys.
I simply strongly urge anyone who is using IC's or is an IC to consult a registered or licensed professional.
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Okay, but my accountant says it's legal and everything I've read on the subject says it's legal. Now, I know not to believe everything I read but when it's backing up professional advice and you can find nothing to the contrary….well….
Some "sources" I found that back up my accountant's position when Googling "legalities of hiring my spouse as an independent contractor":
http://smallbusiness.findlaw.com/business-structures/llc/llc-spouse.html
http://www.dmms.com/newsletter-running-a-business-with-your-spouse.html
http://www.ehow.com/info_7868703_can-spouse-work-llc-pay.html
I do TOTALLY agree with you that a professional should be consulted before making any decision regarding the matter.
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I would think that this phrase in the irs publication would answer the question regarding spouses (or and contractor):
The extent to which services performed by the
worker are a key aspect of the regular business
of the company. If a worker provides services that
are a key aspect of your regular business activity, it
of a is more likely that you will have the right to direct and
control his or her activities. For example, if a law firm
hires an attorney, it is likely that it will present the
attorney’s work as its own and would have the right
to control or direct that work. This would indicate an
employer-employee relationship.
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First of all Chemmie hit the nail on the head…it's more about what type of work someone (anyone) is doing that makes them an independent contractor.
For example you may POSSIBLY consider a spouse an IC if they perform an outside service for your business which they provide to others AND which you have no control over. ie: your spouse has his own business as a plumber and his business is a corporation, and you hire him to come in and work on installing a new toilet. IT's a gray area but it could be considered and IC.
ALso in this case you are paying the corporation. You may pay him based on an hourly fee but he is not regularly employed by you at an hourly rate to work for you on a regular basis.
However if he (or anyone) works for you teaching classes and they are teaching YOUR program YOUR way then they are not ICs.
The links you referenced are ambiguous…they are not making a blanket statement that your spouse can be an IC and in fact would only be referring to situations like I listed above.
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"First of all Chemmie hit the nail on the head…it's more about what type of work someone (anyone) is doing that makes them an independent contractor."
Ummm….exactly. They CAN be one – it's not illegal. What is illegal is considering someone an IC when they should actually be an employee or paying someone as an IC when they aren't actually doing any work/providing any service for your business.
"The links you referenced are ambiguous…they are not making a blanket statement that your spouse can be an IC and in fact would only be referring to situations like I listed above."
I didn't say they were, only that they said things that backed up my accountant's stance on it and that I couldn't find anything that referenced the other side of that coin.
Like I said earlier, I'm not trying to be contrary here. It is just that I could be in this situation soon and IF it were illegal it would be necessary for me to know.
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The point is the government makes it very difficult to be an IC…the IRS doesn't really like people using ICs. So in almost every case it would be illegal because there is no way or very few in which your spouse can be an IC.
The key words are…is your husband "working for you"? If he is he's not an IC but an independent contractor.
My question is what is your husband going to be doing for you that you think he would fit into the role of an IC?
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ALso the government is going to question not only the services an IC provides and but whether it is believed that you have influence or control over the employee…which is why a spouse or child is not considered an IC…the government does not believe it is possible for you to not have influence or control over them, no matter what you say or feel.
Again my example of the plumber is about the closest you can get to twisting this law and it would still be a grey area up for debate with the IRS.
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@RikkiL the best thing for you to do if you have any doubt is to call the irs. The buck stops there.
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This is a copy of the response my husband sent me:……………………………………………………………………………………………………….. .The problem with trying to answer a complex question with a simple answer is that real life and especially the IRS and our tax code is not made up of simple statements like you can do this or you can't do that.
Our tax laws are made up of three parts:
1) What is passed by our legislators, who know little about how the system actually works and don't have to specify the practicalities of how to implement their rules when they pass them. This is referred to as the Internal Revenue Code.
2) Then the IRS makes regulations on how to actually implement what our legislators produce. This is referred to as the IRS Regulations.
3) Then the courts make decisions when someone thinks the IRS implemented poorly, although sometimes the law is written so poorly the IRS asks the courts for direction also. This is called Case Law and is actually the basis for how things really work and once things get here they are pretty much set in stone as it takes a lot (in terms of cause and money) for a higher court to over turn it.So if you find a code section that says what you want, then you need to research if there is a regulation that modifies it and then research the court case history to see if those regulations were upheld.
The IRS publications are incomplete summaries of just one part, the IRS regulations, meant for the layman taxpayer and if you look in each one there is a disclaimer to that effect.
The "Independent Contractor" vs "Employee argument is one of the most often argued principles of tax law, but not because it is vague, but because taxpayers do not want to admit that it is not up to them to agree with another person on what they are or how they are treated. That agreement has nothing to do with the correct classification. It is strictly based on a "Facts & Circumstances" test of the relationship.
Here are the official points to use in the facts & circumstances test of the relationship between a work and an employer in classifying them as an "Independent Contractor" or "Employer". Note that the default is employee and the burden of proof in on the payer to prove that there are grounds for classifying as an independent contractor. There are only penalties for classifying someone as an "Independent Contractor" incorrectly, there is no such thing as incorrectly classifying someone as an "Employee", unless they provide no services.
Per the IRS auditors handbook, which is readily available on the internet, they are to contest any classification as an Independent Contractor if any one of these tests cannot be met.
How to tell if a worker qualifies for independent contractor status:
The following traits are indicators of independent contractor status. A worker may be an independent contractor if he or she:
Is permitted to employ assistants.
Sets the order or sequence of work.
Sets his or her own hours of work.
Works for others (in the same capacity).
Is paid by the job or by the contract completed.
Makes his or her services available to the public in the same capacity.
Has an opportunity for profit and loss.
Furnishes his or her own tools.
Has a substantial investment in his or her trade.
May be dismissed only under terms of a contract.
How to tell if a worker is an employee:
Per the IRS auditors handbook they are to contest any classification as an Independent Contractor if any three of these test cannot be met, although they have the latitude to contest when only one test if failed.
These "20 factors" indicate employee status. Under the "common law test" if an employer has the right to control, both what work will be done and how it will be done, there is an employer-employee relationship. To determine if the employer has the right to control, the Internal Revenue Service (IRS) uses the following 20-factor test. A worker is generally an employee if he/she:Must comply with the employer's instructions about when, where and how to work.
Receives training from or at the direction of the employer. This may include having to work along with an experienced employee or having to attend meetings.
Provide services that are integrated into the business. That is, the success or continuation of the employer's business depends significantly on the performance of certain services which the worker provides.
Performs the work personally.
Hires, supervises and pays assistants for the employer.
Have a continuing relationship with the employer.
Must follow set hours of work.
Works full-time for the employer.
Do his/her work on the employer's premises.
Must do his/her work in a sequence set by the employer.
Must submit regular oral or written reports to the employer.
Receives payments of regular amounts at set intervals.
Receives payments for business and/or traveling expenses.
Relies on the employer to furnish tools and materials.
Lacks a significant investment in facilities used to perform the service.
Cannot make a profit or suffers a loss from his/her services.
Work for one employer at a time.
Does not offer his/her services (in the same capacity) to the general public.
May be fired by the employer.
May quit work at any time without liability other than losing pay.
The exemption for a spouse I believe she is referring to is being misinterpreted by her or her accountant, or her accountant is not understanding the context of her question. There is an exemption for a sole proprietorship to pay a family member, without making them an employee, but the other side of using that exemption is that the payment to the family member is not a deductible business expense, but considered part of the sole proprietors "draw". This exemption is also valid for partnerships but cannot be used by corporations, whether they are classified as a "S" or "C" type for tax purposes.
LLC's are treated according to state law and Kentucky, just like Illinois and most other states and the IRS, considers a one owner LLC a disregarded entity which is why they file the LLC's taxes on their personal return. If they are considered a disregarded entity they can use the same exemption, otherwise regardless if they elected corporate or partnership tax treatment, they cannot.
So any spouse off a studio owner would fail items 1,3,4,6,9,10,11,15,16 and probably 18 unless they work as the owner of a handyman business also. Being a handyman employee of someone else would make them fail 18 also.
And that is the simple set of tests….
If the business is a sole proprietorship or partnership the relationship cannot be independent or deductible since Section 267 of the code defines family members as Spouses, Parents & Siblings to which no amounts paid to or for the benefit of are deductible unless paid as an employee.
If the business is an "S" corporation or LLC there is a similar section copying that definition for Spouses, Parents & Siblings where either together or as a group 2% or more of the corporate stock is owned.
I have seen at least three other good cogent arguments by the IRS why this is not allowed by as you read on all of those were made esoteric last year.
When someone tries to push past of all these the IRS brings out the big, unarguable guns, which is a case that went all the way to the Supreme Court, who refused to hear it on the basis that there was no reasonable cause presented by the plaintiffs (taxpayers). That is " Donald G. Cave Professional Law Corp. v. Commissioner of Internal Revenue, T.C. Memo 2011-48". This involved a lawyer who tried to do the same thing with his wife who worked as a legal secretary elsewhere as an employee and part time for him in his one man practice. Although this is a 2011 tax court memo, it is the result of three years of litigation where he received no relief and he lost and had to pay the governments costs of prosecution.
Unfortunately this case added additional weight to the IRS position as one of the District Court's criteria was the " No one whose income was reported as the same economic entity", could be considered independent. This is no the basis they use for denying all these claims as it is better than a code reference, it is a tax court decision. So if the person you are paying is a dependent or files a joint return with you, this
In real life, in my office, I run across these questions all the time and if a client wants the simple "no you can't" from the IRS and will not settle for anything else I pick up the phone, dial 1-800-429-1040, give it to the client and tell him he has the right to ask an anonymous question on the IRS hotline, although he is free to reveal his identity if he chooses as it will not effect the answer.
Ends the debate immediately was they have always answered as soon as the taxpayer describes the situation with the phrase "so you are saying that your spouse is economically and intellectually independent from you and you exercise no control over their actions?". No matter what the client answers they get the same response. "They are an employee if you pay them, unless you consider what you pay to them as paid to you and treated the same as all the other compensation you pay yourself.".
Sometimes I wonder why I just don't start with the phone call?
Anyway that sounds like the best answer in this case!
There is also a form you can submit to the IRS, describing your potential employee\contractor relationship, and they will give you a written determination that you can legally rely on if you don't feel you can apply the tests yourself on an unbiased basis. It is form SS-8.
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Empyrean, please thank your husband for his time in the response. I will be sure to call or submit the form before we make any decision in how payment will happen.
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