Generally speaking, it is most advantageous for a small business owner to pay a worker as an independent contractor. You may also hear this referred to as a 1099 worker. The 1099 is the tax form that is filed by you, or your accountant, at the end of the year to show the IRS how much you paid someone as an independent contractor.
As the owner of the business, if you pay a worker as a contractor you don’t have to worry about paying their wage taxes. It also saves you money because you don’t have to match federal tax contributions, provide paid leave, or provide benefits.
Saying Someone is a Contractor Isn’t Enough
However, it isn’t enough to simply say someone is a contractor. It won’t work if the worker simply agrees to be a contractor. You can’t even designate someone a contractor simply by entering a written agreement designating them as such. When the IRS is looking at your business, it is going to consider three primary factors. If any of these factors point to employee, you may have the wrong designation.
Control Over Behavior
First, do you control the worker’s actions? For example, do you have a schedule you keep and require the worker to show up to certain hours? What about a monthly schedule for workers? Do your workers use your equipment? Do you have systems in place designating how work should be completed?
For an independent contractor, you can only maintain control over the end result of their work. Any control about how they get from point A to point B will lean toward an employee.
Control Over Wages
Next, how do you pay them? Do you pay them directly for the work? If your worker is a private training coach who gets paid directly from the client and then cuts you a check, that’s a good sign for being an independent contractor. However, if you pay the coach $20 per hour for their scheduled hours, they are likely an employee.
Did you cover their education? Did you reimburse them for their nutrition seminar? These are signs of employment, not a contractor.
Control Over Relationship
Finally, how would you describe your long term relationship with this worker? Do you want them around for a long time? That points toward employment. Is this a one-off job that you are paying a flat rate on an as needed basis? That points toward a contractor.
Prepare Now to Avoid Issues Later
We are concerned about you avoiding the worst case scenario. The common problem is that gym owners try to pay trainers as contractors, when signs point toward employees. The gym is audited by the IRS and the IRS fines the gym for unpaid employment taxes and fines the gym for violating IRS regulations. This can be avoided in the beginning by making the proper designation. That’s where we can help. Get a hold of us before you bring on that new trainer so we can help you set the proper expectations and roles.