*this information is adapted from the IRS newsletter Issue Number: Tax Tip 2023-15 *this information…
What is the difference between employees and contractors?
Choosing to have employees, contractors or a mix of the two is very important for the health of your business. Choosing the wrong type can cost you penalty fees and lots of hassle with local, state and federal government entities.
If you have the option to be an employee or a contractor, you also should understand the differences between the two so you can make the best decision for your personal situation when choosing to work at a specific business.
Who qualifies as an employee?
Worker classification is extremely important to the Internal Revenue Service (IRS). The IRS provides three categories of questions you must ask to determine if your worker is an employee or a contractor:
- Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.
- Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job?
- Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another.
For a pole studio, this could translate in the following ways:
- Do you require your instructors to teach a specific curriculum? Yes? Employee.
- Do you provide all equipment for your instructors? Yes? Employee.
- Do you require your instructors to sign a non-compete agreement so they cannot teach anywhere else? Yes? Employee.
- Do you pay your instructors a regular hourly wage or a per class wage for regular daily/weekly/monthly classes? Yes? Employee
- Do you provide benefits to your employees such as paid time off or health care? Yes? Employee.
- Do you expect your relationship to continue indefinitely? Yes? Employee.
For pole businesses such as an event (with instructors or performers or both) or a product/service firm, this could translate in the following ways:
- Do you expect your relationship to be for a single event only? Yes? Contractor.
- Do you require the worker provides their own equipment or tools (such as a computer for a social media manager)? Yes? Contractor.
- Do you provide a specific contract that ties payment to a specific task on a specific timeline? Yes? Contractor.
For a stripper/SWers:
Historically, most strippers have been categorized as independent contractors. However, there have been several high-profile cases in recent years that have challenged this issue. Laws governing strip clubs vary greatly between states. Make sure to understand your options before you agree to work at a club.
How do taxes work?
The day that you hire an employee, you are responsible for payroll (paying wages/salary for time and/or tasks) as well as payroll tax for that person. Payroll tax isn’t one single tax but represents taxes on all wages for all employees at the local, state and federal level. Read more about payroll here.
As an employee, you file a W-4 form with your employer when you first start work. At the end of the year, you receive a W-2 form which specifies all the taxes they have paid on your behalf through withholding as well as your income and other benefits (if applicable). Your employer takes care of all reporting requirements. You just need to file your personal taxes.
Contractors file a W-9 form with an employer. At the end of the year, the employer files a 1099 form with the IRS and sends you a copy showing how much you were paid that year. This is required for any payment over $600 for LLCs or individuals. It is not required for contractors who maintain an INC. Learn more about types of legal business structures here. The employer does not file any withholding and is not responsible for any taxes taken out of any income they paid you. As a contractor, you are responsible for any taxes.
What are the legal protections?
Being an employee provides several protections under federal and state level labor laws including those around wages, workplace safety, workers compensation, benefits and more. Read about the most common laws at the Department of Labor website.
Independent contractors do not currently have any protections under labor laws.
How are they paid?
Employees are typically paid via payroll in a regularity that might range from weekly to monthly.
Employees can no longer write off unreimbursed expenses for their job on their taxes. So you can no longer write off a trip to PoleCon. Your employer, however, can buy that for you and write it off on their taxes.
Contractors are typically paid after submitting an invoice or at a pre-specified time after a task is complete. They are not paid via payroll.
Contractors can write-off expenses that are relevant to their work in a variety of categories. Learn more about taxes here.
Generally, most pole instructors who are not traveling instructors, do not maintain their own insurance and only teach at one studio, should be classified and paid as employees. Use a payroll service to simplify the payment and reporting requirements. Read more about payroll here.
If you are an instructor that does not have one home studio but teaches at many studios in person or online, set your own schedule and maintain your own insurance, then you may be a contractor.
If you are a performer, unless you have a specific situation with long-term employment, you are likely a contractor.
For small pole businesses, you must make your own decision on what is most appropriate for your situation. You may start with contractors and then develop into paying employees.
For strippers and SWers, please see the laws relevant in your state.