The Yoga Alliance reports that “the IRS and state taxing agencies have increased audits of yoga studios because they may have misclassified their workers as independent contractors rather than as employees” and offers recommendations to studios for transitioning to an employer-employee model. Perhaps the best part of their advice is to consult with an attorney specializing in worker classification. Making a change in classification may lead to auditors asking why did the studio make the change and were the workers properly classified before the change. To work through these other possible issues, consult with an attorney who specializes in worker classification issues. The Yoga Alliance does provide excellent practical advice for making the transition. It states:
If a transition to the employer-employee model is something you have decided to do for your studio, here are a few steps to take:
- Hold an all-staff meeting to discuss the conversion. Be prepared to answer questions teachers may have about the process, the new relationship and how they will be impacted.
- Create new job descriptions for employees. One of the benefits to studio owners using the employer-employee model is that they are able to ask their teachers to market for the business, do jobs to support day-to-day operations, and have control over how classes are taught. As contractors, teachers are legally free to instruct as they wish, but with the employer-employee model, the studio owner has more control over job performance through the employment agreement. Job descriptions allow studio owners to articulate their vision for the business and the terms of the employee’s relationship with that business. This provides students with a more consistent experience, and builds a stronger business.
- Adjust compensation scales for teachers. While independent contractors cannot be paid an hourly rate or fixed salary, Gary notes, “you may compensate your teachers in any way that you wish if they are employees, subject to complying with minimum wage laws. Thus, you can pay them by the hour, by the head, by a fixed base amount or any combination of those methods…Obviously, their overall compensation will decrease because you will now be withholding federal and state taxes. Because your administrative expenses and tax payments will increase after you convert your teachers into employees, you may use the conversion as an opportunity to evaluate and to streamline your business. You may want to consider your overall business model and look at ways to make your business more efficient.”
- Document all changes. Require every employee to sign an employment agreement and appropriate federal and state tax forms. In addition, there are various federal and state forms and reports that the studio owner is required by law to file. We recommend that you get expert guidance from a tax accountant or an employment lawyer to make sure that you comply with all of the tax and employment laws.
Read the full story at Converting Independent Contractors to Employees