Paying Workers: Employees vs. Contractors for Gyms & Fitness Businesses?

When it comes to hiring instructors for your fitness business, one of the biggest decisions you’ll make is whether to classify them as employees or independent contractors.

And when we say “biggest”, we’re not exaggerating.

Making the wrong choice, i.e. misclassifying your workers as contractors when they really should be employees, can actually lead to thousands of dollars, if not tens of thousands of dollars, in fines or penalties.

But don’t worry, it’s a question that’s been around for a long time, and it’s one that we deal with frequently.

In this blog post, we’ll explore when it’s suitable to use each option, what factors to take into account, and the potential risks you should be aware of.

Let’s dive in!

The Benefits of Paying Workers as Contractors

We understand why the idea of paying gym instructors as contractors is so appealing.

On the surface level, it’s cheaper!

When paying someone as a contractor, you may not have to pay all of the payroll taxes, workers’ comp, insurance benefits, etc.  All of those things generally add up to somewhere between 10 and 12% of their pay.

For example, paying someone $100 as an employee is actually going to cost you $112 versus paying someone $100 as a contractor.

So, we get it. Hiring gym instructors or workers as contractors can be an attractive option for businesses that want to save money on labor costs.

However, whether or not you can legally hire gym instructors as contractors is another story, and really depends on:

1. 1. HOW those workers are doing the work for you
   2. WHAT type of work they are doing
   3. HOW that work is controlled, and
   4. WHAT is being performed.

There are a lot of ins and outs that happen here to consider before making an informed determination.

What Factors Do You Need To Consider When Classifying Workers?

The IRS and the state each have their own requirements and expectations as to when you should pay someone as an employee and when it’s okay to pay them as a contractor.

For your individual state, we recommend seeking guidance from your experienced accountant and a labor attorney familiar with your state. If you don’t have a gym accountant that you’re happy with, feel free to get in touch with us here.

When the IRS is determining whether a worker is an employee or a contractor, they usually look at three main things:

1. 1. Behavioral control over the worker
   2. The financial arrangement between the worker and the employer
   3. The relationship between the worker and the employer

Basically, they want to see how the worker is treated and how much control the employer has over the worker.

Are they free to do the job as they see fit, or are they being told what to do and how to do it? Who decides when the work is done?  Is it on the employer’s schedule (like showing up every day at 9 am?) or can the worker do the work on their own schedule?  Are they working for your gym exclusively, or can they take on other jobs at the same time?

TIP: The Fitness CPA really loves this simple test. While not all inclusive: if the workers doesn’t perform this work for others, doesn’t have a website for their business, or work for other clients then chances are pretty good that they are an employee and not a contractor.

However this rule doesn’t work the opposite way: just because a worker instructs at another gym doesn’t mean they can be paid as a contractor.  Confused yet?  We get it!  That’s why a qualified CPA or labor attorney is helpful.

In terms of financial arrangements, the IRS looks at how the worker is paid. Do they get a salary or an hourly wage, or are they paid based on the completion of a project? Do they get benefits like health insurance or a retirement plan? Do they pay for their own expenses? Are they paid every two weeks or twice per month like other employees you already have on staff?

TIP: Contractors should be paid no more than once per month and usually invoice you.

Finally, the relationship between the worker and the employer is important. Do they have a legal contract that outlines the terms of their work arrangement, or is it more informal? Is there an expectation of ongoing work, or is it a one-time gig?

TIP: Businesses that have a visiting workshop provider or instructor who travels around the nation offering on-site specialty events are almost always safe to pay as contractors.  In between this clear case of a traveling contractor and that of a regular instructor, there are vast grey areas to consider for which we recommend you consult with your fitness accountant to help make the proper determination.  For example, as part of our client accounting services, our team of fitness, tax, and payroll experts regularly advise on and resolve these thorny worker issues for our clients as they arise.

It’s important to note that all three factors are considered when determining a worker’s classification.  And while the tips above are helpful, practical examples, no single factor is determinative.

TIP: If you terminate a worker, many contractors will go file unemployment which is the biggest trigger for worker misclassification audits. Employees are eligible to file for unemployment, not contractors. Be sure your workers fully understand whether they are being paid as contractors or employees.

The IRS looks at the entire relationship between the parties to determine whether the worker is an employee or an independent contractor.

An Example of Contractor vs. Employee in the Fitness Industry

One of the reasons this question of “employee vs. contractor” shows up so many times in the fitness industry is that it’s common for fitness instructors to teach at multiple studios.

So, when an instructor is teaching at Studio A, Studio B, and Studio C, they say, hey, I run a fitness instructor business!

However, the IRS and the state would generally disagree.

The reality is that they are not running their own business since they are being told when to show up, how to do the work, and when to go home. 

This means that they are not truly independent contractors, and more importantly, the IRS and state will generally disagree with the classification.

Do people get away with it? They do… but it wouldn’t be our recommendation for any of our fitness studio clients.

What are the Risks of Misclassifying Workers?

What happens if you get caught?

If you misclassify your workers as contractors when they should be classified as employees, you could be subject to a range of risks and penalties.

For example, if the IRS were to come in and reclassify your contractors as employees, you would owe all of the payroll taxes for these individuals, including Social Security, Medicare, and unemployment plus penalties.

This tax alone can add up to roughly 40% of the amount that you would pay them.

So, if you had $100,000 in payments to workers and the IRS or State didn’t agree that they were contractors, you would owe $40,000 in taxes to the government on top of this.

Additionally, the penalties for misclassification are massive, generally the same amount of tax that you owed. So it would double the amount, going from $40,000 to $80,000+.

That’s a lot more expensive than simply paying the 10% more by appropriately paying them as employees from the beginning.

On the surface it may appear to be cheaper to pay workers as contractors. In the long run, it doesn’t work out that way.

It’s important to note that labor laws can be complicated and there are many factors to consider when classifying workers.

If you’re unsure about the classification of your workers, it’s best to seek advice from a labor attorney or an accountant with experience in this area.

The Benefits of Paying Workers as Employees

Now let’s talk about the benefits of paying gym instructors as employees.

It’s not just about doing the right thing, it actually has some advantages for your business and the employees as well.

When you pay someone as an employee, you’re responsible for paying half of their Social Security and Medicare taxes. If the instructors were working for themselves as contractors, they’d have to pay these taxes on their own, which can be a real burden.

Now, I know what you’re thinking, “but won’t that cost me more as the employer?” As mentioned earlier, you will have to pay a bit more in taxes and benefits for employees, but it can actually help you in the long run.

When you treat your instructors as employees, you’ll be providing them with stability and benefits, which can lead to higher job satisfaction and lower turnover rates.

On the flip side, when you pay someone as a contractor, you’re essentially shifting the tax burden from yourself to them. This means that they’re responsible for paying their own taxes, and not all contractors are responsible enough to do so. They might end up owing a lot of money at the end of the year that they didn’t budget for.

Our two cents? The fitness industry is a tight-knit group.

The more you take care of your workers, and foster an environment that is supportive, fair, and goes above and beyond, the more positive your entire working culture will be, which will extend to your clients and long-term success as well.  You can also create a more standardized and identifiable service when you have more control over your workers and the way they perform and deliver the member experience.

Think about it: if your employees are happy and motivated, they’ll be more productive and provide better customer service. And when your clients are happy, they’re more likely to come back and recommend your business to others.

Good culture starts at the top.

What do we recommend?

If you haven’t guessed by now, we strongly recommend taking a look at your individual working arrangements.

Chances are, there are a few front-of-house staff and gym instructors that should be classified as employees in your business, rather than contractors.

If so, don’t fret. It’s a manageable thing to change.

Your next step is to seek advice from a labor attorney or an accountant with experience in this area.

If you’re on the lookout for an experienced fitness accountant, we’re happy to have a chat.

Helping fitness business owners improve their businesses is what we’re here for!

You can fill out a form to get in touch with us anytime.

Until next time!