Employee or Independent Contractor: Understanding the Difference

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Personal training is one of the fastest growing occupations within the fitness industry. More consumers are investing in hiring personal trainers today than ever before to help them design a personalized fitness program. Some personal trainers work in health clubs or gym settings, while others work out of their own homes or that of their clients.

As popularity grows, opportunities open up for new personal trainers to enter the fitness industry. Understanding the nuances of the business of personal training can help you ensure the likelihood of success. One important business decision that is not often given adequate consideration is whether to accept a position as an employee or work as an independent contractor. Understanding the difference between being an employee and an independent contractor can help you make this decision, subsequently preventing unnecessary and costly mistakes with your taxes.

There are advantages and disadvantages for an employer in hiring personal trainers as employees. From an employer’s perspective there is greater latitude to hire, fire and supervise employees. Personal trainers who are company employees must comply with company policies and instructions. They can receive specific training at the direction of the employer, and are required to comply with those directions. Decisions regarding compensation are also under the control of the employer, thus allowing for greater profit margins on personal training income. However, employers must also pay worker’s compensation benefits, unemployment benefits, liability insurances premiums, and health care (if offered by the company). Employers must consider the cost-benefit ratio when determining whether to hire personal trainers as employees or independent contractors.

As with employers, there are advantages and disadvantages to accepting a position as an employee or independent contractor. From the personal trainer’s perspective, being an employee can ensure you worker’s compensation benefits, unemployment benefits, liability insurance coverage, social security benefits and potentially health care coverage. Additionally, being an employee can ensure a regular paycheck assuring you financial security. However, as an independent contractor, personal trainers can operate independently and are not under the strict control of the employer. Independent contractors can train clients as they deem appropriate without direction from an employer. Independent contractors can set their own hours, determine the types of services they provide as well as set the fees for services. All fees generated are considered income for the personal trainer, however, the personal trainer is responsible for all business expenses typically provided for by an employer, including liability insurance and health care costs. In addition, it is wise to consider investing in an individual retirement account, because money that is normally paid by an employer in any type of retirement account is not being invested on behalf of the independent contractor.

Should you decide to work as an independent contractor, it is essential to maintain proper documentation at all times. Completing a tax return as an independent contractor can raise a red flag with the Internal Revenue Service (IRS). Because of this, it is even more important for you to keep accurate records that support items shown on your tax return until the period of limitations for that return runs out. In order to determine whether you can consider yourself an independent contractor or whether you are considered an employee, the IRS has established a list of guidelines. The key guidelines are:

    • Employees must comply with an employer’s instructions about when, where and how to work. In addition, the employer has the right to control how a worker’s results are achieved. An independent contractor has more flexibility with respect to these issues.
    • Employees may receive training from their employers to perform services in a particular manner. Independent contractors can follow their own work practices and receive no training from those purchasing their services.
    • Employees’ services are usually integrated into the business plan since they are considered integral to the success or the continuation of the business. Independent contractors are independent of the business plan and if they terminate their services, the business will continue normal business practices without any interruption.
    • Employees have an ongoing relationship with an employer, where an independent contractor’s relationship is typically more sporadic.
    • Employers usually set the hours and work schedule for their employees. Independent contractors set their own work schedule.
    • Employees may be required to work or to be available full-time. Independent contractors may work when and for whom they choose.
    • Employees usually work on their employers’ premises or on a route or location approved by their employer. Independent can set the location where their services will be conducted.
    • Employees may be required to perform services in the order or sequence set by their employers. Independent contractors establish their own sequence.
    • Employees are paid by the hour, week or month. Independent contactors are usually paid by the job or through a commission.
    • The employer pays the business and travel expenses of employees, where independent contractors are responsible for paying their own expenses.
    • Employers normally furnish their employees with the key tools of the trade necessary to perform their job. Independent contractors furnish their own tools and materials.
    • Employers pay for employees’ benefits such as insurances, worker’s compensation, unemployment benefits, social security benefits for their employees. Independent contractors are responsible for paying any extra benefits.

The IRS has established these guidelines to assist you in determining what your tax status would be considered, however there is still a definite gray area around this issue. The question is usually determined by who is in control over the work that is performed. Generally, if the worker has the right to control where and how the work is done, then they can usually be classified as an independent contractor.

Whether to accept a position as an employee or become an independent contractor is an extremely complex decision for a personal trainer. Understanding the difference between the two is the first step in making an educated decision regarding this issue. It is also recommended that you consult an accountant or tax advisor. As previously stated, there are advantages and disadvantages behind both. Should you determine to work as an independent contractor, ensure that you maintain the proper documentation at all times. This might not prevent the IRS from initiating a tax audit, however, it certainly will help you work through this experience with minimal effort and worry.