In the fitness space, we often talk about whether or not fitness studios should treat their workers as independent contractors or employees. However, we rarely talk about what it means to be an independent contractor. So, this article is specifically aimed at trainers who are freelancers. Generally speaking, you would be treated as an independent contractor if the studio paying you does not control what you will be doing and how you will do it and, instead, gives you freedom.
I’m an independent contractor. Now what?
As an independent contractor, you are responsible for all tax-related items. You are considered to be self-employed. When you get paid, there are no taxes taken out. You simply receive your full gross pay. This means that you will likely want to make estimated quarterly withholding payments to both the IRS and your state. You will also be responsible for paying self-employment taxes (including Social Security and Medicare of 15.3 percent). To help illustrate this, below is a side-by-side comparison between an independent contractor and employee.
- What amount do I receive for my work completed?
- Independent Contractor: Full amount
- Employee: Gross amount less withholding and Federal Insurance Contributions Act (FICA) taxes
- Who is responsible for paying federal and state withholding?
- Independent Contractor: You
- Employee: Employer
- Who pays Social Security and Medicare taxes?
- Independent Contractor: You (15.3% percent)
- Employee: Split (7.65 percent you and 7.65 percent employer)
- Can I deduct work related expenses paid personally?
- Independent Contractor: Yes
- Employee: No
- What year-end tax form will I receive?
- Independent Contractor: 1099
- Employee: W2
- Who remains “in control” of the work completed?
- Independent Contractor: You
- Employee: Employer
Now that I’m technically a business owner, what should I be doing?
This is an important question. For many of you, this may be the first time you have been at the head of your own business, and you have a lot of responsibilities as a business owner of which you should be aware. Below is a quick-hit list of things you should be doing.
- Make estimated tax payments (quarterly): As you are responsible for making all tax payments, you will want to make payments quarterly so you are not stuck with a big tax bill at year-end—not to mention possible interest and penalties on top of that. Estimated tax payments are due on the following schedule:
- Quarter 1 estimate: April 15
- Quarter 2 estimate: June 15
- Quarter 3 estimate: September 15
- Quarter 4 estimate: January 15
- Track business-related expenses: Now that you are a business owner, you are able (and encouraged) to take expenses against your income. Did you treat a client to lunch? Do you work for multiple studios and drive back and fourth between them? Do you buy resistance bands, kettle balls, yoga mats or other workout equipment to perform your training? These are examples of expenses that can all be expensed by you to reduce your taxable income. Below is an example scenario:
- Pay from contractor work: $10,000
- Yoga mat purchases: $275
- Resistance bands: $850
- In this scenario, your taxable income would be $8,875, not the original $10,000 you were paid. This is good news for you, and don’t be afraid to take advantage of valid business expenses that are available to you.
- As your income starts to increase, you will also want to consider investing in a bookkeeping system. This is an easy way for you to track all of your income and associated expenses as they occur, making tax season a breeze. If you are at this stage, I would recommend a cloud-based software like Xero to make this process as painless as possible.
- Consider Tax Planning and Hiring an Accountant: As a business owner, you have a lot more tax strategies available to you than you do as an employee. Depending on the amount of income, you might want to consider doing some regular tax planning to make sure you are paying the least amount in taxes as legally possible. This may also be a good time to also consider hiring an accountant to assist in this area as well as with the day-to-day bookkeeping.
You may be a little nervous being a business owner for the first time. However do not let this get to you. Embrace this opportunity to really take control of your career and take ownership of your goals. Being a business owner brings a ton of advantages and opportunities to the table that are not available to a traditional employee. Do your research and take notes of what it means to be a business owner. When you hit a stage where you need help, do not be afraid to ask.
Author's note: This guidance is for informational purposes and does not constitute legal or tax advice. We also recommend you speak with a professional regarding your specific scenario. JETRO and Associates shall not be responsible for any liability related to the guidance herein.
Mike Jesowshek, CPA is the founder of the accounting firm JETRO and Associates, the official accounting firm of the Association of Fitness Studios. He has a strong passion for both fitness professionals and technology. He helps provide a digital accounting, bookkeeping and tax solution service for studio and gym owners who are looking to take it their business to the next level by utilizing modern, cutting-edge technology. He is also a featured speaker at SUCCEED! AFS’ Annual Business Convention & Expo. If you are interesting in learning more about the topics in this article, he is happy to chat.