Flutterby™! : Independent Contractors 2009-06-15 16:09:02.120945+00

Independent Contractors

2009-06-15 16:09:02.120945+00 by ebradway 11 comments

My wife teaches yoga at The Yoga Workshop. She just received an ultimatum from the studio's new owners that all teachers need to by incorporated as limited liability corporations (LLC) by July 15th. We are trying understand the motivations behind this pronouncement.

Like most yoga teachers, my wife has always been paid on 1099s. She's always been an independent contractor. But the State of Colorado seems to be cracking down on businesses that abuse 1099 employee status. For instance, my wife has regular scheduled classes - a schedule that changes, at most four times a year. She's not doing fixed piecework. It's also common - but not too frequent - that she has only one or two students show up. She is paid by the head, so if she teachers for two hours and only one student showed up, she's making about $2.50/hour on a 1099.

It is enough of a problem that last year, when gas prices spiked, she rearranged her schedule so she was making fewer trips in to work because she was losing money by the time she paid for gas.

What are the benefits (and cons) to a company employing 1099 contractors versus W2 employees? What are the benefits (and cons) to a worker being paid on a 1099 versus a W2? What defines an independent contractor versus an employee?

Sounds like this is the very definition of what the crackdowns on 1099s are generally trying to target: She's not really an independent contractor, her schedule is being dictated by the studio, and they're getting away with paying her a whole lot less than she'd be getting paid as an hourly employee because they're claiming she is one.

The crackdowns generally have two motivations: They're trying to make sure that people aren't skipping out on paying their taxes, and they're trying to enforce minimum wage and similar laws. If your wife is paying her taxes, then this is aimed squarely at the yoga studio that's been getting volunteer labor from her.

Yep. We even left out a bunch of deductions to make sure she made her Social Security contribution.

Of course, she usually makes more than minimum wage. It's more common for her to have 10 students at $5/head for a 1.5 hour class. It would be interesting to work out the head count at which she really makes more money than on a W2 after accounting for taxes and insurance.

My wife's work involves no IP. All equipment is provided. She has to carry her own liability insurance. She works the classes they offer her. She can turn it down - but she can't work whenever she wants.

She has had no students show up before. That means no money. Students pay between $10 and $15 per class depending on the package they buy. This means the studio takes 50% to 100% in overhead.

Compared to the 1099 work I've done in the past - the contract specifically says I need to produce a program or a map with characteristics x,y,z for $Q by R date. Sometimes I'm asked to use a specific tool or language - usually not. I have complete oversight on how the results are produced. I use my own equipment, in my own office, in the hours I choose. And there is absolutely no expectation that I will work for the client again.

And what's having an LLC going to cost? I think you definitely need to get some numbers on average income, and start costing that commute at actual vehicle costs, not just fuel costs. Even an older car probably costs you twice the fuel to operate.

The LLC isn't terribly expensive - and doesn't really add a lot in terms of accounting costs (i.e., I'll still be able to do the taxes with the $99 version of TurboTax).

Asha's net isn't just her paychecks from the yoga studio. One of her primary sources of clients for her private work is her students at the studio. So the direct costs of making a class get muddled with the returns of exposure. She also enjoys a certain cache for teaching at a premier yoga studio - which translates into workshops in other cities.

Secretary of State - links to the right under gen info have FAQ and fee schedules and more.

The other benefit to becoming an LLC is, well, limited liability. Say there's some sort of accident and a student sues. With an LLC it's the corporation that's getting sued. You and your wife can walk away with minimal damage at the personal level. With no corporation, it's possible that the plaintiff could come after personal assets.

It's a low-probability thing, but there are times when folks get litigation-happy. But I wouldn't work as an independent contractor without having a corporation of some form there just for personal protection.

Dave, the corporate limited liability thing is less useful than you may think: There's no control over which entity a plaintiff will choose to sue, the individual or the corporation, especially in a situation where the individual was teaching the class and would be the potentially negligent/whatever person.

Larry & Dave: Yes, we were already considering creating a corporation of some kind for her. It's just the issue of the studio requiring her to form an LLC.

Dan: That's an interesting point and only makes me more certain that the only reason the studio is requiring their contractors to be LLC is to maintain the status quo in which people who are really employees are being paid on 1099s.