One of the common errors a new martial arts school owner often makes is to classify a staff member as an independent contractor instead of an employee. The difference is significant. An employee must have income tax and social security deducted from his check. The social security must then be matched by the employer.
Here’s the error. If you are not making those deductions, then at the end of the year you must issue your worker a 1099 form which indicates the total money paid to the worker by you for the year. The worker must then pay taxes on the total.
This can be a major shock to a staff member who is not prepared for the tax hit. If it is an ex-staff member, they may file for unemployment which will result in an immediate investigation of your worker classification arrangements.
The investigation will determine if workers should be classified as employees or independent contractors. If your independent contractors are reclassified as employees, you could be liable for back taxes and penalties.
This simple error can kill a business. We know of one aerobics instructor whose very successful business was closed after she was hit with six-figures in back taxes and penalties for her instructors.
Don’t let this happen to you.
