Keep Your Guard Up: Employee Classification in Your Martial Arts School

One common error new martial arts school owners often make is misclassifying staff members as independent contractors instead of employees. The distinction between these classifications is significant. Employees must have income tax and social security deducted from their paychecks, with the employer matching the social security contribution.

The Common Error

If you don’t make these deductions, you must issue your worker a 1099 form at the end of the year, indicating the total money paid to them. The worker is then responsible for paying taxes on that total amount. This can be a major shock, especially if the staff member is not prepared for the tax hit. If it’s an ex-staff member, they might file for unemployment, triggering 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.

Employee vs. Independent Contractor

Workers are considered employees if they:

  • Must comply with the employer's instructions about the work
  • Receive training from or at the direction of the employer
  • Provide services that are integrated into the business
  • Provide services that must be rendered personally
  • Are aided by assistants who are hired, supervised, and paid by the employer
  • Have a continuing working relationship with the employer
  • Must follow set hours of work
  • Work full-time for an employer
  • Do their work at the employer's premises
  • Must work in a sequence set by the employer
  • Must submit regular reports to the employer
  • Are paid in regular amounts at set intervals
  • Receive payments for business or traveling expenses
  • Rely on the employer to furnish tools and materials
  • Lack a major investment in the facilities or equipment used
  • Cannot make a profit or suffer a loss from their services
  • Work for one employer at a time
  • Do not offer their services to the public
  • Can be fired by the employer
  • May quit work at any time without incurring liability