W2 or 1099?
This question rears its ugly head every time there is a change at the head of the tennis, and sometimes golf, programming. As the country club industry in the USA contracts and clubs look to minimize costs, more and more often Directors of Tennis and, indeed, assistant professionals, are independent contractors and not employees. But, this savings in costs can come with a heavy loss in control over the tennis staff. This must be weighed by any Board or Committee before deciding whether to have your tennis staff as independent contractors.
Don’t Fall Foul Of The IRS!
It’s simpler in legal terms, and for the IRS, if the Director and his staff are indeed all employees of the club. For the club’s owners, whether a member-owned, equity club or a business operation for profit, this action brings the entire department under the umbrella insurance policy covering the club’s facilities and brings the tennis staff under the worker’s compensation policy as well, which is indeed an important benefit to any worker. Clubs in recent years are preferring this easy method of controlling, insuring and employing their Directors of Tennis.
When tennis staff are employees, it’s easier for the club to track and record remuneration and compensation. Billing and revenues go through the Club – often, when the Director is an independent contractor, he or she bills the members directly for all revenues and leaves the Club without the knowledge of what the position may be worth financially. This is a tough situation when it comes time to hire a new Director. In many instances clubs are left without information, usage numbers and financial profit and/or loss reports.
When housing is involved, especially at seasonal clubs, technically housing paid for and provided by the club is a benefit in kind and is taxable. If an independent contractor is in the housing provided by the club, this becomes a liability if the independent contractor doesn’t claim the housing as a benefit and it is found out later that this housing was indeed provided. It is quite easy to deduct this taxable benefit if the professional is an employee.
Basically, as an employee, the Director of Tennis and his staff are far more under the control of the country club or facility hiring them. Whether on the clock (and that is another issue we will look at in the coming articles) or salaried, the Director and his staff must be on duty a certain number of hours and have to answer to an employment contract and usually an Employee Handbook. As an employee, the Director can be told when to take time off, how to teach, and when it might be needed to attend departmental head meetings and management conferences.
The classification of independent contractors is in and of itself a bit tricky. There is a 20-point test that the IRS will put any club through to prove that their tennis staff are indeed contractors, and not employees of the club. In many cases, we would say in the majority of cases, clubs have mis-classified their independent contractors who are essentially employees.
There is a three-question simple test:
- Behavorial Control – Who keeps the schedule of the independent contractor? If the schedule is kept by the Club, then they are exerting control over the worker and that worker is an employee and not allowing the contractor to pursue work elsewhere. The Club cannot at any time tell the independent contractor when or how to work. Does the Club in any way tell the independent contracted professional how to teach or who to teach at certain times? And does the Club dictate what tools to use or provide tools (baskets, balls, etc). If any of the above questions are “yes” then you are most likely falling foul of the independent contractor classification. Remember, the view of the IRS is that the member taking a lesson or clinic from an independent contractor is a client of the contractor, not of the Club or the Director (if an assistant professional is teaching the lesson or clinic).
- Financial Control – Does the independent contractor stand to lose money in the teaching at the Club? This would mean that your tennis professional could lose money as an independent contractor through un-reimbursed expenses. In most cases, especially with assistant professionals, this is not the case. In most cases as well, the independent contracted tennis professional will have several facilities at which they are teaching and therefore the reliance on one facility or Club would often point to mis-classification.
- Business Relationship between The Parties – The IRS will often look at whether the work being offered is “indefinite” or by “project” and will also look at if there are benefits usually reserved for employment status: housing, along with employee food offerings, can run a Club afoul on classification.
Perhaps where clubs misunderstand the difference between independent contractors and employees in a tennis shop is the so-called “lesson” book. By law, an independent contractor is required to keep his/her own schedule. A club cannot dictate when or how long an independent contractor must be on-site or teach, or even discuss how to teach. In reality, the IRS would say that a club tennis shop cannot book a lesson for a member with an independent contractor – that member is a customer of the independent contractor and must book directly with the professional under this classification and pay the independent contractor directly to avoid any wrongdoing. When faced with this issue, there are many ways clubs may give incentives to the independent contractor to make the club and its members a priority, but again, it is easy to fall on the wrong side of the tax law and classification.
So the Club must weigh the loss of control as noted above with the savings gained by not having costs associated with employees: tax, 401k, food and housing benefits, worker’s compensation and other costs. The decision should not be taken lightly but can easily be changed if needed by revising contracts and employment status and housing leases.
At Beyond the Baselines we work within the club structure to help management and member-filled committees which would be best for their facility – employee vs independent contractor. Often it is the environment and the ethos of the club that will make the decision for us, but sometimes the decision is more about financial and time controls. What will your club offer? A W2 or 1099
Coming next week:
Exempt versus non-exempt tennis professionals.
Coming in October:
How to create incentives for independent contractors.