Before you can hire a new tutor, you have to determine if they are going to be an employee or an independent contractor. This is a highly debated topic in the tutoring world and everyone seems to have an opinion. But fortunately, the IRS has some very clear guidelines to help us.
Now, some of you may be asking yourselves, what is the difference? Why does it matter?
When you hire additional tutors, they become workers. You must classify them as either employees or independent contractors. To be quite honest, this will probably be one of your biggest business decisions when it comes to scaling your tutoring business. It will affect how much control you can have over your tutors, the type and amount of taxes you will pay, and so much more.
If you hire employees, then you will withhold income taxes and you will pay social security, Medicare, and unemployment tax on their wages. Independent contractors, however, are not technically employees of your business. They are contracted to do a particular job or project. An example is a freelancer that a business hires to do a project. In this case, the employer doesn’t have to withhold or pay any taxes. The independent contractor is responsible for paying all of their taxes.
As you can already tell, it’s a lot cheaper on the business owner to hire independent contractors instead of employees. And you’re probably thinking, why should I read any further? The answer is obvious, right?
But, wait. There’s more.
The decision essentially comes down to a “control test”. The IRS has three categories that they use to help determine this. The categories are behavioral control, financial control, and the relationship between the business and the tutor.
Let’s start with behavioral control. Do you plan to provide instructions about when, where, and how the tutor must do their work? If so, then you will need to hire your new tutor as an employee.
The next test is financial control. If the business has a right to direct or control the financial and business aspects of the worker’s job, then they are an employee. Think about how you will pay your tutors. Will you pay them an hourly or weekly rate? Or, will you pay them by the project? Can your tutor work for other tutoring companies while also working for you? This determines how much financial control you have over your tutor and thus becomes a factor in deciding whether your tutor is an employee or independent contractor.
The third test is about the relationship between the worker and the business. How long do you anticipate the tutor working for you? Is it just for a single project or for a set amount of time? Or is the expectation that the tutor will work indefinitely for you or until one of you decide to end the working relationship? If it’s the latter, then you need to hire your tutor as an employee.
So, what does all of this mean for you? Which type of worker should you hire for your tutoring business?
It all comes down to control. Do you want to have control over your tutors and how they work? Or, are you okay with your tutors doing their own thing and having little accountability to you and your business?
It’s a big decision and you should get professional advice from your accountant or CPA. They will best be able to help you decide which direction to go. What may work for me and my business may not work for you and yours.
Are you thinking about opening a tutoring center or scaling your current tutoring business? Check out our Tutoring Center 101 online course. I’ll share step-by-step directions that will teach you how to open, operate, and successfully run a profitable tutoring center.