Whether you’re an old hand or fresh out of school and looking for your first job, you may be wondering whether you’re better off working as an employee or an independent contractor. Or, you may already be working and wondering if you’re being misclassified as one or the other.

It’s a hot topic, not only for the worker, but for the employer as well. It’s such an issue that the Internal Revenue Service (IRS) actually has a form (Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to help those who may need assistance in deciding.            

According to the IRS, there are three characteristics that determine the classification of a worker:

• Behavioral Control concerns whether the business has a right to direct or control how the worker’s job is done through instructions, training, or other means.

• Financial Control covers whether the business has a right to direct or control the financial and business aspects of the worker’s job.

• Type of Relationship relates to how the workers and the business owner perceive their relationship.¹

If the employer controls not only what is to be done, but also how it is to be done, then the worker is most likely an employee. If the employer is only vested in the end result, and not directing how that is accomplished, the worker is most likely an independent contractor. If that distinction doesn’t help, the IRS will be glad to make that determination for people who fill out and submit Form SS-8.

What’s the Difference?

Working as an employee is a relatively cut-and-dried situation: you work the hours you’re scheduled, do as you’re told, and receive a paycheck. The primary difference in the paycheck of an employee and the paycheck of an independent contractor is that taxes have been withheld from an employee’s paycheck. In the work environment, the employer usually provides everything you need, from the massage table to the linens to the massage creams and spa products you’re expected to use.

An employer is paying you for your time, which means you may be required to do something other than massage during your shift, whether that’s helping with the laundry, covering the front desk, or cleaning during down time between your massage appointments.

Where’s the Beef?

An independent contractor is a self-employed person who does what she does either in her space or someone else’s. The beef, according to many of the contractors I hear from, is that independent contractors are often treated as if they are employees. Some are expected to hang around the office all day for no compensation, even when they have no appointments, in the event someone walks in and wants a massage. Others are required to do desk duty, laundry, cleaning, and other jobs that are of benefit to the employer for no pay. Benefit is also a key word in the status determination process. An independent contractor is not entitled to receive any employee benefits such as insurance, sick days, vacation time, and so forth.

Independent contractors are responsible for paying their own taxes. That is probably the biggest reason small businesses prefer to utilize contract labor—to avoid the paperwork and the responsibilities of bookkeeping and filing. When you consider that employees pay federal tax, state tax, and sometimes local tax out of their paychecks, plus social security, workers’ compensation (required of employers who employ a threshold number of people), and unemployment insurance (which independent contractors don’t get to avail themselves of), there’s a lot involved. Independent contractors are obligated to file quarterly estimated taxes, and should keep careful accounting of their business-related expenses in order to offset their tax obligations as much as possible.

Independent contractors may be required to provide all their own equipment and supplies, although that isn’t always the case; some employers may provide the massage table and other accoutrements of the job. Here’s the rub: an independent contractor shouldn’t be required to be on the job with no pay, whether that’s sitting and waiting for an appointment to walk in the door, or doing desk duty and other chores. That is a blatant violation of the contractual relationship. Unfortunately, that doesn’t deter many employers from requiring these tasks, and many contractors go along with it because they think any job is better than no job.

In addition to the IRS, the Small Business Administration (SBA) has advice governing worker status.² According to the SBA, an employee is given training for the work to be done, works for only one employer (although that particular part isn’t necessarily true), and performs duties that are controlled by others. An independent contractor, on the other hand, maintains a separate checking account for her business, has a business name, provides her own tools, sets her own hours, has more than one client, and keeps her own business records. While not every contractor may follow all of these rules, adherence to the majority should be the case. Independent contractors may also have other contractors working for them. One example would be an independent contractor who performs corporate chair massage and contracts with other therapists to handle some accounts during busy times.

Documentation

If you’re the employer, the burden is on you to provide proof of the circumstances under which you are employing people. Employers should bear in mind that if they are found to be incorrectly classifying workers, the employer, not the worker, is the one who is going to be liable for the back taxes and any penalties incurred as a result of the misclassification, intentional or not. It’s very important not to misuse your independent contractors by treating them as employees.

If you’re the worker, documentation is just as important for you. As an independent contractor—a self-employed person—you’re entitled to a lot of tax deductions, the same as any other business owner. Save the receipts for all your business-related expenses. You may use a financial software program or financial journal, but documentation is always the key in proving your deductions are legitimate, should you ever be audited. It’s a fact that small business owners are audited more frequently than major corporations, particularly in businesses where people traditionally receive a lot of their money as cash payments and are perhaps receiving gratuities as well.

It’s illegal to fail to report gratuities as income, and not only that, it’s plain unwise. If you’re injured in an accident resulting from the fault or negligence of another party, and have to be involved in a personal-injury lawsuit, the court would use your annual income to help determine the compensation you are entitled to. If you have received an average of $5,000 a year in gratuities but haven’t reported that, you can’t expect to receive it as compensation in a settlement.

Noncompete Agreements

Noncompete agreements are one of the most frequently discussed, and complained about, topics on my social networks. They are illegal altogether in some states, and some states narrowly restrict the circumstances to which they may be applied. The attitude of employers who require noncompete agreements is that they have paid for advertising, trained employees, and provided employees with clients, and therefore don’t want their staff members to go elsewhere and take clients with them. A noncompete agreement usually states that, should you leave an employer, you will not perform massage within a certain number of miles of the current business for a certain period of time after your termination from the current business, and that you will not contact clients of the current business. They are often required of employees and independent contractors alike.

According to Dale Atkinson, general counsel to the Federation of State Massage Therapy Boards, as well as executive director and general counsel to the Federation of Associations of Regulatory Boards, noncompete agreements must be carefully drafted, and take into consideration the time period and scope of limiting one’s ability to pursue their chosen profession. “While courts are reluctant to enforce such limitations of employment, noncompete agreements of certain corporate-level executive positions may be justified based on access to proprietary information. Massage therapists should be wary of employers seeking signed noncompete agreements as a condition of employment, as the ultimate determination of who provides services lies with the consumer,” Atkinson says. 

Now there’s the key phrase: “The ultimate determination of who provides service lies with the consumer.” For the past decade, I’ve personally utilized, on average, a dozen independent contractors in my clinic at any given time. I’ve never asked for a noncompete agreement, and I never will. I am aware that if a therapist leaves to take another job or go out on his own, a certain number of clients will go with him. People get attached to their massage therapists. My own philosophy is that a client who prefers to stay with a therapist is not going to be happy with me as a business owner for trying to keep him away from that therapist. On the few occasions that therapists have left me to start their own businesses, I have willingly given their contact information to former clients who want to follow them. It hasn’t hurt my business. There are enough aching bodies and stressed-out people to go around, and again, I don’t own the client. People have the right to choose who they’d like to receive services from, no matter how much money you may have spent advertising to get them in your door.

As a worker, if you have left an employment situation to go elsewhere or start your own business, it’s unethical to steal client files and contact information from your employer—whether there was a noncompete agreement or not. However, it is not unethical—or illegal—to advertise your new circumstances. You can get the word out with some ads (and don’t overlook the opportunity for a free press release) that state, “Susan Smith, formerly of The Spa on Main Street, is now in private practice at Green Acres Massage Therapy.” That’s the best way to handle it.

Notes

1. Internal Revenue Service, “Independent Contractor (Self-Employed) or Employee,” accessed June 2012, www.irs.gov/businesses/small/article/0,,id=99921,00.html.

2. Small Business Administration, “Independent Contractors vs. Employees,” accessed June 2012, www.sba.gov/content/independent-contractors-vs-employees.

Laura Allen is the author of A Massage Therapist’s Guide to Business (Lippincott Williams & Wilkins, 2011), Plain & Simple Guide to Therapeutic Massage & Bodywork Examinations (Lippincott Williams & Wilkins, 2009), and One Year to a Successful Massage Therapy Practice (Lippincott Williams & Wilkins, 2008). Allen is the owner of THERA-SSAGE, a continuing education facility and alternative wellness clinic with more than a dozen practitioners. Contact her at therassage@bellsouth.net.