What’s the Difference Between a Contractor and an Employee
Should you hire employees or contractors for your music school? Does it make sense to switch your contractors to employees? In this episode, I speak with music school owner James Brandt about the pros and cons of contractors and employees.
The main difference between contractors and employees is this idea of independence and freedom, independence and freedom for the instructor. Typically when you think of contractors, you might think of hiring a contractor to come in and build a teaching studio in your music school. That’s a great example of a contractor, where you hire them to do a certain job and if they do it well, great, and if you’re not happy with how they’re doing it, you fire them. You let them go and you hire somebody else to come in and do the job. You wouldn’t go to your contractor and comment on the hammer that they’re using or their drilling technique and show them and say to them, hey, I really want you to drill this way. They’re independent. They have a certain level of freedom.
–Show Highlights–
What the IRS Has to Say
I went to the IRS’s website to look up the definition of an independent contractor, and here’s how the IRS defines it.
“The general rule is that an individual is an independent contractor if the payer, has the right to control or direct only the result of the work and not what will be done and how it will be done.”
So to apply that into our world, the only control that you have is the result of the work. You can only hire them to teach music lessons, but you can’t control how they do this.
The IRS says…
“You are not an independent contractor if you perform services that can be controlled by an employer,” meaning what you will do and how you will do it. What matters is that the employer has the legal right to control the details of how the services are performed. That’s defining an employee. If an employer-employee relationship exists, regardless of what the relationship is called, you are not an independent contractor.”
Employer vs Employee
So how does one define what an employer is and what an employee is? If you’re giving any directive to your music teacher, if you’re giving them feedback on their work performance, according to what I understand here with the IRS, you’re functioning as an employer. From a strict legal definition, if your music school consists of contractors, you have to have a pretty hands-off approach with them. I only had employees in my music school, so I don’t really understand what you can and can’t do with them. According to this, if a customer calls to complain about a teacher, maybe you could share that complaint with them. But let’s say the complaint has something to do with their style of teaching. According to this, you can’t sit that instructor down and talk to them about their style of teaching and make recommendations. They’re independent.
Know The Laws of Your State
Let’s say you want to change the brand promise of your music school. You want to shift or change the whole tone of your music school, and you want your teachers to be on board and make some adjustments in their teaching, so you can better bring to life your brand promise. You can’t do that with contractors, not according to this definition, not according to what the IRS has to say. In my interview with James Brandt, he is going to point out that in his state, there’s a certain level of leniency there, which might not exist in your state. He’ll share with us how he works with that leniency.
The Benefits of Contractors
The obvious question to ask is, well, clearly, there are so many benefits to going with employees, why even hire contractors? Well, there’s a huge benefit to hiring contractors. There’s a big tax benefit. You’re not obligated to pay a contractor’s taxes. It’s all on them. It’s a trade-off. You’re keeping more money in your bank. That tax burden is the contractor’s burden, but the trade-off is that you forfeit control.
The Benefits of Employees
I think for most of us, the independent contractor model makes a lot of sense at the beginning of our music school, maybe the first five years. You know, the first five years, you’re probably down in the trenches teaching with your teaching staff. Most likely, your focus is on offering a better music lesson. You’re focused on your students and serving them. Yeah, you want to grow your school. You hire one, two, maybe three teachers, but what quite often happens to schools, as they begin to grow, is the music school owner begins to move out of teaching and fully embraces their role as a business leader, as an entrepreneur.
If you look at most music schools with over 300 students, most likely, the owner is not teaching. And if they are teaching, it’s pretty minimal. The only way to get your school that big is to pull out of teaching, so you can focus on leadership and growth. When your music school is made up of independent contractors, it becomes difficult to lead them. They’re not on your team. They’re not a part of your organization. They’re independent. The word “independent” says it all.
Having the Freedom to Lead
I once sat my teaching staff down, and I said, “Look, I really want the parents to feel more a part of the music lesson experience. You know, the way we’re doing it now, the parent is really only, or is solely relying on their child to give them feedback as to how the lesson’s going. I think it would be great if everyone would invite the parent in the last five minutes, model for the parent what the child’s working on, and make that five-minute segment really more of a performance opportunity for the child. I encourage you to encourage the parents to make a video of the child in those final moments of the lesson.”
Having the Freedom to Create Culture
I asked my staff for feedback. I wanted to hear what they thought of this, what value that they felt this could add to the lesson. I wanted to hear feedback, but nonetheless, this was a new policy. Going forward, everybody had to do this. Not everybody did. And you know, people were reluctant to do it, but I had the legal freedom to say to them, “Look, you have to do it. This is how we’re doing it here.”
Having the Freedom to Redirect Instructors
When I noticed that somebody wasn’t doing it, I’d pull them aside and say, “Look, you know, remember the meeting. I really expect you to be doing this.” Once my staff saw that I really meant it, they eventually all bought in, and they all did it. This is something I’ve seen a lot in the Facebook groups where people talk about how to redirect or reprimand an employee. It’s hard to do with a contractor. Legally, it’s not really your place. I think a lot of music schools are banking on the fact that most independent contractors don’t really fully understand their legal rights.
Why You Might Be Treating Your Contractors Like Employees
I have a hunch that most music schools with independent contractors are treating them like employees. I think it’s unavoidable. The nice thing about employees is that everybody is a part of the team. You can run your school like an organization. The challenge with employees is you then have to know how to be a good leader. With contractors, there’s really not that much pressure on you to be a good leader because you really can’t lead at all. Everyone is their own independent company within your company. If you have 10 independent contractors teaching for you, you have 10 different companies under the umbrella of your company.
Switching From Contractors to Employees
What I’ve seen a lot with music schools is that they start off with independent contractors. They want to move to an employee model because they’ve become a little more marketing savvy, or they become a little more deliberate in their marketing, and they want their staff on board. They want to be a different type of leader. They then transition over to the employee model, yet they really haven’t developed a leadership style based on employees. When you have employees, you can now implement strategy into your music school in a way that you couldn’t before.
How to Offset the Added Tax Burden of Employees
The big question, the big pushback I often get on employees, is the tax implications and it’s significance. With contractors, you’re not responsible for any of their taxes. With employees, you’re responsible for 50% of their taxes. I think I’ve got that percentage right. That’s a new expense, all of a sudden, that you got on your plate. It’s great if you start your business off with employees because you’re building your business around this reality. The way I offset that tax burden, not that I even thought about this at the beginning, but my strategy was always to hire good solid musicians with great personalities but with little to no teaching experience. I had a training program for them.
The Problem With Hiring Experienced Music Teachers
A lot of music schools that hire contractors, hire experienced teachers. They’re paying them maybe 30, $35 an hour, maybe more. I was bringing my teachers in at $15 an hour. They were thrilled to be learning this new skill, and I was playing the role of their mentor. And they were very open to this idea because they didn’t know anything about teaching. And I gave them annual pay raises, but still, even my most senior teachers were never making more than $20 an hour, and I had great retention with my staff. Perhaps they felt a certain loyalty to me since I had mentored them through this process of learning how to teach.
How to Hire a Contractor
Something that James will point out in his interview, and I think he’s so spot on about this. With contractors, the pressure really is on hiring these contractors, getting it right during the interview process. With contractors, you have to find ones who just already kind of line up naturally with your philosophy regarding music education. I think that’s a great approach. I love what James says about that. That’s a skill that, as a music school owner, if you do have contractors and you want to stick with that model, to really focus on how to interview effectively. What information specifically do you need from that interview to identify whether that candidate really lines up with your worldview regarding music, music education, and the impact that you want to have on kids, and the impact that this potential instructor wants to have on kids.
How To Lead Employees
I really tried to make the most of the fact that I had employees. I did a lot of mentoring programs. I would have my teaching staff observe each other in their lessons, and they had a little questionnaire that they’d fill out after the lesson about the teacher that they were observing. And then I’d have staff meetings where I’d read through some of the comments that the teaching staff had made about each other.
One of the most helpful questions was, what is this teacher doing that you would feel that you could incorporate into your teaching? That really got a lot of discussion going amongst the teaching staff. My teaching staff was teaching each other how to be better teachers. And my job was to simply kind of go, “Guys, remember, here’s our mission statement. This is what we as an organization are working towards.” I empowered my staff by putting them in a position where they could learn from each other.
Hi David, great job. Thanks for having me on.
I probably should complete the information on our to IRS audits, the story was getting a bit long and we had to cut it short.
In a nutshell, both instances resulted in the IRS finding against us in the appeals process, and subsequently, we took the option to take the case to tax court (had to pay $50).
In both instances after the IRS attorneys looked at the situation, they bailed. We received a letter telling us that they were no longer pursuing the issue and that, officially, there was no need to change any of the business practices they had cited.