Thus, for example, a yoga teacher who brings his or her own props, travels from studio to studio, pays his or her own travel and other business expenses, and is paid on an hourly or per-class basis according to his or her own constantly changing schedule, would likely be considered an independent contractor. On the other hand, Studio X’s “master teacher,” who fills regular classes, teaches them in the manner prescribed by the studio, relies on the studio’s props, is slated to teach a particular style of yoga for a lengthy (i.e., a year) or indefinite period, meets with the studio owner regularly to provide feedback on progress, and is considered an integral part of the studio’s daily operations, would likely be considered an employee of that studio.
Yoga teachers should understand these distinctions, because even if the contract between studio and teacher specifies that the yoga teacher is an “employee” or “independent contractor,” the IRS will look beyond the words of the contract to the actual arrangement. As for yoga studios, an employer that misclassifies an employee as an independent contractor may be held liable for employment taxes for that worker, plus a penalty.
The Tax Breaks
Being an independent contractor not only increases flexibility and control; it also has some tax advantages.
As an independent contractor, you can deduct from your taxable income any necessary expenses related to your business. According to the IRS, a “business expense,” to be deductible, must be “both ordinary and necessary.” An “ordinary expense” is one that is common and accepted in your industry. A “necessary expense” is one that is helpful and appropriate for your trade or business. For example, if you use wood or foam blocks as props, the cost of these props would likely qualify as a deductible business expense; so too would your yoga mat, folding chairs, blankets, and straps.
Here are some major categories of potentially deductible business expenses:
Business Use of Home: The IRS allows deductions for business use of part of one’s home. Deductions include a percentage of rent, utilities, home insurance, depreciation, mortgage interest, real estate taxes, and repairs and improvements relating to the part of the home used for business. To qualify for the deduction, the IRS requires that you regularly use this part of the home exclusively for a trade or business, and that at least one of the following is met: (a) you use the business part of your home as your principal place of business; (b) you meet patients, clients, or customers (i.e., yoga privates) there; or (c) you use a separate structure on your property exclusively for business purposes. Under this test, your home office qualifies as your principal place of business if you use the office exclusively and regularly for administrative or management activities of your trade or business and have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Making calls, sending faxes and emails, and doing paperwork from a portion of your home to set up yoga teaching assignments and contracts would likely meet this definition. Business Use of Car: Business use of your car to travel to and from the yoga studio may also qualify, at least in part. IRS rules provide that if you use your car exclusively in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you may only deduct the cost of its business use. Business Travel Expenses: The IRS defines “business travel expenses” as “the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” According to the IRS, you are traveling away from home if your duties require you to be away from the general area of your tax home (the city or general area where you work) for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away. Yoga teachers who travel to give workshops in distant cities would likely qualify for this deduction. Meals and Entertainment: The IRS allows you to deduct the cost of meals in either of the following two situations: (1) it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business; or (2) the meal is business-related entertainment. If you discuss your contract over a vegetarian dinner, that may be deductible. However, IRS rules limit the amount one may claim for meals and entertainment.
Additional business expenses, such as dues and publications, would probably qualify for deduction (for example, your Yoga Journal subscription can likely be deducted). Offices expenses and expenses for legal and professional services (including professional liability insurance) also should be deductible business expenses. On the other hand, fancy yoga outfits and other items of clothing generally are not deductible.
In sum, the tax advantages available to independent contractors are considerable. In addition, independent contractors set their own wages and therefore may earn more than they would as employees.
Be sure to consult an accountant or tax attorney at tax time to discuss your unique deductions and to address nested exceptions within IRS rules.
Michael H. Cohen, J.D., M.B.A. is Principal in the Law Offices of Michael H. Cohen and the publisher of the Complementary and Alternative Medicine Law Blog (www.camlawblog.com). The materials in this website/e-newsletter have been prepared by Michael H. Cohen, J.D., M.B.A., and Yoga Journal for informational purposes only and are not legal opinion or advice. Online readers should not act upon this information without seeking professional legal counsel.