Are your CFIs employees or independent contractors? If you think you know the answer, read on because you may realize that the Internal Revenue Service would not agree with you if an auditor showed up at your door.
The majority of flight schools prefer an arrangement with instructors that categorize them as independent contractors. When done properly, a school can usually save money because they don’t have to withhold deductions, pay worker’s compensation insurance, or employment taxes (Social Security and Medicare tax on wages).
In recent years, the IRS has intensified its scrutiny of the role of employees versus independent contractors. If the IRS finds you misclassified an employee as an independent contractor, the tax consequences, penalties, and legal fees for defending your case for both you and the CFI could be a financial fiasco.
While there is nothing wrong in choosing to have your CFIs as independent contractors, it can become a problem when a flight school fails to correctly establish the working relationship out of the gate. If you issue a Form 1099 to your instructors, it would be in your best interest to standardize a method by which these instructors should be treated so as to minimize confusion among staff. The mere language or treatment of an independent contractor by an employee of the school, for instance, could be enough for an IRS auditor to deem that CFI as an employee.
Though a flight school should have a written agreement with a CFI that clearly spells out the relationship as that of business-independent contractor for multiple business records, that agreement alone will not be enough to convince an IRS auditor.
Some of the most obvious factors that an IRS auditor may look for in his investigation are often those easily overlooked or considered trivial to an operation as a whole. For instance, do you require that all “staff” attend regular meetings? If so, make sure this does not include any worker classified as an independent contractor. You should merely extend an invitation to them instead. Do you provide business cards with your logo or school name to your CFIs with their names imprinted? You shouldn’t, but if you are adamant about them having cards, ask the CFI to fill out the order form, making sure to include on the card that they are an independent instructor, a personal telephone or email address in addition to the school’s, and to pay for the printing of the cards. Have a website? Make sure that any CFI featured on it—or in any advertising—is indicated as an independent instructor.
One of the most glaring factors the IRS considers is whether or not the business is controlling the behavior of how a worker performs his job. In other words, what will be done and how it will be done cannot be controlled by the business. One method IRS auditors use is to scrutinize your school’s teaching and training methods, which makes flight schools particularly vulnerable. Since CFIs ebb and flow and are sometimes given to leaving on a moment’s notice based on airline hiring surges, many schools try to standardize methods by which students learn so that the successor CFI knows exactly where the last one left off. Be aware, however, that by requiring CFIs to conform to a prescribed syllabus or a set of instructional materials, you’ve usurped control over how your contractor does his job.
Other significant factors that an IRS auditor may deem as those of an employee are signs of regularity, such as a fixed schedule, or a set amount of pay. The most egregious error a flight school can make, however, is if a CFI on status as an independent contractor is forbidden to provide services to anyone outside of the operation. That fact alone will usually prompt an IRS auditor to classify the worker as an employee, regardless of all other factors.
If you classify any workers as independent contractors, you can find more complete details and information about the regulations directly on the IRS website, Independent Contractor (Self-Employed) or Employee? Being prepared and organizing these records now will help ensure that your business doesn’t receive any unwelcome surprises that you’re not equipped and enabled to handle.
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