An important and disturbing development is threatening the yoga community in California.
The California Economic Development Department (the “EDD”) is aggressively targeting yoga studios to determine whether they have properly classified yoga teachers and other workers as independent contractors rather than as employees. The EDD targets industries that are abusing the tax laws, audits and forces re-classification of workers from independent contractors to employees.
I know of eight yoga studios that are being audited in the Bay Area alone and several more that are under audit in Southern California. Although some audits are ongoing, the EDD has imposed substantial fines against yoga studios. I do not know of any studios that have won their audits.
The EDD may share information about companies that have misclassified their workers with the IRS. If a studio is audited by the EDD, it may be audited again by the IRS. There are 15 states that have signed an agreement with the U.S. Department of Labor to share information about misclassification. These states are: California, Washington, Montana, Utah, Colorado, Minnesota, Iowa, Illinois, Louisiana, Alabama, New York, New Hampshire, Connecticut, and Maryland. For more information visit the U.S. Department of Labor site.
If you are audited and lose, you will pay back taxes and penalties. You may be forced to change your business model to employer-employee and your cost of doing business will increase. Your relationship with your teachers will change. Your teachers cannot deduct their business expenses incurred in teaching at your studio. You must comply with a large body of employment and tax laws.
Penalties For Misclassification
If you misclassify your workers and lose your EDD audit, you may be liable for state unemployment taxes, worker’s compensation insurance, unpaid payroll taxes, penalties and interest. The EDD can review your last three years of operations. Furthermore, in 2012, California passed an independent contractor law which imposes harsh civil penalties. For each violation, you may face a penalty of between $5,000 and $15,000 in addition to back taxes and other penalties. These may increase if there is a “pattern or practice” of violations.
If you are audited by the IRS and lose, you may be liable for federal tax withholding, FICA and Medicare payments, federal unemployment, penalties and interest.
What Can Yoga Studios Do?
If you’ve classified your teachers as independent contractors, you have three choices:
Do Nothing and Hope You Don’t Get Audited
It is not a wise strategy to do nothing and hope that you do not get audited. You chances of being audited are increasing. If a studio in your town has been audited and converts to employer-employee, it may report your studio to the EDD because it is at a competitive disadvantage. Audits have been triggered when workers have mistakenly filed for unemployment compensation. Finally, the EDD randomly audits businesses. If you do nothing and are audited, you may be following business practices that may cause you to lose your audit.
Build Your Case That Your Teachers Are Independent Contractors
Take a conservative position on classifying your workers as independent contractors and build the strongest legal case to defend yourself. The basic steps are to research and understand the law, review the IRS tests for independent contractor status and complete the EDD worksheet to assess whether you have properly classified your workers. If necessary, you should change your business practices to take the most conservative position, use professional independent contractor agreements and avoid red flags. Links to the IRS test and EDD worksheets are in the Resources below.
“The more you control your teachers, the greater the chance they are employees. The less you control your teachers, the greater the chance they are independent contractors.”
The law in this area is too complex to discuss in this article but the key legal test is control. The more you control your teachers, the greater the chance they are employees. The less you control your teachers, the greater the chance they are independent contractors.
We urge you to consult with your tax expert, accountant or employment lawyer to get professional guidance on whether you have properly classified your workers.
Convert to the Employer-Employee Model
Studios are beginning to convert to the employer-employee model as a way to cut-off the accrual of additional liability and to stop worrying about an audit. This is more common for larger studios or studio chains. Some smaller studios are beginning to convert as well.
You should consult with your tax expert, accountant or employment lawyer to get professional guidance if you want to convert.
Avoid Red Flags
Make sure that you do not have any red flags that may weaken your legal position if you are audited. Some of these red flags are:
- failing to get invoices from your teachers;
- not using professional independent contractor agreements or using “do it yourself” agreements (or none at all);
- supervising your teachers;
- requiring teachers to follow a studio manual which makes them do odd jobs around the studio and controls the way they teach;
- requiring teachers to open and close the studio;
- expecting teachers to collect money from students on behalf of the studio;
- paying for the benefits or business expenses of the teachers; and
- not requiring teachers to run independent businesses.
What Should Yoga Teachers Do?
Many yoga teachers think this is not their problem because the studios are liable for properly classifying their workers. However, yoga teachers have an important stake in this issue. If a studio is audited and loses, it may be driven out of business. This devastates the yoga community and you will lose your job. If the studio survives and converts to employer-employee, taxes will be deducted from your paycheck and you will lose your tax deductions for that studio. Fortunately, I have not heard of any cases where an audit of a studio has triggered an audit of a yoga teacher.
Yoga teachers should bring these issues to the attention of the studio owners and encourage them to make intentional, informed decisions as to the business model they wish to follow. If you work at a studio and see the red flags, provide the studio with a copy of this article and encourage it to get professional help.
I am sorry to bring these unpleasant developments to you but I have seen the results of these audits and they are heartbreaking. We cannot continue under the conventional view that teachers are independent contractors because “everyone else does it that way.” Both the IRS and the states are auditing businesses nationally over this issue. Although the auditors seem to be the most aggressive in California and New York, it is happening in many other states and I anticipate other states are following the trend. They view using independent contractors as abusive and want the tax revenues. This is a result of the success of yoga. As money has flowed into yoga and the mainstream media has embraced yoga in everything from advertisements to movies, it has caught the attention of the tax collectors and they are following the money. They want our tax revenues.
This article is meant to educate the California yoga community about the alarming actions of the EDD and the effect that an audit and potential tax liabilities may have on the viability of yoga studios. Yoga Alliance’s intention in publishing it is to help raise the urgency of this issue within the entire yoga-studio community in the U.S. Yoga Alliance will soon be issuing additional resources on this topic.
If issues arise in your state, please let Yoga Alliance know.
We both hope to empower you to understand and comply with the tax laws to reduce your chances of tax liability. We want to see yoga studios build strong businesses so they can continue to spread the power of yoga across the globe.
This discussion is for informational and illustrative purposes only and is not meant to impart legal or tax advice. Each studio owner’s situation may differ depending on the factual circumstances and the jurisdiction in which the studio operates.
Gary Kissiah has been studying and practicing yoga since 2000. He is a RYT 200 with Yoga Alliance and has a Certificate of Yoga Philosophy from the California Institute of Integral Studies. Gary has studied yoga at Esalen Institute, Parmarth Niketan Ashram and Satchidananda Ashram. Gary teaches workshops on yoga philosophy, law and ethics for teacher training programs and is a frequent speaker at yoga conferences. The author of the new book, “The Yoga Sutras of Patanjali: Illuminations Through Image, Commentary and Design,” Gary is also on the teaching faculty of Breathe Yoga of Los Gatos, California. He has written the “Light on Law” series of books about yoga, law and business. View his website for more information.