In this video, Ryan Vaughn addresses a common question from gym owners about whether they can change the way they pay coaches to reduce payroll taxes. He explains that tax law does not allow switching a worker from W‑2 to 1099 solely to avoid payroll taxes, but it is permissible to have a hybrid arrangement where a coach is paid as a W‑2 for duties that the employer controls (e.g., leading group classes) and as a 1099 for services performed with significant autonomy (e.g., personal training, nutrition coaching). He stresses the importance of checking state-specific rules—especially California, which often requires W‑2 status—and using the IRS’s 24‑factor test to determine worker classification. Vaughn recommends that coaches who receive 1099 payments operate through a business entity to simplify audit trails. He concludes that, when applied correctly, 1099 arrangements can increase profitability for both the gym and the coach because the coach pays less in taxes and the gym saves on payroll taxes.
Chapters
Hey everyone, um, I got an email from someone yesterday about a question they had for paying their coaches. They have seen a lot of growth and their W-2 coaches now, um, their payroll tax is really high. And look, changing the way you pay your coaches just because your payroll tax is high isn't a reason allowed to change the way you pay them. But, um, there are some ways in which you can make this work. The first thing is there is nothing in the tax rules that say you can't pay a person a W-2 and a business that they may be the owner of as a 1099. And so we do see this structure often in scenarios where, especially if your state requires you to pay your coaches W-2, like California, They may be the only one, but you always want to check with your state rules. Um, when you pay your coaches for coaching group classes or maybe doing non-coaching things that you have a lot of control over, they are W-2 employees, but maybe they're doing some other work for the gym that brings in revenue that you give them complete flexibility and autonomy for, such as maybe they set their own personal training schedule. Maybe they choose which clients they want to work with. Maybe they're actually going out and interacting with the members during class time and selling them on personal services. Maybe you have a nutrition coach and your nutrition coach has flexibility on their schedule and they are teaching maybe, uh, their own methodology. Anything where your worker— that's the IRS status— anytime your worker has a lot of flexibility over what you, what you're asking them to do, you can pay them 1099. So I will say this though, if I'm paying Bob as a W-2 for coaching group classes, and then he is also getting his own personal training classes and sessions and setting his own schedule, I want to make sure Bob has a business entity that I will be paying. It just makes it a lot cleaner when you are going through the types of audits that you may go through on something like this. So, um, again, you can't not pay someone a W-2 just because you don't want to pay payroll tax. But there are 24 factors that the IRS looks at, which a lot of the states rely on. And then the states have their own rules on top of that, which you need to look at based on what state you're in. Again, and other than California, most states have some flexibility in the way you could pay coaches. So if they're doing multiple services for you, figure out the ones that do have more autonomy that fit the bill, or I should say fit the rules in which you can pay them a 1099. Hope that helps. And of course, you know, this being profit-focused, If you do pay them 1099, both you and the coach will be more profitable. The coach is going to pay less in taxes. I've done the math hundreds of times. It always works out. And obviously you pay less payroll taxes. So profit is a choice. Have the courage and wisdom to choose it.
