I have been both an employee and an independent contract as a CFI. The last place I worked paid me as an independent contractor but treated me as an employee. This ticked me off quite a bit as I became more informed on this issue. After some extensive research I confronted my employer about it. In the end they didn't want to change their ways because they would have to do so with all their instructors... so I quit. Employers do this often and it is not legal, but easy for them to get away with. It was a fun job, and principles don't pay bills, but it forced me to go out and find an even better job - and that is a good thing.

Some CFIs should be ICs, and some should be employees. It depends on the way the business is run. Get informed and stand up for your rights. If you are an IC then get a contract and make sure everything you want is in it.



Here is a good article on this topic from AOPA:

Professional CFI
Tax Status of Flight Instructing

By Patti Arthur

School and instructor should remember that control is the key to determining a CFI's status as an employee or independent contractor.
The Internal Revenue Service has intensified its scrutiny of the aviation industry in an effort to learn more about the inner workings of its business. CFIs are not exempt from the IRS's microscopic analysis. One of the IRS's concerns is whether employers have properly classified individual aviation workers, including CFIs, as employees or as independent contractors. Every CFI should be familiar with a few rules that can help avoid falling into a tax trap with the IRS or state taxing authority.

When a CFI begins instructing, he (or she) most likely associates with a flight school or offers freelance instructing. Most CFIs choose the flight school route because it can provide a steady stream of new students. Freelance instructors, on the other hand, must continually find innovative ways to attract students.

How does this choice of working arrangements affect a CFI's tax situation? When an instructor associates with a flight school, the school treats the instructor either as an employee or as an independent contractor. If the relationship is employer-employee, the employer generally pays the CFI a set salary and withholds certain deductions from his paycheck for federal and state taxes, worker's compensation insurance, etc. Some schools pay employee-instructors a set hourly rate based on how many hours the CFI teaches.

No matter what the employer-employee pay arrangement, when the school treats an instructor as an employee, the employer makes the required payroll deductions. Then the school pays the appropriate governmental agencies such as the IRS, state taxing authority, or division of workers' compensation.

If the school treats a CFI as an independent contractor, problems can arise for both the school and instructor if the working arrangement is not set up properly, in compliance with the tax laws. Nothing is illegal or immoral about a school treating instructors as independent contractors, as long as it's done right. The problem is that worker status is not a simple matter of choice. Unfortunately, many flight school managers are unaware of this fact and treat all instructors as independent contractors without correctly establishing the working relationship first.

Flight schools prefer to characterize instructors as independent contractors because the school doesn't have to withhold or pay taxes and workers' compensation. It also relieves the school from certain tax reporting requirements as well as other administrative and financial burdens.

An independent-contractor instructor must keep careful records of the income he earns from instructing, must make quarterly estimated tax payments to the IRS, and must complete and file a Schedule C with his annual 1040 tax return. But, an independent-contractor CFI generally doesn't have to carry workers' compensation insurance on himself.

Still, being an independent-contractor CFI isn't all bad. Like freelance CFIs, an independent- con- tractor instructor can take certain business deductions an employee-CFI cannot.

For example, an independent contractor can deduct the cost of equipment used in instructing, such as headsets, charts, books, and even sunglasses. If he owns a computer and uses all or a portion of it to prepare outlines, tests, etc., he can depreciate the computer, based on the percentage it's used for flight training.

Employee CFIs can deduct some job-related expenses, but only if they itemize their deductions on their annual 1040 tax return. A contractor can deduct these expenses whether he itemizes or not. Being an independent contractor at a flight school can actually be the best of both worlds. The instructor can have a healthy supply of new students and get some good tax benefits, too.

So where do all the problems come from? As mentioned earlier, worker status is not a simple matter of choice for either an instructor or a flight school. If the IRS audits either one and determines a school has improperly classified a CFI as a contractor, the IRS can impose severe penalties, some criminal, on both the school and the instructor.

Under the tax law, the IRS considers an instructor to be an employee if the school "has the right to direct and control the instructor, not only as to the result to be accomplished by the instruction, but also as to the details and means by which the instruction is performed." The test is not the actual direction the instructor receives in performing his duties, it is whether the school has the right to exert that control over the instructor.

The IRS uses a 20-factor test to determine if "control" exists in a working relationship. If they display a majority of these factors, the IRS generally considers CFIs to be employees regardless of how the school characterizes them or how CFIs characterize themselves.

The CFI:

1. Must comply with employer instructions about the work.

2. Receives training from or at the direction of the employer.

3. Provides services that are integrated into the business.

4. Provides services that must be rendered personally.

5. Hires, supervises, and pays assistants for the business.

6. Has a continuing working relationship with the business.

7. Must follow set hours of work.

8. Works full time.

9. Works on the business's premises.

10. Works in a sequence set by the business.

11. Submits regular reports to the employer.

12. Receives payments of regular amounts at set intervals.

13. Receives payments for business or traveling expenses.

14. Relies on the employer to furnish tools and materials for the work.

15. Has no major investment in the work facilities.

16. Cannot make a profit or suffer a loss from the services.

17. Works for one employer at a time.

18. Does not offer services to the general public.

19. Can be fired by the employer.

20. May quit work at any time without incurring liability.

If an instructor associates with a flight school, what should he look for in the working arrangement to avoid trouble with the IRS? First, he should get a written agreement that clearly says the school will treat the instructor as an independent contractor and not an employee. This agreement alone will not convince the IRS about contractor status, but it is a good place to start.

Because evidence of employer control is the key, the agreement should state that the CFI alone is responsible for the way he gives instruction, that the school provides only a minimum of direction and training, and that the instructor is responsible for paying his own taxes. If you associate with a school that doesn't have an agreement, consider asking for one. Most flight schools provide aircraft, teaching aids, and classrooms to teach in, but because the IRS is looking for control, it probably won't put much weight on those factors.

Schools should also avoid giving instructors business cards that include the school's name or logo, unless the cards state the instructor is independent. CFIs should get their own business cards.

Most important of all, a school should not, under any circumstances, require an instructor to teach for that school only. Schools should not even imply an instructor cannot teach anywhere he wants. This is the most egregious error a flight school can make. If a CFI can't teach where he pleases, the IRS automatically classifies the school's instructors as employees. Despite any other mitigating factors, the IRS weighs this display of control so strongly, it considers no other factors.

Instructors should not associate with a school that treats them as independent contractors but doesn't permit them to instruct anywhere else. The tax consequences to both school and instructor could be devastating.

Finally, both school and instructor should remember that control is the key to determining a CFI's status. If an instructor retains control over how he teaches, the methods he uses, where he teaches, and generally has the freedom to do as he pleases within the parameters of safety and the FARs, he can safely be called an independent contractor and enjoy all of the attendant benefits this status will bring.

 

Agree 100%

 

Thanks a ton for that article. Very helpful.

 

YAAFM.

Teaching people to fly is a hobby?

 

Yeah. that pretty much sums up that my employer is probably committing tax fraud. I signed an agreement that I was an independent contractor and that I was responsible for my on taxes. That was day one. When the days and months went by, I am required to keep hours, we have a 141 program, sell supplies, non-compete agreement, not allowed to instruct anywhere else (according to our insurance) , help with FAA written testing...all and all, I'm an employee. I just want to pay my state and federal taxes here soon and leave this place. I most likely will need to file for my home state too. I've made about $1200 in the last 5-6 months and don't have enough money to probably go to H&R Block. I never switched residency, b/c when I got here I was already looking for employment back at home. This is the stuff I don't like. This is why I hate dealing with money, b/c I don't see honesty and there are so many ways for me to get screwed. I will pay the taxes, but I just don't want to go to court or jail. Chances are slim to non-existent, but that wouldn't look good for future employment. This is why I thought I would start this tread up.

Thanks for the info.

 

Don't stress it. Your company is just doing what it does because most employees don't get informed. Make some timesheet copies, record your duties and collect some other evidence that you are treated as an employee. There is a form you can then fill out and send to the IRS claiming you have been misclassified and want them to look into it.

http://www.irs.gov/pub/irs-pdf/fss8.pdf

You always have the option of confronting your employer about this before you send in the form and asking them to make it right in house. Either of these options risk you burning a bridge with your employer so you need to weigh that. I say screw em, because they don't have a problem screwing you.

 

Thanks for the article towhook, but it raises a question. Does this make me an employee since I also tow gliders for the company?

 

So collecting wages for providing a service for someone else utilizing a knowledge base and skill set you have isn't a job? I wouldn't consider instructing a hobby, not by a long shot.



At any rate, I work as an employee for a flight school.

 

We recently switched from independent contractors to employees due to :"workman's compensations issues."

 

Independent. Why would I be an employee for $13/hr when I can make $40/hr as in independent contractor. Undervaluing ourselves makes us seem less professional. Bill for your time and take yourself and flight instruction seriously regardless of your career goals.