What is the true cost of hiring a Groom?
Freelancer vs Employee: Is the Grass Greener on the Other Side?
By Lisa Derby Oden
We are very lucky to have another wonderful guest to share her knowledge about employment issues in the horse industry. Lisa Derby Oden shares her smarts about what it takes financially to hire a Groom. I am so glad to be able to share this with Grooms everywhere, so that you have an idea of what really goes on behind the scenes and just how detailed and complicated things can get.
“As the saying goes, “There are two sides to every coin.” In the case of working in the horse industry I believe that there may actually be four sides to this coin. By that I mean that not only will you as a professional Groom consider whether you prefer to be an employee versus a freelancer, but your employer and the IRS is likely to consider those two sides of the coin from their perspective as well (employee vs independent contractor). Let’s take a look at these four sides of the coin.
There is much to consider when hiring an employee. The decision to bring someone onto their payroll triggers several things for an employer. There are financial and time investment implications. Time investment revolves around the time it takes to prepare payroll, tax documents, submit taxes due and maintaining these records for.
First, the employer must set up a system and records for withholding taxes. Every time you get a paycheck, the employer must deduct your federal and state taxes and submit those funds to the respective government quarterly. The employer is also responsible for providing the federal government and the employee with a W-2 annually. The W-2 is a report of wages paid and taxes that are withheld for each employee.
Once the withholding tax system is in place and the employer has chosen an appropriate new hire, the employer must also have an Employee Eligibility Verification form completed. You may know this document better as an I-9. It is the employer’s duty to make sure that they are hiring a person that is eligible to work in the US. Then once you have a new employee on board, you must report that you have made a new hire to your state’s New Hire Reporting System.
Another financial implication of hiring an employee is Workers’ Compensation Insurance, which is required. The employer is also required to pay Unemployment Insurance Tax, and in some states Disability Insurance must also be purchased.
These are the basic requirements that an employer faces. In addition to that, employers can offer fringe benefits such as health insurance, retirement, holiday and vacation time, and sick time, to name the most common. In the horse industry other elements may be included as part of the employee’s compensation such as housing, meals, board for a horse, riding instruction, or a vehicle as examples. As a general rule of thumb, employers pay approximately 40% of your hourly rate in taxes, insurance, workers comp, and time off.
In Dollars and Cents
Let’s look at an example to better illustrate how this works out in dollars and cents. Let’s say the employer hires a professional groom for $400/week for a 40 hour week. Let’s say they pay you for all 52 weeks of the year. This includes 10 days off for vacation, holidays, and sick time.
Unemployment taxes (FUTA and SUTA) are paid by the employer. SUTA is calculated first using the rules for your state. FUTA is 6.2% percent of the first $7000 of an employee’s wages. However, the employer can take a credit up to 5.4% for SUTA taxes paid, which can reduce the FUTA tax to as little as 0.8%. In NH the SUTA is 3.7% for a new employer, with rates ranging from 1.1% to 9.5%. We’ll use a middle rate of 5%, and take the credit for FUTA, resulting in 1.2% for FUTA.
Then there’s FICA which is comprised of Social Security and Medicare. These two added together come to another 15.3% and is paid by both employer and employee splitting this, or 7.65% each.
And now, how can we forget Workers Compensation Insurance. Workers Compensation rates vary from state to state, and from company to company. Part of the rate is also based on the employer’s modifier, or whether they have had claims on their worker’s compensation. If they have, the modifier is higher resulting in a higher rate. I called an insurance company here in NH and was quoted $9.38 per $100 of income, with a $1000 minimum.
Last but not least, let’s say your employer is providing you with health insurance. Generally speaking, this can cost anywhere from $45 per month up to over $2000 per month depending upon your age, height and weight, current health, smoking status, location, and the type of policy. For our purposes here, let’s go with $200/month for a single person.
Annual wages $20,800
State Unemployment Insurance 350
Federal Unemployment Insurance 84
Social Security (6.2%) 1,290
Medicare (1.45%) 302
Workers’ Compensation 1,951
Health Insurance 2,400
COST TO EMPLOYER $27,177
$6,377 for these fees plus $800 to cover you when you are taking the paid time off = $7,177 above what they pay you for wages. This is 26.4% of your hourly rate. This example is meant to demonstrate basic employer-paid costs and doesn’t include other perks mentioned previously. You can see from this example that even though you might be thinking, “Why do I only get $10/hour?” the employer knows that you are costing them more than that. In this example you are costing them about $12.64/hour, and with more perks and overtime it costs them even more.
From seeing the basics of what’s involved to bring someone onto the payroll, it’s easy to see why hiring freelancers can be appealing. There is a lot less paperwork to contend with, no withholding, and no benefits. It’s likely that the business owner will compartmentalize some of the tasks, and may rededicate some tasks to someone else that they have on payroll already. So instead of working 40 hours/week for 50 weeks, a freelancer is asked to provide 25 hours for 30 weeks that run across show season. Sure, the hourly rate may be higher, but the amount of time and benefit expense saved may be greater.
Freelancers are considered independent contractors, and as such are self-employed. There are several nuances to this definition. Sometimes business owners may find it more appealing to hire independent contractors because it is easier than having someone on payroll, yet the business owner still wants to direct the work as though they are an employee. This doesn’t meet the definition of an independent contractor. Horse business owners can stipulate the outcome, but not necessarily how or when the work is accomplished when working with independent contractors. For more information about the definition of independent contractors and the nuances surrounding the definition, view the IRS website.
Most professional Grooms should NOT be classified as independent contractors. Some of the reasons include that generally speaking, the stable owner designates work hours and the work to be done. They also typically indicate how they would like the work to be done and provide the tools for the groom to accomplish the work. It’s key to remember that it is not the groom or the employer that decide if the relationship fulfills the definition of an independent contractor – it is the IRS!
To Freelance Or Not To Freelance – That Is The Question
Using a similar example as above, let’s look at this in dollars and cents. You charge $20/hour. You are contracted to work 25 hours/week, 30 weeks/year. You will gross $15,000. You’re thinking, “Wow – I’m already making 65% of what I made as an employee for 1500 hours less. Now I can go find more work to add to my income. If I find another 1500 hours of work, or another 2 clients that also want me to work a total of 750 hours each, that will add another $30,000 to my income, resulting in annual income of $45,000.”
Okay, as appealing as it can sound to earn $20/hour and be your own boss, there is the other side of the coin. You’ll be responsible for paying quarterly self-employment taxes, providing your insurance, and earning enough so that you can take sick time when you need it and a well-deserved vacation.
Social Security is 10.4% and Medicare is 2.9%, though that is a reduction for 2011 and 2012 and is likely to return to a total of 15.3% in the future. Since you are no longer covered by Workers Comp, you will want to consider Disability Insurance. These rates can vary from 2 percent to 2.5 percent of annual salary for a male, and 3 percent to 4 percent for a female. And take a close look at what the benefit pays – it isn’t 100%, but it does keep something coming in while you are unable to work.
Social Security 5,580
Health Insurance 2,400
Disability Insurance (4%) 1,800
Income after these costs $33,915
So now you’re looking at these figures and thinking you should definitely be a freelancer. Freelancing is not for everyone. It is a more volatile work environment, in that you have to go and find your work. What happens to the scenario above if you can’t lock down 3 horse business owners that want you for 750 hours each year? Being hired as an employee does provide more job stability in terms of having a set number hours each week, so you know what you are making and what benefits are included. Being self-employed can work well for someone that is self-motivated, a good sales person, has a business head and recognizes that amount of paperwork and bookkeeping they are taking on for themselves. As a freelancer, after all, you are now running your own business. So that means not only do you need to produce the income, but you also have the other responsibilities that go along with running a business: determining your rates, providing a contract to those that contract for your services, paying your federal and state income tax fees, shopping for reasonable health and disability insurance, considering your retirement plans, understanding marketing and sales, focusing on a niche market, customer service excellence, planning for contingencies and unexpected circumstances, tax planning and preparation….you get the idea. This is a personal decision that should be made with due consideration and not just because you had a couple bad days at work.
There is also one major point to remember here – just because you want to be a freelance groom, and even if both you and a trainer or manager agree to this, the IRS, DOL, and state regulatory agencies may disagree. That is true even if you have a written contract!! Freelance grooms typically do have multiple clients (barns and trainers) they work with, they supply their own tools, and are often specialists. A great example of a true independent contractor in the horse business is a braider who works with multiple clients. Other examples include Farriers and Veterinarians.
I’ve Made Up My Mind – I’m Going For It
Whoa Nellie! A good tool to use when you’ve gotten to this point is to compare pro’s and con’s. Not just in your head either. We fool ourselves when we don’t put in on paper. You don’t need to write a novel, just make two columns – one for the pro’s and one for the con’s. The write down everything you can think of for each scenario, employee or freelancer. And then ask your friends and colleagues their thoughts and ideas too. They may surprise you and bring up some you haven’t considered. After weighing pro’s and con’s, look at the finances. I mean really look at them.
DON’T simply project the best case scenario when you are looking at the freelance piece. Project Best, Worst, and Mid-range. That way you’ll have a full understanding of reality. It can be easy to think you want to work for yourself – it is another thing entirely when you haven’t had any work for 2 weeks and are an introvert that isn’t comfortable selling yourself.
Which brings up marketing. If you aren’t enthralled with marketing in a general sense, you’ll need to hire someone to help you as you get established. It turns out that there are plenty of marketing people available that you can hire as independent contractors. Be sure to understand what they are offering you, what you will get, and what it will cost you. Ask for an agreement in writing. OR if you do like marketing (even though you may not know much about it yet) you’ll need to schedule enough time in your week to explore this and implement what you decide on. Keep in mind that marketing is the single largest issue that any small business deals with over the course of their business life.
And a word about contracts. Yup, I believe in them. And just as much as you would ask another professional to provide you with one, you should also have one that you provide to those that hire you. Contracts help to provide common understanding from the very beginning. Know what you can be flexible about and what you can’t. Make sure you run your contract by an attorney so that you have a full and deep understanding about what this document actually means. And then make sure that you use it! If a potential client hesitates to sign, ask why. It may a simple matter that you can clear up and resolve. Or it may be that this person won’t sign one no matter what. That is a client that you probably don’t want.
A Perfect Life
Is life ever perfect? No. But it sure can be pretty darned close if we follow what works best for ourselves individually. Some of us are better suited to work as employees, and some as their own boss. Many times it’s an evolution that begins by working for others and then making the decision to go it on our own. In the final analysis, be sure you’ve given deep thought to all sides of the coin.”
Thank you Lisa!! You have shed major light on what employers and Grooms need to understand about hiring. I want to also take this time to remind everyone that just because you call yourself and independent contractor and conduct yourself in this manner, if the IRS disagrees both you and your client can be in some super hot water. It’s up to Employers and Grooms alike to understand the rules – and for the most part, Grooms are NOT independent contractors. Grooms (with rare exception) are hourly employees!
Lisa Derby Oden, MS, has been involved with horses throughout her life. Early in her career, she owned and operated a riding stable and worked as freelance riding instructor, and brings that practical experience to her consulting practice. Blue Ribbon Consulting focuses on business and association development primarily in the equine industry where she provides businesses with evaluation, planning, and marketing services. Oden has received state and national honors for her work in the equine industry. She has also been a nonprofit founder, board member, and executive officer for local, state and national organizations. She has worked with nonprofits in strategic planning, program development, corporate development, fundraising, grantwriting and grant administration. Oden has served as adjunct faculty and guest lecturer at several universities, and has delivered business development, marketing, and leadership seminars throughout the United States. She also developed and oversaw the Entrepreneurs Resource Center for a community college. Oden has published two books, has also been a columnist and freelance writer for trade publications, and is a partner in the “Inventing Your Horse Career” CD series.
You can find Lisa on her facebook page here.
Lisa Derby Oden, Professional Equine Grooms, LLC and Liv Gude expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this article.