It is wonderful to see the travel agency industry growing. Newcomers
are realizing that being a travel advisor is a viable career with rewards and
the ability to earn some good money. The new professionals entering the
industry are passionate, entrepreneurial, competitive, technology-savvy, and
possess strong marketing skills. For many, the fastest way into the industry is
as an independent contractor. However, before you dive in, it pays to
understand a few fundamentals of the travel business.
Before reading further, know that this article aims to
enlighten new-to-the-industry entrepreneurs about basic business models for
setting up a travel business, particularly the tax and financial implications.
If you already run a traditional agency or host agency, you have already
addressed some of these things. However, I will say that even if you are not
new to this, the advice on contracts and compensation plans is pertinent and is
something agency owners continue to grapple with all the time.
This article is a starting point - not a substitute for
legal and tax advice.
Agency owners running a storefront agency, a remote
workforce, or a host agency should consider the tax and financial implications
of choosing a business model that makes sense for you and makes you money.
First, your tax obligations will depend on whether you issue
1099s or W2s at the end of the year. Independent Contractors receive 1099s and
are responsible for paying their employment taxes, often by making quarterly
estimated taxes. Employees receive W-2s, and the agency is responsible for
withholding the employee share of taxes and paying the employer share,
remitting these payments quarterly to the IRS.
For W-2 employees, your compensation model will be based on
salary, hourly wages (especially for part-time employees), salary plus
commission, half salary and half commission, bonus-based, or commission-only.
For 1099 independent contractors, compensation will be a
commission split of varying percentages. 50/50, 60/40, 70/30, 80/20, 90/10,
100% to the IC who pays a fee for services provided by the host agency. Many
factors come into play in commission splits. Does the contractor produce mostly
high-margin business, luxury, FIT business, and sell groups? Does the
contractor bring high-net-worth clients to the agency's portfolio, thereby
attracting suppliers' attention and benefiting the agency with relationships it
might not otherwise have? Is the person generally self-sufficient - in other
words, do they use few of the agency's resources?
When must you pay an
employee time and a half for overtime work? This depends on whether an employee
is classified as exempt. The Fair Labor Standards Act (FLSA) under the U.S.
Department of Labor defines what constitutes an exempt or non-exempt employee.
Salaried employees in professional, executive, or administrative positions may
be exempt from time-and-a-half pay. Seek advice from your attorney so you don't
run afoul of misclassification.
As for benefits, W2 employees seek a range of benefits from
paid vacation and sick days to group health insurance plans. There are many
other benefits companies offer employees, but I think these two are the most
important. I am not going to get into more specifics about benefits, but the
main point regarding benefits in this article is cost. Health insurance, paid
time off, payroll taxes, unemployment insurance, etc., average 30% of an
employee's salary and wages.
This cost is not a factor in IC relationships. Independent
Contractors cover these costs. Some companies may offer the IC the option to
participate in the company's health insurance program, but the IC covers 100%
of the cost. Before offering access to the health insurance plan, check with
your attorney to avoid IRS and state employment laws regarding the sometimes blurred
lines between who is an employee and who is an independent contractor.
Contracts between employers/host agencies and their 1099
independent contractors, and between employers and their W-2 employees, are
vital. Don't operate a travel agency without these documents in place with the
people you contract or employ. An agency owner should consider entering into
contracts with their W-2 employees. This may not be common in the industry, but
why not?
Contract templates are available through ASTA and several
travel industry attorneys.
Employee and Contractor handbooks that define company
policies, business ethics, and philosophy on treatment of clients and customer
satisfaction should also be in place.
Building a travel business - whether as an independent
contractor, a W2 employee, or an agency owner - comes down to understanding the
fundamentals. Clear contracts, fair compensation, and a solid understanding of
tax obligations are essential. Align yourself with professionals such as
attorneys, accountants, host agencies, consortia, and, of course, trade
associations such as ASTA. Doing so will lay the foundation for a thriving and
profitable business.
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