The IRS commonly will target a few industries to create precedent in how a particular tax item is treated. In this case, the IRS has targeted Beauty Industry companies that have Independent Contractors. The IRS has set a pretty high standard of what works and what doesn’t for Independent Contractors. If you’re not in this particular industry, it doesn’t mean you can ignore the important case law being handed down. That’s because the very decisions that are made here might be applied to your business as well.
In the case of beauty salons, the IRS has stated that very few people working as hair stylists or nail technicians actually are Independent Contractors. Generally speaking, there are two forms of workers inside a salon:
- An employee
- A booth renter
In the case of an employee, the salon collects money from customers and pays a percentage or an hourly wage to the employee. In the case of a booth renter, the booth renter collects money from customers and pays rent to the salon.
Salons give a Form W-2 at year end to employees. Booth renters give a Form 1099 to salons at year end.
Employers withhold taxes and pay payroll taxes. Booth renters are not required to withhold taxes or pay payroll taxes on the rent.
The difference between the two all comes down to control. Who books the clients? Whose clients are they really? Who controls the money? And one more thing, a booth renter must have a key to the business, proving that he/she can access the building according to his/her own schedule.
You would have an employment contract with an employee but a rental agreement with a booth renter.