IRS Targets Beauty Industry Independent Contractors


This post is in: Business
7 Comments

3-17-11

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.


7 Comments

  1. dennis miller says:

    I’m an owner of massage establishment in Honolulu. I pay my staff as employees, because a staff from the state UI office told me to, about five years ago. However, none of my competitors do. The nicer spas all pay massage therapists as employees, but all the $60 per hour massage establishments pay as independent contractors. I’m wondering if I can make a contract to rent my tables to the therapists, on the same model as beauty salons. If you have any thoughts, please let me know. I do set the price, I do set the pay, i do provide the equipment; linens, oils. But, perhaps, i could work the cost of the equipment into the rental agreement??

  2. Mary Lupacchino says:

    Hello,
    I also appreciate your information, but I just talked with the IRS on Monday 2/6/2011 and they did say that a KEY does NOT have to be given to a booth renter. It is only an “indication” that they might be. I was employed for years and I usually always had a key,It was a trust issue, but I was an employee. Many people have keys to a business, but that does not make them a “owner of their own business” The IRS also said that I DO NOT have to allow them to retail their products. That is my own preference. In the end it is my reputation and clients can come back on the Salon owner for anything. That goes with them having a key. It is a HUGE liability on my part when I am not able to be there 24/7 They DO HAVE to work with in the hours set from the business. Meaning they set their hours “with in” those hours. All this is to be stated in contracts (which I have also on Monday looked up) and since I was under this impression from information I purchases from Ken Lange and other articles, I will be changing my contract. 1099 forms are also required for the renter to give the owner. If they don’t the owner can still do their taxes w/o it. The owner only has to give them one if they were given funds over $600 for things like sold retail ect.

  3. Julie says:

    Hi Diane, you are very informative. I am sure you do not want to give incorrect information so you may want to edit “a booth renter must have a key to the business.” According to the IRS, having a key is only an indication of status, it does not determine it, nor is it a prerequisite for it. I am a salon owner and have been put through an audit. Rest assured, my booth renter did not need a key, only access to the building during times specified in the contract. My employee did have a key- that did not make her an independent contractor. One factor alone, in this case, does not determine status.

  4. Diane Kennedy says:

    Jason, I actually talked to one of the head analysts at the IRS in DC on this very issue. At this point, the IRS is not viewing MLM as anything other than independent contractors or hobby loss. (Actually hobby loss is the biggest tax hurdle for MLM start-ups)

  5. Jason says:

    Does anyone have thoughts on how this could affect the network marketing industry down the line?

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