There is such an ongoing issue in the salon industry: Are your workers employees or not? Every salon owner wants to somehow earn a profit, and searches for a way to do so, but some bad practices are common–and they should stop.
The IRS does not care who pays the payroll taxes that are based on wages. The Social Security and Medicare together are 7.65% deducted from the employee, and 7.65% should be matched by the salon owner. If you are self-employed, you are responsible for the entire 15.3%. As long as all 15.3% is paid, the IRS is happy. But they will audit to be sure they’ve received all that is due when there is a chance an employer has not paid their share. How does this happen?
In the struggle to make ends meet there have been some creative allocations of costs and revenues in salons. Things such as “back bar charges” and “amenities fees” and “shared profit” schemes have blurred the lines. The single most common model, however, is the salon tells its employees they are Independent Contractors (ICs), and that they are responsible for paying their own taxes…but then proceeds to control every facet of the way in which the work is performed–basically treats them like employees. They don’t want to pay the employer’s share of the payroll taxes, but they want all the control being an employer permits them. Well, owners, you can’t have it both ways!
EITHER you are an owner and are able to set boundaries and control things like scheduling, and products and hours worked and uniforms (or dress code). You basically control the manner the services are being performed and this means you must pay your half of the payroll taxes.
OR if you don’t want to pay your half of the payroll taxes, then you don’t get to be the boss. Your best bet is to become a landlord and have booth renters and function as if you are a mall and all your booth renters are individual businesses in the mall. They will have to go along with mall hours and obey the rules of the common areas, but for the most part, they have complete autonomy in how they run their businesses….and ultimately they control the manner in which the work is performed.
“But my employees are Independent Contractors!” one salon owner stated. First, let’s just address that the owner even calls them employees indicates the mindset of “I am your boss and I am in control.” If that’s how you feel, fine! Be the boss and be responsible for your own product costs and for your share of the taxes. Passing along the costs of doing business like back bar fees and credit card fees is unethical. It’s your business…you need to bear the burden of your costs yourself. Set up a fair wage payment plan that allows a profit to you and a fair wage to your staff members.
Second, there are very rarely true examples of Independent Contractors (ICs) in the salon industry. An IC has the ability to work more than one location (and demonstrably does so.) An IC comes in to perform a specific task that others in the salon are not performing. An example would be a lash artist that comes in 2 days a week. Or a massage therapist that is on call. In these cases, the owner may not set hours, dictate product, require uniforms, control products that are used, etc. These workers are contracted, not employed, to perform tasks that are not integral to the main business offering of the salon.
If you don’t want to pay your half of the payroll taxes, then you don’t get to be the boss…
The IRS has Form SS-8 which breaks down the issues used to determine the status of an employee: some general information is considered, behavioral control, financial control, relationship of the worker and the business and specific questions about sales activities. You can download and submit it to the IRS for a ruling to make sure you’re doing things right–or a worker can submit because they want to know if they are being treated fairly.
This specific scenario has in recent years become a prime IRS audit are of interest. Many salons have told their employees they are ICs and wouldn’t pay the payroll taxes, but treated them exactly like employees. All it takes is for a salon to be reported and an audit will ensue. These salons are billed for past years’ taxes on all employees, penalties and interest, and the employees can file for a refund of the employer’s share of payroll taxes they paid. More than one salon has been put out of business by this. Don’t let it happen to you.