As many of us are now getting the various forms and statements we need pulled together to file our tax returns, here are some things to keep in mind.
The IRS and state labor boards only recognize two categories of worker: You are either an employee…or you are not. That’s it! Very simple!
The IRS does not care if you are an employee or not. They also don’t care what type of non-employee worker you are (booth renter versus I/C). They just care that they get the full amount of taxes owed:
15.3% of all earnings is due in Self-Employment taxes for those who are NOT employees – to be paid by the worker on their individual tax returns.
15.3% is paid by withholding 7.65% from an employee’s paycheck, matched by the employer with another 7.65%, and both halves must be remitted on a timely basis to the IRS after each payroll.
That’s it! Very simply put, the IRS wants 12.4% of earnings for Social Security and 2.9% for Medicare or 15.3% total…and they don’t care who pays it! They only care that it is reported and paid. So, who pays?
- IF you are “hired” and “bossed”: told how to perform the services you perform, what products to use, what protocols, your appointments are made for you and you must be there even if no appointments and must participate in various chores and tasks for the behalf of the salon/spa’s business, required to wear a uniform and attend staff meetings, and most telling of all, they PAY YOU, then you are an EMPLOYEE. If your owner walks like a boss and talks like a boss, then by definition s/he is one. In this case THE EMPLOYER PAYS HALF.
- If you are not an employee, then you fall into one of a couple commonly-seen categories of NON-EMPLOYEE working relationships. In this case THE WORKER PAYS IT ALL:
A. If you owe rent for the space you inhabit each week/month, then you are a renter. In this case, you are a micro salon inside the business and you should bear the burden of your own expenses: your products, supplies, marketing, credit card fees and all. If you are paying for these things, then you get to choose how/which ones to pay for. If you have to pay for these things but don’t get to choose, then this is not a legal booth renting set up.
B. You are a true Independent Contractor – though this is actually very rarely a legal situation. There are several rules which dictate exactly what a true I/C is. One of the biggest definitions is that the I/C performs only services which are not the core services of the business. For example, a hair salon may have an I/C manicurist who comes in and performs manicuring services; or one that adds a specialty such as lash extensions or massage. These I/C workers must be free to work in other venues if they choose…they may NOT be treated as employees! Since they are paying for the products they use, they get to choose which ones….and the manner in which the work is performed. To be considered a true, legal I/C situation, a hair stylist working inside a hair salon does not meet the definition. If the salon bills itself as a hair, nail, skin care salon, then it cannot engage I/Cs to come in and do those core services. This is often ignored in our industry, but just because others do it, does not mean YOU should!
OK, now we have the definitions correctly set out…what happens in real life? Here’s a disturbingly common scenario:
You were given a paycheck each week by the salon/spa. Your paycheck did NOT have payroll taxes withheld, but you were “bossed” and treated like an employee. The boss wants your Social Security Number so she can issue you a 1099.
What to do: Have your boss send you an email requesting it in writing along with a form W-9. Fill out the W-9 and send it back, keeping a copy for yourself. (This correspondence might be important documentation later!)
Next, download a Form SS-8 from the IRS website or just fill in an SS-8 online and print yourself a copy. Submit it, along with the 1099 your boss will send you, to your CPA and ask them to please file this with your tax return. If you meet all (or most of) the criteria on that form as an employee, the IRS will look to your employer for 7.65% of your wages in payroll taxes, and you would be eligible for that same 7.65% as a refund.
This may take several months to process…but think of it this way…for every $1000 they paid you in paychecks, $76.50 should have been paid on your behalf to the IRS by the employer. If you made, say $50,000, then $3,825 in payroll taxes should have been paid by your employer…not you!
This information is not meant to replace the advice your CPA or a good employment attorney could give you. It’s meant to open your eyes to the rampant misclassification of workers that happens in our industry.
If you are a salon owner who has this set up for your books, be aware that salons and spas are now on the radar with the IRS. They are happy to hit your business up for 7.65% of all the wages you have paid all your “I/Cs” over the last 3 years…along with penalties and interest, of course. Can you afford that?