Saturday, February 27, 2010

Could we use independent contractor stylists?

When we were doing the research for opening our own salon, we looked at the options for paying stylists. Most salons in our area pay on commission. As we did our research, we were a bit shocked to find that in most salons around 50% of gross revenues go to pay salaries, commissions, and payroll taxes.  
This, and other factors discussed in my post called "Is a franchise salon really for us?”, caused us to decide against the franchise option for our salon.

The potentially significant cost of payroll taxes has led many salon owners to attempt to designate their stylists as independent contractors rather than employees and issue them a Form 1099 at the end of the year instead of a W-2. The logic behind this is that business owners do not have to pay payroll taxes for independent contractors, only employees. However, there is potentially a huge risk being taken. If audited and the IRS determines that the stylists are employees and not independent contractors, a business owner can be penalized up to 75% of payroll taxes owed. If you have several stylists, that could be a huge penalty on top of still having to pay the taxes owed. See my post called “Stylist as Employee vs. Independent Contractor” for more information on the differences.

For the salon to effectively handle walk-in traffic, we needed predictability in stylist schedules, thus leading to specific hours for most stylists. Also, we wanted to provide some training and establish at least a basic dress code. After all, each stylist represents the salon and us.

The overall effective management of salon operations made the argument for independent contractors very weak. Specifically, we did not want each stylist using and selling a different product line. We had a central telephone number and one receptionist that handled appointments. Finally, payments for services were made at a central location and deposited into the company account.

It was very clear that independent contractors would not work for our salon.

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