Stylist as Employee vs. Independent Contractor

Many salon owners desire to designate their stylists as independent contractors rather than employees in order to avoid paying payroll taxes. In some instances this may be permissible, but owners should be very sure before doing it. If the Internal Revenue Service (IRS) determines that the stylists are employees and not independent contractors, the 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.

IRS Publication 3518 provides specific tax guidelines for the beauty and barber industries. For the purposes of this post, I will take the perspective of a salon owner, but the same guidelines apply to a barber shop, spa, or any other service oriented business within the personal appearance industries.

What makes an employee?

There are a number of factors that could make a stylist qualify as an employee, but here are some of the most common: (1) the stylist works hours established by the owner, (2) the salon has a dress code, (3) the owner determines the product line and provides products and supplies for stylist use, (4) a salon employee or owner handles appointments for the stylist, (5) the owner processes sales and manages payments for stylist provided services, (6) the owner provides training to the stylist.

What makes an independent contractor?

There are also factors that could indicate a stylist is an independent contractor and not an employee; here are some of those: (1) the stylist sets her own operating hours, (2) stylist has her own key to the salon and is free to come and go as required, (3) stylist provides all products and supplies she will use and determines her own product line, (4) stylist has her own phone number, (5) stylist makes her own appointments and builds her own client base.

What about booth or chair renters?

Even booth renter arrangements can run into problems if not properly managed by both the renter and the owner. Arguably the most important item to keep the arrangement clear is to have a signed lease. Within that document, ensure there are no factors that could imply an employer/employee relationship; all the factors of an independent contractor should apply to a renter. In addition, the owner should provide the renter with receipts for all rent payments and any product or supply purchases. The renter should issue a Form 1099-MISC to the owner indicating the rent paid for the year.