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Full Version: Clearing up the employee/independent contractor conundrum once and for all
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I thought this information was worth sharing, and I hope it helps anyone who might be confused. There seems to be a common misconception on this forum that there is no such as thing as an independent contractor in the salon industry and that there are either booth renters OR employees and "salon employee" automatically means that the salon is paying you a set wage, and paying your taxes, insurance, etc. That is not true. Over the past couple weeks I've been talking to an attorney and the IRS to determine if my position at a new salon is legal, and unfortunately, it turns out there are not a lot of rules about what a salon owner HAS to provide for you. I was kind of upset to learn that everything "shady" I thought this salon was doing is completely legal and IRS compliant. I guess it is just not a good fit for me and the way I like to work, and hopefully this info can help anyone else who is on the fence about this kind of thing to make a decision.

According to the IRS agent who was assigned to help me, here is how they define the different types of salon workers in 2013:

Employee: Paid at least a minimum wage per state requirements for all hours worked (note, that is STATE requirements, and unfortunately state wage requirements can still undermine federal minimum wage requirements). Business is responsible for paying taxes for employee, and providing any insurances required by state law (this includes social security, workers compensation and unemployment insurance, and any industry required insurances). Minimum wage may include commissions and tips, and hourly wage may be lowered accordingly, even less than minimum wage depending on state laws. (similar to restaurant servers).

Independent contractor: This category is actually where most salon "employees" fall. You are not paid a regular hourly wage, but paid according to the type of work or service rendered. Commission-only workers fall under this category. You are still considered an independent contractor if you have a defined work space, or do not travel for your job if: you are not paid an hourly wage on top of commissions earned and you are responsible for cultivating your own customer base within a larger business. You are responsible for paying taxes on income earned and providing your own insurance and any tools/supplies required to conduct business. You are exempt from company policies that govern the business and their employees (this includes hours of operation, dress codes, etc), unless outlined in a signed contractor agreement. (similar to real estate agents).

Booth renter: You enter into a lessee/landlord relationship with a salon owner according to state/city property laws. The salon worker is considered a self governing and separate or partnering business within an established business. You are exempt from all company policies that govern the business and their employees, unless outlined in a signed lease agreement.

Also, its worth noting that in my research I also learned that in most states a business is not required to pay employees the federal minimum wage if the companies earnings in the last tax year were less than $500,000. And unfortunately, that probably applies to most salons.
wow, that last paragraph is an eye opener!
There are still enough variances state-to-state that make this information, as good as it is, NOT the once and for all answer! For instance, in Washington, the tips can't be counted as part of the minimum wage requirement, so even if an employee is straight commission you have to guarantee minimum wage (I believe it's $9.04/hr here) and you can't count tips. If they work overtime you have to give them time and a half, not including tips. Also, I don't believe the IRS's definition of an independent contractor would fly here, the state law supersedes the federal law and WA business' have to adhere to both - there are more qualifications for WA than what the IRS guy told you. The booth renter info is correct for WA, though. Smile

I don't know if it's still the same, but when I lived in Idaho a business could pay the state minimum wage (less than Federal) if they ONLY did business in Idaho, regardless of the earnings. That was a long time ago, so it might be different now.
You're right Candice, and that's exactly what I saidWink "employees must be paid at least minimum wage PER state requirements" and "minimum wage MAY include commissions and tips ... depending on state laws". and "unfortunately state wage requirements can still undermine federal minimum wage requirements". LOL. Under Independent Contractor, I guess I should have said "commission only workers MOST LIKELY fall under this category".

Also, the IRS is a federal organization, their rules for employees vs independent contractors apply to ALL states. Obviously there is more to their rules than what I listed, there can be exceptions and special circumstances. I was just giving a brief summary as it applies to working in a salon since it seems we have all had it drilled into our heads that if you are not a booth renter you are automatically an employee and entitled to wages, benefits, etc). I wanted to let everyone know that it is possible to be an independent contractor working in salon, and in fact it is probably more common than being an actual employee since MOST salons do not pay an hourly wage on top of commission unless required by their state. Every state has their own labor department that governs their wage requirements and labor laws, but the IRS decides who is an employee or contractor or booth renter and they do not have different rules for different states.

Another thing I forgot to mention in my original post (though it was implied)... in states where the business isn't required to pay any minimum wage the general deciding factor in determining employee vs contractor is the amount of control the business has over the worker. If the services performed can be controlled or regulated by the business, the worker is generally going to be considered an employee, even if they are working for commission only (ie the salon owner tells you what products to use, or what hours you can work). And while they still may not be entitled to a minimum wage, the business is responsible for paying taxes on the employee and providing workers compensation and unemployment insurances. This is what we determined in my situation... my salon owner was calling me an independent contractor, paying me commission only, and requiring me to pay my own taxes. However, they are requiring me to work within an hourly schedule set by them, and regulating where and how I can advertise and market myself. Since I have never signed a written contract agreeing to any of that, I am considered an employee by the IRS. However, had I signed a contract agreeing to follow these rules AS an independent contractor, I could've forfeited my rights as an employee.

Sorry that post turned out so long! LOL.... I just want to make sure I'm detailed incase I can help someone avoid the huge mess I've been dealing with for the past couple weeks!
I spoke with the Tax Office locally and they advised me that I could not work as an Independent Contractor on commission for a salon as I didn't pass the questionnaire.

http://www.esd.wa.gov/uitax/taxreportsan...actors.php

An Independent Contractor must perform a business that normally isn't performed withing the salon.
There needs to be an end date of being an Independent Contractor. They need to write on paper when my contract is up.
I must be free from direction and control over the performance of the service.
...plus all the other things listed on that webpage.

She told me that I could only be a booth renter or employee.

A contractor get s a 1099 tax form from the business they are working for. A booth renter gives a 1099 tax form to the salon they are working for. She said that salon's are doing the Independent contractor thing to avoid paying taxes.

Now, I could look past all these things and still work as an Independent Contractor but if they business gets audited, they have a good chance of being found out and having to pay taxes to the IRS for the money they received from me based on commission. Or, I could tell the IRS that I feel I was treated as an employee, not Independent Contractor and that's when it gets bad. The salon would have to pay taxes on my wages and quite possibly end up having to pay me the difference of working as an employee vs Independent Contractor based on the hours I worked.
A note about Commission workers:

If you are commission only, and the salon pays your taxes, provides customers and supplies equipment and products - you are an employee, not an independent contractor.

If you supply your own materials (polish, etc) even if you use the salons equipment (chairs, tools) and find your own clients, you are independent contractor.

The best thing you can do if someone is tellling you that you are a contractor, is to get a contract in place. You can write your own, pull one from the internet, or use the salon's - but this is the one thing that will safeguard you if you have any questions or issues about your rights or status.

My father is an employment lawyer, and we have discussed this in depth since I am opening my own salon. However, the truth is that the "laws" are very flexible and not definitive at all. There is a lot of and/or questions and it basically comes down to what can be proven - which is why the contract is key.

The IT industry has been a huge focus of the unfairness of contractor laws (my DH is in IT) but nothing has happened to change or fix it. Seems like this is across a lot of industries - too bad the Labor Commission won't address it directly Sad
There is a very informative webinar here

http://www.irsvideos.gov/ProperWorkerClassification/
Melissa, that is exactly why I posted this, because a lot of us have been lead to believe what you were told. In fact, that information had been drilled into my head since beauty school: "you can not be an independent contractor, you are either an employee or a booth renter, end of story". And I see it repeated over and over on this forum. But in fact, you can be a contractor and work within a defined space, you do not have to be providing a unique service, and you can work indefinitely (no contract end date, or at least a contract with the option of renewing at the end of a defined period). This information was given to me directly by the IRS, not a local tax office, and confirmed by an attorney who specializes in labor and employment law. Also, the IRS agent told me that they do not use the questionnaire to determine independent contractor status anymore as there are to many variable, and that they just leave it available to the public as a general guideline.
I feel that as an Independent Contractor they (the salon/spa) can't make you sign a non-compete. I'm sure it happens, but if I'm responsible for my own taxes I wouldn't.
(04-25-2013, 02:05 PM)yeahyeah Wrote: [ -> ]Melissa, that is exactly why I posted this, because a lot of us have been lead to believe what you were told. In fact, that information had been drilled into my head since beauty school: "you can not be an independent contractor, you are either an employee or a booth renter, end of story". And I see it repeated over and over on this forum. But in fact, you can be a contractor and work within a defined space, you do not have to be providing a unique service, and you can work indefinitely (no contract end date, or at least a contract with the option of renewing at the end of a defined period). This information was given to me directly by the IRS, not a local tax office, and confirmed by an attorney who specializes in labor and employment law. Also, the IRS agent told me that they do not use the questionnaire to determine independent contractor status anymore as there are to many variable, and that they just leave it available to the public as a general guideline.
That's really confusing. Why is the tax office telling me this then? Why isn't there a standard around?

Melissa, where the confusion comes in is that, as yeahyeah stated, the State variations come into play on top of the IRS. The IRS rules have to be followed by everyone, then the states can each make up their own additional rules. So while the IRS regs can be stated as true and correct, no blanket statements can be made for all states. Thus the confusion reigns on...
Wonderful! =/ *scratches head*