I make no claims at being an expert at the difference between being an employee or an independent contractor. However, I have learned enough over my past 40 years in Business and I have been privy to many stories from B2B associates which keeps me abreast of just enough to keep me out of trouble.
I have had the same accountant for almost as much time as I have been in Business and I depend on her and her firm to keep me aligned with the rules and regulations. The one thing I now for sure……don’t mess with the IRS. You may think you are or can get away with “something”…… you WILL eventually get caught.
If you don’t have a good accountant….find one. If you have a Business….you need one. It’s not worth the outcome of NOT following the rules.
To share just one example of what can happen;
Prior to the Beauty Business I was part owner of an Office Supply Business. We had trade shows (just like our Beauty Industry) and we had many Business owner friends whom we would get together with for “table talk” conversation. We would share ideas, keep each other updated on current trends and mostly talk about of Business challenges.
There was an Office Supply Company, we’ll call them XYZ.
XYZ had “employees”. Mostly very dedicated, hard working employees. However, this one time (it only takes once) there was a disgruntled employee who reported them to the IRS because she was asked to work during her lunch hour…just once. There is more to the story….I’m trying to keep it short.
The IRS came in for an audit. In talking to their employees (very happy employees) whom have been with them for years, conversations were very casual. Unknowingly, the employees graciously talked about how they liked working with the Company and how they always took care of them. Pool parties because they offered help during inventory, Gift cards for going out of their way for a client etc. They also “casually” shared how secure they feel in their job because they are so busy….sometimes skipping lunch to get all the deliveries done. Again, all these conversations between the IRS agents and the employees were all very casual, very friendly conversations.
THEN-months after the audit, the Company literally went bankrupt. Why? Because these casual conversations turned into hours upon hours of back pay the Company had to pay for lunches not being taken. For work they didn’t get paid for (although the Employees were very happy with their pool parties etc.). They even got digged for having to pay their employees who got off work, yet may have stayed in the parking lot talking with another employee before they left. Why? Because they were considered still on Company property.
My point is…..it only takes one!
The IRS distinguishes between employees and independent contractors based on the degree of control and independence in the working relationship. The main difference is how the worker is classified for tax purposes, which affects payroll taxes, benefits, and legal responsibilities.
Employees (W-2 Workers)
An individual is considered an employee when the business has the right to control what will be done and how it will be done, even if the worker has some level of independence. Key characteristics include:
- The employer dictates work hours, tasks, and processes.
- The employer provides tools, equipment, and training.
- The worker is paid a regular wage or salary.
- The employer withholds payroll taxes (Social Security, Medicare, and income tax).
- The worker is eligible for benefits such as health insurance, retirement plans, and paid time off.
- The employer must provide a W-2 form for tax reporting.
Independent Contractors (1099 Workers)
An independent contractor is a self-employed individual who provides services under a contract but retains control over how the work is performed. Key characteristics include:
- The contractor sets their own schedule and determines how the work is done.
- The contractor provides their own tools, supplies, and workspace.
- Payment is usually per project or milestone rather than a regular salary.
- Taxes are not withheld; the contractor is responsible for paying self-employment taxes.
- The business issues a 1099-NEC form if the contractor earns $600 or more in a year.
- Contractors are not eligible for employee benefits.
In the salon and spa industry, understanding the difference between employees and independent contractors is crucial for compliance with IRS regulations. Here’s how it applies specifically to salons and spas:
Typical Employee Characteristics in a Salon/Spa:
- Work Schedule: The salon/spa owner sets their work hours.
- Pricing & Services: The business dictates service pricing, promotions, and the products used.
- Tools & Products: The salon/spa provides all tools, products, and equipment.
- Payment Structure: Paid an hourly wage, salary, or commission.
- Taxes & Benefits: The business withholds payroll taxes (Social Security, Medicare, income tax). Employees may receive benefits like paid time off, health insurance, or training.
- Client Ownership: The salon/spa owns the client list and handles bookings.
✅ Example: A stylist works Tuesday-Saturday, uses salon-provided products, follows salon pricing, and receives a commission paycheck with taxes withheld.
Independent Contractors (1099 Workers in a Salon/Spa)
An independent contractor (sometimes called a booth renter) is self-employed and operates as their own business within the salon/spa.
Typical Independent Contractor Characteristics in a Salon/Spa:
- Work Schedule: They set their own hours.
- Pricing & Services: They decide their service prices, accept payments, and manage their own promotions.
- Tools & Products: They supply their own products, tools, and equipment.
- Payment Structure: They pay a rental fee to the salon/spa or a percentage of earnings to the owner. The salon does not pay them wages.
- Taxes & Benefits: They are responsible for their own taxes (self-employment tax, income tax) and do not receive employee benefits.
- Client Ownership: They maintain their own client list and booking system.
✅ Example: A nail tech rents a station for $200/week, sets their own service prices, books their own clients, and handles their own payments. The salon provides only the space, not products or marketing.
Key Differences at a Glance
| Factor | Employee (W-2) | Independent Contractor (1099) |
|---|---|---|
| Work Schedule | Set by the salon | Set by the worker |
| Pricing & Services | Controlled by the salon | Controlled by the worker |
| Tools & Products | Provided by the salon | Provided by the worker |
| Payment | Hourly, salary, or commission | Pays booth rent or keeps service earnings |
| Taxes | Withheld by the employer | Paid by the worker (self-employment taxes) |
| Benefits | May receive benefits | No benefits from the salon |
| Client Ownership | Salon owns client list | Worker owns client list |
IRS Compliance for Salons & Spas
Misclassifying employees as independent contractors can result in IRS audits, back taxes, and penalties. If a salon exerts too much control over a worker classified as an independent contractor, the IRS may reclassify them as an employee.
💡 Salon Owners Should:
✔ Clearly define booth rental agreements to avoid misclassification.
✔ Ensure independent contractors have full control over their business decisions.
✔ Provide a 1099-NEC for independent contractors earning $600+ per year.
✔ Withhold and pay taxes for W-2 employees.
If a salon does not properly categorize its employees in the eyes of the IRS, it can face serious legal and financial consequences, including:
-
Back Taxes & Penalties – The IRS may require the salon to pay back taxes, including unpaid Social Security, Medicare, and unemployment taxes, along with interest and penalties.
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Fines & Legal Fees – Misclassification can result in significant fines. The IRS may impose penalties of up to 100% of unpaid payroll taxes. Additionally, state labor departments may impose their own fines.
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Lawsuits from Workers – Employees who were misclassified as independent contractors may sue for unpaid wages, overtime, and benefits such as workers’ compensation and unemployment insurance.
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Loss of Business Licenses – Some states may revoke or suspend a salon’s business license for labor law violations.
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Audit Risks – Incorrect classification can trigger an IRS audit, which may lead to further scrutiny of the salon’s financial records.
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Damage to Reputation – Public legal disputes and penalties can harm the salon’s reputation, making it harder to attract employees and clients.
To avoid these issues, salons must correctly classify their workers as either employees or independent contractors based on IRS guidelines, which consider factors like control over work, financial independence, and business relationships.
I reached out to my accountant to verify some information I wanted to share with you.
Here are the specifics of my question
- 10 people work in salon
- 3 people are employees
- 5 are independent contractors
- 2 are booth rental
This is her response. Remember this is a certified accountant caring for my taxes since probably 1990.
No-if you are audited , they will consider the contractors employees and assess back payroll taxes. No problem with the booth rentals.
Take this information seriously….why put you or your Business in jeopardy?
I know many of you who are not following these basic classifications. So….I ask you...is it worth it?
CJ Murray, President
