What's in a Title

When it comes to being a stylist, you are either an independent contractor, self-employed business owner, or employee. Over the years, the beauty industry has come up with several different types of worker classifications that are not legal and result in misclassification, which, essentially, is felony tax evasion.

The general rule of independent contractors is that salon owners do not have the right to control what and how results will be obtained. If the salon owner controls the services you perform, you are not an independent contractor. This applies even if you are given freedom of action. For instance, if the salon owner lets you set your schedule but requires that you get their approval first, the salon owner controls your business. What matters is that the salon owner has the legal right to control how the services are performed.

If you are a business owner or an independent contractor, who provides services to other businesses, you are generally considered self-employed. Another example in our industry would be someone who rents a booth or suite. They are their own individual business that happens to be doing business under the same roof as other businesses. The significant differences are that these business owners often pay the salon owner rent to occupy space to operate their business, and they are paid by their clients directly.

Under common-law rules (established by the IRS), an employee is anyone who performs services for an employer (salon owner); the salon owner has the right to control what will be done and how it will be done. The salon owner is essentially concerned with how the stylist performs their job and controls various aspects from when the stylist works; who their clients are; what services the stylist performs; how much the stylist charges for services, and how the stylist appears to the clients and when stylists are paid.

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The Misconceptions of Contractors

Over the years, salon owners have taken terms from other industries and tried to apply them to the beauty industry to get out of employee expenses. Here are some of these misconceptions explained:

General Contractor

A general contractor is a person or entity who signs the contract for a big project. They are in charge of hiring all of the subcontractors and suppliers for the project. It is an individual, partnership, corporation, or other business entity with the overall responsibility for successfully completing a project using its own forces to perform or supervise part of the work. General contractors are usually found in the construction industry and are hired to oversee the construction of a hospital, skyscraper, school, etc.

A new bride feels overwhelmed with everything that goes into planning her big day, so she hires a wedding coordinator to oversee all the aspects of the wedding. The wedding coordinator would be a general contractor. The wedding is a big project that the wedding coordinator has signed a contract to be responsible for ensuring that it goes off without a hitch. She will be in charge of hiring and overseeing subcontractors, who will complete various wedding aspects.

Subcontractor

The general contractor, however, rarely does all the work. The work that remains is performed by subcontractors, who are under contract to the general contractor. They are individual businesses, which are specialized, like an electrician or plumber. In turn, subcontractors may hire their own subcontractors to do part of the work they have been contracted to perform.

In the instance of our bride’s big day, the wedding coordinator (general contractor) will contract with a florist, baker, venue, salon, and many other subcontractors who will contribute their specialty to the big day. The florist may also contract with a specialty distributor to bring in specific roses that the bride has requested.

Independent Contractor

Independent contractors are in an independent trade, business, or profession where they offer their services to the general public. The IRS and many states have adopted common law principles to define an independent contractor. The common law principles focus on the level of control the employer has over the worker. This means the employer has a say in how the end results will be accomplished. Independent contractors are professionals who are hired to complete a job or service; the concept is that as professionals they are to be trusted in the method they chose to complete the job or service and do not need direction or supervision from anyone else.

In reference to our bride’s big day, the wedding coordinator has contracted with your salon to perform services for the bridal party on the wedding day. However, part of your contract is to provide makeup services to the party, but your salon does not offer those services. As the salon owner, you reach out to a local makeup artist who has their own business and does not regularly show up to your salon to offer services to the public, come in, and do makeup for the wedding day. The makeup artist will be free to fulfill their part of the contract without direction from you, the salon owner.

As the salon owner, you will schedule your employee stylists to do updos on the bridal party and then pay them either an hourly rate, commission, or whichever is higher. If you have booth renters, you can negotiate a contract with them to help provide services on the big day; they would be considered your subcontractors. The booth renters should be paid individually, preferably by the clients, because they are self-employed business owners.

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Why Does It Matter?

The reason all these matters is misclassification. According to a conservative estimate by the U.S. Department of Labor 25 years ago, ten to thirty percent of all employers misclassify their employees. Since that time, the prevalence of misclassification and employers paying their workers in unreported cash has skyrocketed. For instance, in New York from 2002 to 2005, data for a range of industries shows that, on average, more than $4 billion in unemployment insurance taxable wages were under-reported due to misclassification each year. Ohio loses an estimated $890 million annually in state unemployment taxes, workers’ compensation premiums, and state and local income taxes.

Misclassified stylists miss out on their right to be paid at least minimum wage for all hours required to be in the salon because of the misconception that ‘commission stylists’ can be paid only commission. They also pay higher income taxes every year than if they were classified as employees; they also are not covered by unemployment insurance nor worker’s compensation coverage.

It is essential to know that self-employed workers are not under the control nor direction of another party; however, employees are. Both types of classifications have their own rights and responsibilities. It is also essential to know that there is no such thing as a hybrid worker - a worker who is an ‘independent employee.’ Do your research; be in the ‘know,’ and end these mystical industry standards that are unethical and illegal.

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Disclaimer: The advice detailed above is for educational purposes only and is not meant to replace a certified tax professional nor should it be construed as legal advice. Readers should seek proper legal and/or tax advice from licensed and/or certified professionals.