Updated: Nov 1, 2022
About the author:
LeeAnn Miley is a salon owner based in Hastings, Nebraska, and the President and Executive Director of The Sovereign Stylist. Her personal experiences led her to advocate and educate stylists on proper worker classification. LeeAnn’s blogs are typically focused on tax compliance, worker classification, and general business practices. LeeAnn believes that laws and business are powerful entities when one has knowledge of them and has dedicated herself to spreading such knowledge to the industry she loves.
“1099-NEC replaces Form 1099-MISC for reporting nonemployee payments.”
Starting with tax filing year 2020, you are going to see what you might think is a new form from the Internal Revenue Service (IRS), the 1099-NEC. This form has actually been revived from 1982. Essentially, form 1099-NEC separates out payments to nonemployees (Line 7 of Form 1099-MISC), and Form 1099-MISC is getting some upgrades as well. For instance, the box numbers on form 1099-MISC have been rearranged for reporting various forms of payment.
Warning: The 2020 Form 1099-MISC and the 2020 Form 1099-NEC are to be used for reporting payments made in 2020 during the 2021 tax season. Do not use these forms for reporting 2019 payments during the 2020 tax season. Use the 2019 version of Form 1099-MISC to report 2019 payments to nonemployees.
NEC stands for NonEployee Compensation, which may seem clear as to who gets one of these forms, but it is not that cut and dry. The IRS requires that 4 requirements be met when determining if payments should be reported using form 1099-NEC:
It is made to someone who is not your employee;
It is made for services in the course of your trade or business;
It was made to an individual, partnership, estate, or, in some cases, a corporation; and
The payments made to that payee were at least $600 or more for the year
Some examples of payments you must report on Form 1099-NEC include:
Professional service fees to attorneys (including law firms established as corporations), accountants, architects, etc.
Fees paid by one professional to another (fee-splitting, for example)
Payments for services including payment for parts or materials used to perform the services if they were incidental to the service
Commissions paid to nonemployee salespeople not repaid during the year
You must also file Form 1099-NEC for anyone from whom you withheld federal income tax under backup withholding rules for any amount, even if it’s less than $600.
Who is a Nonemployee?
The major reason for not issuing stylists a tax form 1099-NEC is because they are not your employee. However, there are several factors the IRS takes into account when determining whether a stylist should be classified as an employee, an independent contractor, or considered their own independent business.
According to Section 530: Definition of the Employer-Employee Relationship for Federal Tax Purposes, “One of the most confusing and difficult concepts to understand in federal tax law is the dividing line between employees and independent contractors. Nonetheless, this distinction is critical for numerous reasons, including, but not limited to, whether a person paying a worker is liable for withholding and remitting Federal Income, Social Security, and Medicare taxes from the worker’s pay, how certain fringe benefits should be taxed, and the right to deduct certain kinds of expenses.”
The usual common law rules state that if an employer has the right to control both the ends as well as the means by which the worker performs his or her services, the worker is an employee. The existence of the employer’s right to control is critical; the exercise of that control is not. Thus, the Treasury Regulations state that, “it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. What does that mean for the salon world? Essentially, if the salon owner has the right to show any control over the end result, the relationship is employer-employee.
The IRS used to utilize The 20 Factor Test when determining the classification of a worker, but in 1996, the IRS reorganized the twenty factors into three broad categories: behavioral control, financial control, and the relationship of the parties.
Behavioral Control: The facts of the working relationship which determine whether there is a right to direct or control how the stylists perform the specific task for which they are engaged. The following are examples of behavioral control in a salon setting, but not a complete list:
Clients make their appointments through the salon, not the stylist directly. This is the salon owner controlling who receives services by whom.
The salon owner requires stylists to offer specific services to clients whether they are adequately trained or not. This is the salon owner controlling what end results can be achieved.
The salon owner sets or approves the stylist’s work schedule. This shows control over when the end result will be achieved.
The salon owner requires the stylists to attend mandatory meetings/training or requires the stylist to complete a “probationary” period before officially being allowed to operate on their own. This indicates that the salon owner has preferred methods on how they want end results to be achieved.
Financial Control: The facts that illustrate whether there is a right to direct or control how the business aspects of the stylist’s activities are conducted. Indicators of financial control may include:
Clients pay the salon owner and not the stylist directly. When clients pay the salon and not the stylists directly, the salon owner is showing financial control because they are the ones in charge of the exchange of money.
Requiring the stylist to use specific brands or shop at certain stores. Some salon owners want a cohesive vibe in their salon and will require that all stylists use the same products, this indicates that the stylist is not in control of what their money is spent on. Another thing that salon owners will try to do is require all stylists to purchase their supplies from the same supply store because they receive a discount, once again, the stylist is not in control of the business aspects of their activities.
The salon owner provides products, tools, and other amenities. The more a salon owner provides, the less investment the stylist is making into their own business.
NOTE: This would also fall under behavioral control because the salon owner is determining what products and brands are being used by the stylist.
Relationship of the Parties: The facts that illustrate how the parties perceive their relationship. Some of these facts might include, but are not limited to:
The stylist is on the salon’s regular payroll. Being paid at regular intervals, by the salon, indicates that there is a continuing relationship between the owner and the stylist.
The stylist regularly shows up to the same salon to work. This also indicates a continuing relationship.
The salon owner offers insurance, vacation time, pays a commission on salon retail sold, and/or investment opportunities. These are all benefits offered in traditional employee environments.
The stylist is required to sign a non-compete or non-solicit agreement. By signing these forms of contracts, the stylist is agreeing that they are an integral part of the salon.
Warning: The existence of a contract and its wording isn't proof of worker status. The IRS considers a contract as just one factor in its decision about a worker's status.
How to Fill Out and File the Form
Payer’s information: Name, address, and taxpayer ID
Recipient’s information: Name, address, and taxpayer ID (You will need to issue a form W-9 to get the taxpayer ID)
Box 1: For nonemployee compensation, if you paid this person $600 or more during the year
Box 4: For any federal income tax withheld, though it’s not usual to withhold income taxes for nonemployee payments, unless you have received a backup withholding order for that person
State information: If your state has an income tax, include the total payment amount to that person for the year and any state tax you withheld
Form 1099-NEC must be given to nonemployees by January 31, the year after the reporting year. For example, you must give 2020 forms by Feb. 1, 2021 (because Jan. 31, 2021, is a Sunday). The forms must be filed with the IRS before Feb. 1, 2021, using either paper or electronic filing. If you file electronically, you’ll need to use the IRS FIRE system.
Form 1099-NEC is rather simple to fill out on your own, the difficult part can be determining who receives the form.
Disclaimer: The advice detailed in this blog 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.