Note: This blog was updated on 4/7/2024
About the author:
Drawing from her extensive background as both a stylist and salon owner in central Nebraska, and college degrees in psychology and business administration, LeeAnn is passionate about educating fellow beauty professionals on the legalities and business intricacies within the salon industry. LeeAnn firmly believes in the transformative power of knowledge when it comes to navigating laws and business dynamics. With a dedication to empowering her industry peers, she has made it her mission to disseminate invaluable insights and expertise to the industry she holds dear. Join us as we delve into the world of salon ownership, stylist rights, and everything in between!
I see and hear it all the time: “I’m a 1099.” Seeing those three words causes my eyes to roll so far back in my head they get stuck. Let's just get this out of the way now:
1099 is not a type of worker, 1099 is an IRS tax form!
It's a common misconception that "1099" refers to a type of worker, when in fact, it's an Internal Revenue Service (IRS) tax form used to report income earned as an independent contractor or freelancer. It's crucial to clarify this distinction because misclassification of workers can lead to significant legal and financial consequences for both businesses and workers themselves.
First, let's clarify that the IRS has over twenty different types of 1099 forms, plus each individual state has their own 1099 forms. For this article we are specifically referring to the 1099-NEC which is for non-employee compensation typically used by independent contractors to claim their business income every tax season.
Why is it such a big deal when a stylist receives a 1099-NEC? Well, let's break it down. When a beauty establishment owner opts to issue a 1099-NEC to a stylist at year's end, they're essentially classifying the stylist as an independent contractor rather than an employee who would receive form W-2. This distinction carries significant implications, impacting what the owner can and cannot expect from the stylist.
First and foremost, independent contractors operate with a level of autonomy that employees do not. They can't be subjected to dress codes, mandatory meetings, or directives on product usage and techniques. Owners can't dictate their schedules or require them to adhere to set salon hours. Moreover, their choice of payment systems can't be restricted and they can't be prevented from collecting client contact information for future business endeavors.
In essence, independent contractors are not bound by non-compete agreements, nor can they be subject to formal disciplinary actions for behavior the owner deems inappropriate. While the owner retains the right to terminate the contract if the stylist's conduct doesn't align with their standards, owners can't enforce systematic changes or expect the stylist to conform to their preferences.
For more information on the differences between stylists who are employees and stylists who are independent please check out our related article here.
These principles also extend to booth or suite stylists operating within a salon. Understanding the distinction between employee and independent contractor status is vital for both salon owners and stylists to navigate the complexities of the industry and ensure fair treatment and compliance with labor regulations.
In the realm of salon, spa, and barbershop operations, it's essential to understand the distinctions between booth renters and independent contractors. Booth renters typically lease space within a salon to establish their own business presence. They pay for the privilege of utilizing that space regularly and are directly compensated by their clients for services rendered.
On the other hand, independent contractors operate on a contractual basis with the salon owner. They don't have a set schedule at the salon and aren't bound to work there regularly. Instead, they're engaged for specific projects or services as outlined in a formal agreement, and their compensation is determined by the terms of that contract.
For more information on the different classifications of beauty industry workers check out our related article here.
To illustrate, consider a scenario where a salon has a bridal party scheduled for updos and makeup services, but lacks an in-house makeup artist. In such a case, the salon owner can reach out to a local makeup artist and negotiate a contract for the provision of makeup services for the bridal party. This arrangement allows the salon to meet the client's needs effectively while engaging the services of an independent contractor to fulfill the specific requirement. The independent contractor receives a 1099-NEC from the salon owner if the independent contractor has been paid more than $600 by the salon owner for the calendar year (and they are not incorporated). This is so that the independent contractor can claim that income with the IRS.
Booth renters do not receive a 1099-NEC, in turn, they give a 1099-MISC to non corporate salon owners for rents paid over $600 a year, so that the salon owner can claim the rent income with the IRS.
Why do salon owners hand out the 1099-NEC like it’s Willy Wonka’s golden ticket, and why do stylists put up with it?
Don't Know Better
The simple answer is no one knows any better. Owners frequently take cues from their peers, often mirroring the practices they observe. This perpetuates a cycle of misinformation, akin to a spreading illness, as incorrect practices become ingrained and disseminated throughout the industry. Unfortunately, stylists, trusting in the expertise of salon owners, may not realize they are being misled and assume that these practices comply with the law.
Those Who Should Know, Don't Know
Even professionals such as lawyers and accountants can inadvertently contribute to this misinformation. They may advise salon owners on issuing 1099-NEC forms without fully comprehending the legal complexities involved. For example, when I began questioning whether I was misclassified by a salon owner, I sought guidance from two accountants and two lawyers, all of whom assured me that my situation was lawful. However, subsequent investigations by the IRS and the National Department of Labor (DOL) Wage & Hour Division (WHD) revealed that I was indeed misclassified.
This underscores the importance of seeking informed advice and understanding the nuances of employment classification to ensure compliance with regulatory requirements and protect the rights of workers within the salon industry.
This is also why we need to stop referring to independent stylists as “1099” because when you associate that title to the status of a worker, it i assumed that the form is used.
The Administrative Headache
Salon owners often seek to sidestep the burdensome task of managing payroll taxes. Indeed, the administrative aspect of business operations can prove taxing, particularly when owners aspire to spend their time behind the chair rather than buried in paperwork. However, resorting to issuing tax forms as a means of shirking administrative duties not only breaches legal boundaries but also reflects a lack of diligence.
For those disinclined to handle such responsibilities, outsourcing payroll services presents a viable solution. It's imperative for salon owners to recognize that evading these responsibilities is not just illegal but also indicative of an unwillingness to fulfill essential obligations.
Illusion of Higher Paychecks
Stylists may initially appreciate receiving larger paychecks without taxes deducted, but this sentiment often shifts come tax season when they realize they owe self-employment taxes.
Allow me to clarify this scenario. Suppose you're earning a 50% commission and receiving a 1099-NEC form. However, approximately 25% of your annual earnings are allocated to self-employment taxes, as you likely lack many deductible business expenses. Consequently, your effective commission rate dwindles to 25%. Then, if you're required to cover a backbar or chemical fee, typically amounting to another 10% of your commission, your net commission drops to 15%.
Contrastingly, if you were properly classified as an employee, the salon owner would bear half of those taxes and wouldn't (hopefully) impose a backbar or chemical fee upon you. Thus, the significance of proper classification becomes apparent, ensuring fair treatment and equitable distribution of tax responsibilities within the salon environment.
They Totally Know What They're Doing
Numerous salon owners are fully aware of their actions; they calculate that the purported savings on employer taxes outweigh the potential risks of detection. However, they often underestimate the formidable authority wielded by the IRS and DOL in enforcing labor laws.
In essence, the salon owner's actions constitute tax evasion, a federal felony carrying severe repercussions. According to the IRS, violators may be liable for back taxes amounting to as much as 41.5% of the stylists' earnings, with penalties applicable for up to three years. In cases where intentional misclassification is suspected, the IRS may pursue criminal charges, potentially resulting in imprisonment for up to a year and substantial fines reaching $500,000 for corporations. Additionally, offenders risk acquiring the notorious label of "tax evader."
Furthermore, state insurance agencies and Departments of Labor will demand reimbursement for unpaid unemployment insurance and workers' compensation premiums, exacerbated by penalties for deficient recordkeeping. This multifaceted fallout underscores the grave consequences of misclassification and the importance of meticulous adherence to labor laws and regulatory requirements within the salon industry.
Fear Mongering
Stylists often harbor concerns that speaking up about misclassification could jeopardize their employment status. This fear is pervasive across various industries, where employees may recognize exploitation but hesitate to disrupt the status quo due to apprehensions about potential repercussions. However, it's crucial to understand why you shouldn't let this fear deter you from reporting a owner who is misclassifying you.
There are several government agencies that are involved in misclassification. The 3 main ones are the IRS, WHD, and your individual state’s DOL. When you report to the IRS you file an SS-8 and if the IRS deems an investigation is warranted, they investigate the salon business as a whole and basically audits them. The IRS tries to keep your identity confidential. When it comes to the Wage & Hour Division, you are able to anonymously report a salon owner and most state’s also have anonymous reporting.
If you report the salon owner to one of the three agencies I just listed above, you are covered by the Whistleblower Protection Act which is governed by OSHA, protects employees from retaliation for reporting underpayment of taxes, potential violations of internal revenue laws, or potential violations of any provision of federal law relating to tax fraud to their employers or to the federal government, or engaging in other protected activities. This process makes it an offense for an employer to take adverse action against Whistleblower employees, such as: firing or laying off, demoting, denying overtime or promotion, or reducing pay or hours, for engaging in activities protected by OSHA’s whistleblower laws.
The best way to bring integrity to the beauty industry is to report the behavior to government agencies.
In summary, it's imperative for both salon owners and beauty industry professionals to understand and adhere to correct worker classification protocols to mitigate the risk of misclassification. Misclassification constitutes a form of tax evasion, a serious federal offense that can result in fines and potential imprisonment. Every worker deserves to receive a fair wage and be afforded ethical and legal treatment in the workplace.
