Debunking the 1099 Status
Updated: Oct 31, 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.
I see and hear it all the time, “I’m a 1099,” and it causes my eyes to roll so far back in my head that 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!
What is the big deal about handing a stylist a 1099? As soon as you choose to give somebody a 1099 at the end of the year, you can not consider them to be employees. This means you can not expect them to: follow a dress code; come to meetings; tell them what products they can or can’t use or how to use them; set a schedule for them or expect them to regularly show up to your salon to work set hours; choose what kind of payment systems they use or prevent these stylists from collecting their client's contact information so that they can one day take that business with them. These contractors can not be asked to sign non-compete agreements nor can they be written up or reprimanded for behaving in a way you deem to be inappropriate. If a contracted stylist behaves in a way that you don't agree with, you can certainly choose to end their contract; however, you can not expect them to follow any system or change their behavior to meet your needs. All of this also applies to booth/suite stylists.
The main differences between booth renters and independent contractors are that booth renters pay to lease space to regularly show up to run their business and are paid by their clients; independent contractors do not regularly show up to the same salon to work and are paid according to contract by the salon owner. For instance, let’s say a salon has a bridal party coming in for updos, they also want makeup; however, the salon does not have a makeup artist. The salon owner can contact a local makeup artist and negotiate a contract for services.
Independent contractors receive a 1099-MISC 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-MISC, 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.
Now, read those two things again and really pay attention to the distinction being made.
Why do salon owners hand out 1099-MISC like they are a golden ticket, and why do stylists put up with it?
Well, no one knows any better. Salon owners listen to their peers who advise them to do the same thing they do. Thus, a cycle of misinformation begins and continues spreading the incorrect practice like an illness. Stylists often don’t know any better and assume the salon owners are following the law. Even lawyers and accountants have been known to incorrectly advise on giving out 1099-MISC without fully understanding that there is more involved than handing out a piece of paper. For instance, when I first started to wonder if I was being misclassified by a salon owner, I consulted with two accountants and two lawyers who all said my situation was perfectly legit. Turns out, the Internal Revenue Service (IRS) and Department of Labor (DOL) found that I was indeed being misclassified.
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 is assumed that the form is used.
Salon owners know exactly what they are doing. There are many salon owners who know exactly what they are doing, they just figure that they’re saving more money on employer taxes that it is worth the risk of getting caught. However, they often do not fully understand the power of the IRS or DOL. Ultimately, the owner is evading taxes, tax evasion is a federal felony, offenders face owing back taxes of as much as 41.5% of the stylists’ wages, according to the IRS. And these penalties can go back for three years. If the IRS thinks the salon owner intentionally misclassifies workers, they may seek a criminal conviction with up to a year in jail and a fine as high as $500,000 for a corporation. Plus they get the label as a “tax evader.” The stylists themselves may be audited and may be forced to repay any business deductions they took during that time. The DOL, via the Wage and Hour Division (WHD) will require you to pay back wages for up to three years and will levy fines for improper recordkeeping. The company will also get an audit that may then uncover other wage and hour violations and assess their own penalties. State insurance agencies and Departments of Labor will also be seeking back payments on unemployment insurance and workers’ compensation premiums. They will also be unhappy with the lack of recordkeeping and may levy fines.
Needless to say, breaking the law results in a snowball effect of government agencies.
Salon owners want to avoid the hassle of filing payroll taxes. The administrative side of running a business can definitely be a hassle especially when salon owners dream of being behind the chair, not doing paperwork. Those that can’t be bothered by this stuff should hire out payroll services at the least. Handing someone a tax form to get out of extra administrative duties is not only illegal but lazy.
If you want to spend more of your time behind the chair than tending to the responsibilities of having employees, then you need to give up some control and have booth renters.
Stylists like getting a bigger paycheck that doesn’t have taxes taken out. They like it until tax time when they owe self-employment taxes. Let me break this down for you. Let’s say you are making 50% commission and receiving a 1099-MISC, but a solid 25% of your yearly profit goes to self-employment taxes because you most likely do not have any business expenses to claim as deductions, so that means you are actually making 25% commission. Then, let’s say you have to pay a backbar/chemical fee, which is around another 10% of your commission, which brings you down to 15% commission. If you were to be properly classified as an employee, the salon owner is responsible for half of those taxes & shouldn’t be charging you a backbar/chemical fee.
The illusion of a tax free paycheck ends abruptly when a stylist does their taxes.
Stylists fear that if they say something, they’ll lose their job. This is an issue in any industry. Employees sometimes know they’re being taken advantage of but keep the status quo for fear of the consequences. Here’s why you shouldn’t be afraid to report a salon 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 conclusion, both salon owners and beauty industry professionals need to be aware of proper worker classification in order to prevent misclassification. Misclassification is a type of tax evasion, which is a federal crime, and punishable by fines & possible jail time. All workers have the right to earn a fair wage and be treated not only ethically but legally, too.
If you would like to read more about the proper classification of stylists please click here!