Is Commission Pay a Rip Off?
The saddest fact about this industry is that most hairstylists will spend most of their life living paycheck to paycheck. Too scared to call in sick because of the fear that they'll lose a client. Too broke to take an annual vacation or schedule long weekends monthly. Too caught up in the hustle to quit working long days. Too old school to consider working Monday through Friday. Shall I go on?
So what is the secret of making it big as a hairstylist? Many independent contractors choose to pocket cash instead of claiming it to avoid paying taxes. Maybe that is what makes the difference. Nope, reducing your claimed income is a very short sided gain. Try buying a new car or a home or even applying for a new credit card when your taxable income hovers below the median income level.
Then there are the elite 5% who truly master this crazy industry and live incredibly well balanced and wealthy lives. So what makes the difference between barely making your car payments and booking annual trips to Maui? Is it those who break free from the shackles of being an employee on commission based pay? Those who take on additional roles such as become an educator? Those who stay on commission and enjoy the benefits of working with well trained assistants? The answer is D, all of the above. There is more than one path to success.
Let's take a look at the difference between the pay of an independent contractor (booth renter) vs a stylist paid based on commission:
At a 50/50 split you'd have $25,000 take home but we have to account for taxes
Employee tax at 7.5% would have been $1,875
At $25,000 income, the tax rate is 15% so thats an additional $3,750
Total take home pay would be somewhere around $19,375. If the stylist had kids, owned a home or had other big tax write offs it could potentially be up to $22,000
Let's look at the Booth Rent Stylist. I have to make up some numbers. In my area rent is about $375/week, but let's split the difference and just say $175/week
Booth Rent Stylist:
$50,000 take home pay pre-expenses and pre-tax
Before we figure out taxes we have to deduct the write offs so let's start there:
$9,100 in rent ($175x52 weeks per year)
$4,800 color cost (based on 2 colors per day at $10 per application. Probably way too low, but again I'm just estimating)
That brings taxable income down to about $36,000 which is in the 15% bracket
Okay so now we do tax on the $36,000 because that is the taxable income
Employee tax at 15% (double) would have been $5,400
Income tax rate is 15% so thats $5,400
After taxes, take home pay is $39,200. From that we deduct rent and color cost which brings total pay to $25,400.
Did the renter come out ahead? Yes totally, but I was estimating and probably under estimated color cost. I also didn't factor in things like liability insurance, health insurance, cost of education, business licensing fees, credit card processing so the gap would without a doubt close more.
Basically, commissioned stylists give up income to not have to worry about color, paying rent during slow months and sometimes benefits like health insurance, vacation pay, etc. Renters or independent contractors enjoy freedoms like truly building their own brand, coming and going as they please and not being bound to rules such as dress codes and mandatory meetings.
I am often asked:
"What is better: commission or rental?"
"I know I need to rent eventually, but when is the time right?"
My answer is always "quit worrying so much about the structure and just work to grow your clientele! That is where the money is at". Most stylists get so caught up in trying to figure out how to save a dollar here or there that they don't focus on what actually matters. Does the way you are paid really make a difference in your income, honestly not really. We could get crazy and factor in things like having multiple assistants that allow you to triple your income (truth!) or pocketing cash to keep it away from uncle Sam, but at the end of the day, it's not about the structure, it's about the determination to succeed.
If you are wondering "what if I'm a commissioned stylist who receives a 1099"? Click here to read a blog post just for you.
With all that being said, if you do this same math with two stylists producing $100,000 per year behind the chair, the booth renter comes out ahead by almost 30%. There is absolutely a tipping point where the scales can land in your favor. Just be sure you are 100% ready to take on the challenge.
Quit making excuses, find your hustle and build your clientele love!