When is it right to receive a 1099 as a hairstylist?
Does anybody else remember when it seemed like every hairstylist was either a booth renter or commission based? I remember thinking that the goal of every stylist was to ultimately rent their own chair; that was foolish. I know now that stylists all over the US are paid in a miriad of different ways and only about half of what I've seen is legal. That's probably a generous guess too. The actual figure is probably much lower.
While we could debate the ins and outs of pay systems all day, it's a debate I'll never choose sides on. I think the beauty of our industry is the options and flexibility and I truly believe that different structures fit different lifestyles. Here's what I'm not into, stylists being taken advantage of. I've heard more sad stories of stylists being taken advantage of then I care to count, but by far 1099's are the worst of the worst.
In the last few years a new hybrid pay structure was born. Stylists started being offered the opportunity to make commission while still having may of the freedoms that booth renters enjoy. This is incredibly tempting to many stylists who are still trying to build a clientele because they aren't locked into paying rent as they build. The color is all provided for them, there is a system in place for processing payments and then they get a paycheck every two weeks for the agreed upon commission percentage. Sometimes these stylists are told that they can make their own schedule or provide their own marketing materials. Wow how cool! The freedom of being a renter without the responsibility of ordering color or dealing with payment processing. Awesome, right?!? Wrong.
What I find usually happens is that stylists are still expected to be in the salon working a set schedule as an employee would. They have a dress code to follow, behavioral or procedural policies are in place, they need to arrive on time and their prices are determined by the salon owner. In this structure stylists are paid their agreed upon commission split throughout the year and then are handed a 1099 to file on their own. This is so wrong on so many levels.
Let's start at the beginning with a little boring, but super important, legal information.
What is a W-2? A W-2 is a form used by the Internal Revenue Service to track money paid to employees. The IRS defines a W-2 as a way to "report wages, tips and other compensation paid to an employee as well as a way to track an employees income and social security taxes withheld"
What is a 1099? A 1099 is a form that is used by the Internal Revenue Service to track money paid in exchange for work. The IRS defines a 1099 as a form to "report payments made in the course of a trade or business to a person who is not an employee".
These two definitions can look similar, but did you catch the key difference? 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, regulate what products they use or how they use them, ask them to follow a structured schedule, choose what kind of payment systems they use or prevent these stylists from collecting their clients contact information on the side 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.
Now I will say that there are certain instances where a salon would hire a contractor. Let's say they want to have somebody come in and do facials in their esthetics room just on Saturdays through the Summer time to see how the arrangement goes. This would be a great time to find an esthetician who is interested in picking up some extra work on a short-term contract. That person could be paid on an agreed upon commission (usually 40%-50%) for the clients they see you would just pay them their portion and that would be the end of it. The salon owner isn't legally responsible for maintaining the employment and the contracted esthetician would take care of their own taxes at the end of the year once the owner provides the 1099. Perfect.
So if this hybrid system isn't legal, why is this the fastest growing pay structure in the industry? Two words: tax evasion. By classifying stylists as contractors instead of employees, salon owners no longer have to pay their portion of Social Security or Medicare taxes which are currently at about 15%. If you are truly an employee and your employer is taking care of tax deductions throughout the year, they are paying about 7.5% and you are paying the other 7.5%. Independent contractors must pay the full 15% themselves. Salon owners also won't have to carry workers compensation insurance and certainly aren't offering benefits like health insurance, vacation pay or education funds. Also, if a salon owner hires commissioned stylists as employees they'll need to support those stylists with an hourly wage as they build their clientele to ensure that they continue to make at least minimum wage. As you can image, these expenses add up quickly. I'm not saying that all salon owners need to offer benefits, but I think it's bull s*** that salon owners are taking advantage of stylists by not paying their portion of taxes owed or offering wage support to stylists that they treat like employees. The owners double benefit and the stylists end up screwed.
That being said, if you are a stylist currently being paid on commission and then handed a 1099, here are some quick facts you should know:
- Your salon owner can't tell you when to come to work, what to wear, how to treat your clients or provide any on salon training. You can not be forced to use any specific system or structure.
- You are over paying in taxes in so many ways. Booth renters are able to write of all of their rent payments, cost of color and many more day to day expenses which help to offset their taxes. Since your salon owner is paying for the color and you aren't paying any rent technically, you can't write any of that off. You are missing out on these deductions yet paying the full 15% Social Security and Medicare tax. Double whammy.
- You need to pay quarterly taxes if you are expected to make more than $1,000 for the year. Look up the IRS form 1040-ES for more information.
- You'll need to carry your own liability insurance as the salon owner won't have a policy that covers you should anything go wrong.
If you are a salon owner paying your stylists commission and then issuing a 1099, here are some quick facts you should know:
- If a stylist chooses to take you to court over loss of wages due to tax overpayment or for any other reason, you'll be required to prove that the stylist was truly contracted and not an employee. Do not offer any benefits, training or have rules in place that could result in disciplinary action.
- Most salon owners lose court cases when it becomes clear that the stylist worked a structured schedule. A contracted stylist wouldn't be working regularly and would have fairly limited availability. You'll want to limit the hours the 1099'd stylists work in order to prove that they are truly contracted. It will be incredibly difficult to find a team of stylists who is willing to work on-call or on a limited schedule.
- You can not dictate these stylists price points, how they perform services or how they market themselves. They can use any tools they'd like and can use their own business cards and marketing materials. They can not be forced to accept coupons or special offers that you create if they don't want to participate.
- Do not require your 1099 stylists to do any chores, clean up, work the front desk, attend staff meetings, provide coaching or training or do any work in the salon other than servicing the clients. They are hired to perform hair services and can not be asked to work beyond that role. Think you can just include additional responsibilities in the contract? You'll quickly be creating an employee contract and the IRS will come knocking for back taxes as soon as one angry stylist decides to take you to court.
Don't think that any stylist will ever sue an owner? I came across a case out of New York in which a salon owner was required to pay over $22,000 in back taxes based on one stylists complaint and I'm willing to bet that other stylists who had worked there are lining up to get their fair share next.
The bottom line is that we work in the best industry on the planet. If we as salon owners want our stylists to be more dedicated to our salons and act as professionals, we need to treat them as such.