Commission VS Booth Rental: Where is the money really at?
Rather just listen instead? Check this video out on my Youtube channel here
I remember when I first enrolled in cosmetology school, I honestly didn't even know what commission was. I assumed all stylists rented chairs because here in California, it was and still is really common. I quickly learned that the vast majority of stylists do start off working commission or hourly and may never even become business owners themselves and there are plenty of ways to become successful behind that chair!
Through the years I've come to find that the mindset shift is often times "I'll stay working on commission just until I can afford to rent" as if it's some right of passage or something.
On the other hand, you talk to some stylists who went from commission to booth rent and back to commission again who swear they'd never rent a booth again. It really got me thinking, what is the better option?
We are living in a world where we're kind of always looking for what's next. Is the grass greener on the other side? Could you be making more money if you did things a little bit differently? I know I was always wondering those things and still do think that way from time to time, so I'm sure that you are too.
Maybe you're kind of on the fence wondering if commission is right for you, if booth rent is right for you, if you should rent a studio suite or just open your own shop and what can you really afford? I've got you covered, you're in the right place. We aren't diving too deep into salon ownership or studio suites this week (I promise, we'll get there) but let's really compare booth rent and commission for a minute.
I want to start by doing a little myth busting...
Is commission kind of a rip-off?
I think there is this common theory that commission is a rip off and greedy salon owners are keeping too much of your money. You guys, any salon owner will tell you that running a commission salon is insanely expensive, and having employees in any business in any industry is expensive. The profit margin in a commission hair salon is generally between 0%-8% aside from those rare cases where a commission salon owner really hits it out of the park. The stories of the commission salon owner who retires a super rich man these days are few and far between.
The overhead to stock a color room in a salon full of stylist is thousands of dollars, maintaining retail, all the benefits and everything that goes along with having employees in the commission environment is really high. It's not so much that greedy salon owners are keeping all of your money, it's more that the benefits you get of working in a commission salon are huge and those things cost money.
All booth renters totally lie on their taxes and that's how they make so much more money, right?
Like the theory about commission salon owners being crooks, this theory is also fully false. Now that's not to say, some booth renters don't pocket some extra cash here or there, I've heard of plenty who do, however I always coach booth rent stylists to be 100% above board and honest and for good reason. I can't tell you how many salon owners or booth renters get to the place where they want to get a new credit card or buy a new car or purchase their first home only to be completely shot down. The problem is that for a lot of major adult purchases you've got to be able to prove your income through tax returns.
Nobody cares if you promise you really do make $100k a year if on paper you only make $70k. If you can't prove it on paper then it doesn't exist. And I will tell you, I do know plenty of booth renters who went from commission to booth rent kept everything above board and did come out ahead. It really just depends on the growth and success of your business.
So what are the benefits of working commission?
With commission, your pay will always be guaranteed by at least minimum wage meaning if you're in the salon for 8 hours, even if you don't see a single client, you must be paid minimum wage for those 8 hours. This is actually a federal law in the United States so if you are a commission stylist and you're working at commission salon you are deserving of that compensation.
Your employer will cover the Social Security and Medicare taxes which equal 7.5%. If you're a booth renter, you have to pick up that 7.5% yourself (and 7.5% of your money is actually a decent sized chunk, so that's a nice benefit).
Benefits like free in-salon or individual education, health insurance and company matched retirement savings plans are often also included. All of these things are worth thousands of dollars each year, so if your employer is footing the bill, that's a nice thing that's taken off your plate.
You also get to walk in, do your clients, market your business, and walk out. You don't have to worry about driving to the beauty supply store every week to get what you need. You don't have to worry about itemizing your taxes, it's all taken care of for you. So when you go out at the end of the night, your time is really your own and that was one of my favorite things.
Probably the best part of being in a commission salon is having a team. We can't even put a price tag on that. By far, my favorite part of being in a commission salon was the amazing team. When you have an incredible team, there's nothing else like it. The support you get, the love you have, and the way that the clients feel that love too is incredible.
So what are the benefits of working as a booth rent stylist?
Probably the biggest and most obvious is that any money made behind the chair is yours to manage however you'd like. Notice that I didn't say that any money made behind the chair is yours to keep. That's not how it works. Running a business is really expensive, but you get to make all the choices, you're in the driver's seat, and that's really powerful.
You can enjoy the tax benefit of writing off business expenses. This is HUGE and can set you in to a completely different tax bracket and save you thousands of dollars each year.
You have complete control of your schedule which was always the biggest draw for me. You can come and go as you please, choose the hours you want, there's no one to tell you when or where to be and you don't have to follow their terms. You do have to follow the terms of your rental agreement, but you don't have to follow the rules like an employee would.
Am I really ready to booth rent?
There are some things you'll really want to consider before you pull the trigger and leave your comfy commission home. You'll need to pay for things like business licenses, retail sales certificates, liability insurance, employee tax which is increased from 7.5% to 15% if you're a booth renter, your own health insurance, education, retirement savings. Those will all come out of your own pocket.
If there is one thing that I hear most often from booth renters is that they didn't realize it would be so hard to keep the business in order. It's a lot of paperwork, a lot of little pieces to keep straight, a lot of things to itemize. Getting organized is crucial.
You'll have to pay the initial investment of stocking color and retail. Every single person I've talked to who goes to booth rent for the first time or goes into a studio suite tells me it was much more expensive than they thought it would be. Just know that initial investment cost is expensive.
The other thing you'll need to remember is that even if you don't have a good week rent is still due. With commission you have that minimum wagesafety net. If you don't have a good week as a commission stylist, it's all good because you still get a paycheck. If you don't have a good week as a booth rent stylist, you still have to pay your rent even if it means you can't afford to eat dinner tonight. That's a huge thing to consider.
How much more money does a booth renter really make?
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!