January 2012

LeAnne Velona

The Beauty Professional| by Fred Jones

 

Here Comes The Tax Man: Are You Properly Classified?

We all know opportunities for business ownership abound in the beauty industry.

When the Professional Beauty Federation of California (PBFC) advocates on behalf of the world of beauty to policymakers and administrative officials, we like to point out that, our industry is arguably the most entrepreneurial sector of our nation's economy.

Booth rental is a significant contributor to the vibrant and competitive nature of our industry, as each booth renter is, in fact, a separate business entity. However, it is this "separateness" that is now under scrutiny by state and federal agencies.

Recently in the news you may have learned of a renewed regulatory focus on businesses utilizing contractors; this includes a new law in California severely cracking down on those who wrongly classify workers (when they exercise substantial control over) as independent (SB 459).

This is not just a California concern. The IRS recently opened a short window of time for employers throughout the country to come clean, so to speak, about their past, incorrect classifications of their workers. This temporary offer of limited forgiveness is likely a prelude to increased audits of 1099 contractors.

Salon owners and booth renters have to get these matters right, not only to avoid such costly audits and penalties, but to protect the overall image of our industry. All government sectors are hunting for new revenue and our industry has reason to be concerned.

Under the common and far too often loose business practices of the beauty industry, many booth rental salons are likely subject to significant tax and insurance liabilities and stiff regulatory fines and penalties if they are ever inspected, audited or the subject of an injury-related claim.

Which Category Are You?

To help clarify this complicated subject, let's look at the four categories in which beauty industry licensees currently operate, namely: (1) owner-operator, (2) employee, (3) booth renter and (4) independent contractor.

OWNER-OPERATOR — An owner-operator can be either a one-person shop, or the owner of a multiple-station salon who also works behind the chair. An owner-operator is solely responsible for all of their beauty services and activities. An annual tax return disclosing the business income and expenses is necessary. They carry their own professional and general liability insurance, but are not eligible for workers compensation insurance as they are not employees; however, several states offer owners the option of paying into a state disability program ("SDI" in California.)

EMPLOYEE — An employee works for and is controlled by the salon owner. Extensive human resource requirements apply to such workers. All of the owner's insurance policies (i.e., general liability, professional liability and workers compensation) cover the employee-technician. In addition, payroll taxes are mandated by the federal government, which includes Social Security and Medicare payments for each worker. The employee-stylist must conform to the laws and regulations governing beauty services, but the establishment owner will ultimately be responsible for all of the technician's work.

BOOTH RENTER — A booth renter operates under an executed contract with an establishment for the right to provide services within a salon. That agreement spells out the distinct responsibilities of booth renter and salon owner -- including the fees charged to the booth renter for the use of shared facilities, equipment and other resources provided by the salon. Such contracted services may legally include the booth renter being covered under the salon's general and professional liability insurance policy; however, if such coverage is part of a booth rental agreement; there are serious, workers comp and "independent contractor" misclassification implications for the salon owner.

Under current salon practices, however, if a booth renter is injured on the job, it is likely that the establishment will be held responsible for that technician's compensation coverage; and the salon owner held liable for back premiums and interest penalties.

More chilling yet, the salon owner faces the possibility of criminal prosecution for failing to provide such pre-accident coverage to all of the booth renters working in his/her salon. This financial and legal jeopardy is particularly serious if the injured booth renter did not maintain general / professional liability insurance separate from the salon's policy. This important legal reality is often overlooked or misunderstood by salon owners, booth renters and even many insurance agents.

In short, the common business practices of our industry fail to qualify most booth renters as truly independent businesses. Therefore, workers compensation mandates and potentially stiff misclassification penalties will likely apply to most rental establishments.

INDEPENDENT CONTRACTOR — The only definitive way to avoid workers' compensation liability and misclassification penalties for beauty technicians working in a salon is to establish a truly, independent contractor relationship with such beauty professionals.

For purposes of workers comp liability, a bright line test is whether the booth renters maintain their own general and professional liability insurance.

To avoid misclassification penalties, an independent contractor must operate as a stand-alone business, usually under a fictitious business name (not in the name of the individual technician). The independent technician must maintain his/her own bookkeeping and scheduling system and provide for his/her own janitorial services; such "shared" services may be provided by the salon only if they are specifically itemized and paid by the contractor in a well-defined contractual agreement, and all client payments/tips aren't commingled with the salon's account. All of the business income and expenses must be accurately reported in the contractor's annual tax returns, including self-employment tax.

As previously mentioned, the contractor-business carries its own professional/liability insurance, and the coverage is usually not tied to any specific salon (allowing the licensed contractor to work in other venues). The contractor is responsible for his/her own tools, equipment and supplies, and advertises his/her business to the public. In addition, the contractor-business receives and posts its own state license and municipal business permit to distinguish itself from the establishment in which the contractor operates.

Surprisingly -- given the need for separation -- a well-drafted contract may include some specific standards of operation demanded of the independent contractor by the establishment owner. However, this requires careful attention to legal details to avoid the appearance of ultimate control over the contractor's work.

Available Resources

There are resources available online to help clarify this complicated subject, including the actual list of facts that taxing and regulatory agencies use when considering what type of legal relationship exists between the establishment owner and salon technicians; that will have to wait until next month's contribution. In the months ahead, the PBFC website will offer additional resources to the salon professional striving to be safe, legal and successful.

For now, a salon business structure can come in different, legitimate forms; the degree of liability on both the salon owner and technician, however, depends on several, varying factors determined by the contractual and day-to-day relationship established between them.

Fred Jones serves as Legal Counsel to the Professional Beauty Federation of California, a trade association singularly dedicated to raising the professionalism of the beauty industry. To learn more about the PBFC and receive further details about the subjects contained in his column, go to www.beautyfederation.org.