Apologies to all employee-based salons/spas with W2 employees for having to write this post...you are salon/spa owners that properly follow IRS tax laws by withholding payroll taxes from your employees’ paychecks.

This blog post was written for all the salons/spas in our industry that classify workers as 1099. This includes stylists, estheticians, nail techs, massage therapists, support staff, etc.

We use the term “worker” because a 1099 worker IS NOT an employee.

There are two reasons why salon/spa owners classify workers as 1099:

1. Owners don’t want to be bothered with collecting, depositing employee withholding tax and paying the employer’s required payroll taxes. It’s so much easier pushing the tax burden on their “employees.” If it were that easy for a business to avoid payroll taxes - no company would have employees. FACT: It’s not that easy.
2. Didn’t know. Didn’t care. Followed bad advice. These excuses are not a viable defense if IRS determines that you misclassified W2 employees as 1099 Independent Contractors. If you have any degree of control over workers with respect to supervision, schedules, performance standards, training, products used to do the work, dress code, etc. … the workers are W2 employees. 

As the business owner, you will be liable for your back payroll withholding and employer taxes … plus interest and penalties.

TEN questions to determine if a worker is a W2 Employee or a 1099 Independent Contractor:

1. How often does this person work for you? How regularly someone works for you is more important than how many hours he/she works for you. If the person works for you full or part-time on a regular basis, he/she is most likely a W2 employee.
2. Do you set the person's schedule? An indicator of employment status is how much control you exercise over a worker’s schedule. If the person works a regular schedule, he/she is most likely a W2 employee.
3. Do you instruct or supervise the worker? While you're probably providing all workers with some guidance, how much control you have over their approach helps determine their status. If you supervise and/or oversee the person’s work, he/she is most likely a W2 employee.
4. If additional workers are needed for a job, who hires them? The amount of control you have over a worker's decision-making power is an important factor. If it is your responsibility to hire additional workers to meet the volume of work, he/she is most likely a W2 employee.
5. Who pays the costs related to the work? How much the worker pays for tools and supplies to perform the job compared to how much you pay is another factor. If you pay for supplies, materials, support staff, etc., he/she is most likely a W2 employee. (Product and/or service charges collected to offset your costs do not classify the worker as a 1099.)
6. How is the worker paid? The timing and method of payment is an indicator of the worker’s status. Employees are often on payroll, whereas contractors invoice you. If the person is paid hourly, salary, commission or piece work, he/she is most likely a W2 employee.
7. Is the worker economically dependent on your business? An important factor in deciding whether a worker is an independent contractor or employee is whether he/she is dependent on you or, if he/she is in business for him/herself. If the person’s primary income comes from your business, he/she is most likely a W2 employee.
8. Does this worker make decisions that impact their own profits and losses? How much the worker’s managerial skills affect his/her opportunities for profit or loss helps determine his/her worker status. When risk is shared, and the worker gets paid only when you get paid, therefore risking loss of his/her own investments, he/she is more likely an independent contractor. If the person only needs to work more hours or be more productive to increase his/her income, he/she is most likely a W2 employee.
9. Is this person hired to work indefinitely, or for a specific project or time period? How long someone works for you is one of the key considerations in determining employee status. If the person is hired and continues to work for the business with no specific end date, he/she is most likely a W2 employee.
10. Are the person’s activities a core part of your day-to-day business? The role a person plays in your broader business is a critical factor. If the worker’s performance increases your profits, the person is more likely an employee. If the person is required to perform a service or do work that is integral to your business, he/she is most likely a W2 employee.

If you are classifying workers as 1099 and your answers to any of the above questions lean toward W2 employee … you are misclassifying workers.

You will be the one responsible for back payroll withholding taxes, interest and penalties.

Statutory Employer Payroll Tax Deductions

Payroll taxes must be withheld from an employee's paycheck. This is required by law. Employers must hand these withholdings over to various tax agencies. Payroll tax deductions include the following:

• Federal income tax withholding (based on withholding tables in Publication 15)
• Social Security tax withholding (6.2% up to the annual maximum)
• Medicare tax withholding (1.45%)
• Additional Medicare tax withholding (0.9%) for employees earning over $200,000
• State income tax withholding
• Various local tax withholdings (such as city, county, or school district taxes, state disability or unemployment insurance).

Employer Payroll Tax Responsibilities

The responsibility for payroll taxes continues even after paychecks have been issued to employees. The company is responsible for:

1. Paying the employer's share of payroll taxes.
2. For depositing tax dollars withheld from the employees' paychecks.
3. Preparing various reconciliation reports.
4. Accounting for the payroll expense through their financial reporting.
5. And filing payroll tax returns.

Here’s our challenge to you:

If you are a salon/spa with W2 employees: Please share this post with as many owners as possible. Salons/spas that classify workers as 1099 … and treat them as employees … are a serious problem in our industry. The practice hurts all salons/spas that are tax compliant.

• Share it on your social networks
• Share it with the product companies and distributors you support.
• Share with industry groups or associations you belong to.

If you are a salon/spa with workers on 1099 … it’s time to comply with Federal IRS tax laws. Converting from 1099 to employee-based is a process that Strategies can coach you through. It may not sound like fun … but the alternative of having IRS determine that you misclassified employees will be a financial nightmare.