Should a hair dresser be paid as a subcontractor or an employee? They
will be paid hourly and receive comissions on cuts. They provide all
their own supplies, and work their own hours, and obviously cut as
they see fit. After reading publication 15-A I'm still not sure. It
seems possible both ways. Obviously I'd prefer the subcontract.
In article ,
Since you have gone through the checklist in Pub 15A, you see that
quite a few lean towards being a contractor. Especially the
Supplies own Tools, and Sets own work hours.
If the person also holds and pays for workers comp insurance, and I
would hope this is the case, and perhaps even liability insurance, that
would clearly swing my view towards contractor.
Ah, but the determining factor here IS: that the workers is paid hourly
PLUS commissions. Doesn't matter that they 'set their own hours' ,
which simply means that they show up when they have appointments.
Unless there is a formal booth rental agreement, they are common law
IRS has guidance on it.
Harlan Lunsford, EA n LA
has little to do with how they are paid or how pay is calculated. The
issue is who controls the work and work flow. If someone is paid
hourly it is one indicia of an employee, but a minor one.
That's not what the courts would say.
Can you find that? I'd like to see it. Here's Publication 15:
I just looked at IRS web site and can't find the specialty position
paper on the subject. Thought it was an MSSP, but not currently among
those. perhaps I can find something at office if you send me email
to "lunstax" at my ISP and remind me.
The IRS has a Market Segment Specialization Paper for Beauty and
Barber Shops which has a section devoted to employee versus
contractor. It is a rather substantial section and does NOT
unequivocally spell out an answer, it certainly leads the auditor
towards the employee classification. Here are a few brief excerpts:
Common Law Factors
The question of whether an individual is an independent contractor
or an employee is one fact to be determined upon consideration of the
facts and application of the law and regulations in a particular case.
See Professional & Executive Leasing v. Commissioner, 89 T.C. 225,232
(197), aff'd 862 F.2d 751 (9th Cir. 1988); Simpson v. Commissioner, 64
T.C. 974, 984 (1975). Guides for determining the existence of that
status are found in three substantially similar sections of the
Employment Tax Regulations; namely, sections 31.3121(d)-1,
31.3306(i)-1, and 31.3401(c)-1, relating to the Federal Insurance
Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and
federal income tax withholding, respectively.
In general, it should be noted that section 3121(d)(2) of the
Internal Revenue Code requires the application of the common law rules
in determining the employer-employee relationship. In determining
whether an individual is an employee under the common law rules, 20
factors have been identified as indicating whether sufficient control
is present to establish an employer-employee relationship. The 20
factors have been developed based on an examination of cases and
rulings considering whether an individual is an employee. The degree
of importance of each factor varies depending on the occupation and
the factual context in which services are performed. See Rev. Rul.
87-41, 1987-1 C.B. 296; IRM Exhibit 4640-1, Employer-Employee
Relationship. The 20 factors are not to be applied blindly. Rather,
they are to be used as an aid in applying the common law.
Although a variety of factors may be used to analyze employment
status for tax purposes, the regulations provide that employer control
over the manner in which the work is performed is probably the most
important. The test is not the actual control by the employer but the
employer's right to control.
State Regulatory Authority
While the Service is not bound by State laws or determinations on
this issue, State laws and regulations may be helpful to the examiner
in analyzing the facts. The salon industry is regulated by each State
Board of Cosmetology. Most states have a set of regulations.
For example, New Jersey regulations do not allow the holder of a
shop license to rent space (a booth or chair) to a nonemployee (an
independent Contractor). In Oregon, rentals are allowed if the renter
is an independent Contractor. In Florida, while salons and barber
shops must obtain a license from the Board of Professional Regulation,
a booth renter is not required to be licensed by the Board. However,
Florida's legislation had a bill pending, at the writing of this
guide, that would require booth renters to be licensed with the Board
of Professional Regulation. The bill in Florida is a trend started in
the salon industry to regulate their booth renters. Check with the
state regulatory board to help facilitate in determining the
independent contractor and employee issue.
Revenue Rulings and Court Cases
Review the following revenue rulings and court cases that address
the employee vs. independent contractor issue:
Revenue Ruling 57-110, 1957-1 C.B. 329
Facts: Fixed weekly fee; owner furnished heat, light, water and
supplies; barber provides own tools; barber sets own hours of work;
and barber collects his own money and does not account to the salon
owner for revenue earned. Determination: Independent contractor
Revenue Ruling 70-488, 1970-2 C.B. 219
Facts: Barber is paid a percentage of the money from services
performed; salon sets hours of work; required to wear a uniform.
Revenue Ruling 73-591, 1973-2 C.B. 337
Facts: Salon agrees to furnish, repair, and maintain all equipment;
hair stylist is paid on a percentage of gross receipts; no credit work
or free work can be done without the approval of the salon owner;
working hours are set; hair stylist furnishes a report each day to the
owner reflecting the day's receipts. Determination: Employee
Revenue Ruling 73-592, 1973-2 C.B. 338
Facts: Rents for a fixed monthly fee; the salon furnishes heat,
light, water, and supplies; hair stylist retains the money collected;
hair stylist sets own hours of work. Determination: Independent
Wolfe v. United States, 77-1 U.S.T.C. para. 9346 (D. N.D. 1977)
Facts: Hair stylists are paid on a percentage of gross receipts;
hair stylists handle own clients; hair stylists provide own supplies;
appointments are made through one receptionist; hair stylists set
their own hours and have their own keys to the shop; money from
services is paid to the salon; hair stylist decides what prices to
charge; hair stylists are responsible for bounced checks; and hair
stylists are not required to work on salon's customers. Decision:
A Henry, d,b,a, Center Beauty Shop, 78-1 U.S.T.C. para. 9433 (E.D.
Facts: Rent is based on a percentage of gross receipts; no
receptionist; anyone in the salon will answer the phone; salon
furnishes the supplies; hair stylists collect own money; hair stylists
set own hours of work; prices were set by an agreement among the hair
stylist; and minimum rent payment is $50. Determination: Independent
The following is Tax Management's summary of the issue based on
revenue rulings and court cases.
"* ** the one factor which appears to hold overriding persuasive
value in the case of hair stylists is the nature of the remuneration
under the agreement between the hair stylist and the shop owner ** *
the factors tending to show an employee relationship seemed to
predominate over independent contractor type factors in those
situations where the remuneration is based on a percentage of
earnings, whereas the opposite is true in those situations where the
hair stylists rents the chair for a fixed monthly fee."
Hope this helps,
Gene E. Utterback, EA, RFC, ABA