Every year, more hairstylists report to be employed as 1099 service providers. However, it is impossible to “employ” 1099 workers, as the term 1099 refers to a tax form summarizing non-employee compensation. The form’s official title, “1099-MISC,” clearly indicates that it is for reporting miscellaneous income.
Employee vs. Independent Contractor: Know the Difference
As a salon owner and leader, it is your responsibility to comply with state and federal employment and tax laws. A straightforward test can help clarify classification: if you set service prices and dictate salon hours, your workers are likely employees and should be issued a W2 at the end of the year.
Employers of W2 employees are required to remit taxes and match FICA contributions. FICA (Federal Insurance Contributions Act) encompasses Social Security and Medicare taxes, which must be withheld from wages, commissions, and bonuses. The employer must also match these amounts.
To ensure compliance and make informed decisions, consider taking Intuit’s ten-question classification quiz. This simple test provides recommendations based on IRS guidelines and can help you determine whether your workers should be classified as W2 employees or 1099 independent contractors. Share the results with your accountant to manage your business effectively.
Take the W2 vs. 1099 classification test here
Reporting Tip Income: Your Responsibilities
Salon owners are also responsible for reporting tip income for their employees. While it may seem unfair to match FICA contributions on money you didn’t directly earn, the IRS mandates that all tips are taxable income. This includes tips received directly by employees and those remitted to employees from credit card or debit card transactions.
The IRS requires employees to report their tips to you by the 10th day of the month following the month they were received. To ensure compliance, include these tips in federal income tax withholding. For detailed guidelines, refer to IRS Publication 4902, which outlines reporting requirements specific to the Cosmetology and Barber industry.
Proposed Tax Changes Under Donald Trump’s 2024 Platform
According to Donald Trump’s 2024 platform document (source), the proposal includes making the Trump Tax Cuts permanent and eliminating taxes on tips for millions of restaurant and hospitality workers. While this change could be beneficial for many workers in service industries, it remains unclear whether hairstylists and salons will be included in the definition of "hospitality workers."
Additionally, the proposed elimination of tip taxes appears focused on employee obligations, meaning employers may still be responsible for paying their portion of employment taxes on tips. This ambiguity raises questions about how the tax cuts would impact salon owners who employ tipped workers. If hairstylists are excluded from the "hospitality worker" designation, they may not benefit from the tax relief intended for other service sectors. Salon owners should monitor these developments closely and consult with their accountants to understand how these potential changes might affect their business and employees.
Why Compliance Matters
If your salon’s profitability depends on ignoring tax liabilities, it’s time to reassess your business model. There are ways to operate a compliant, profitable salon that aligns with legal requirements. Estimating extra costs like tax contributions and credit card processing fees is complex, which is why we created the service pricing calculator for Salon Strategists. This tool incorporates taxes and fees into its calculations, enabling salons to operate profitably and in compliance with tax regulations.
Resources for Salon Owners
This article is intended for informational purposes only and does not constitute legal or tax advice. Gordon Mix is not an accountant. The information provided is based on resources including IRS publications and other reliable references. Readers are encouraged to consult a qualified accountant or tax professional for advice specific to their salon’s circumstances.
IRS Publication 1779: Independent Contractor or Employee?
IRS Publication 4902: Tax Tips for the Cosmetology and Barber Industry
IRS Publication 15 (Circular E): Employer’s Tax Guide
IRS Publication 531: Reporting Tip Income
Understanding and adhering to employment classifications and tax responsibilities is essential for running a successful salon. By ensuring compliance, you not only protect your business but also create a thriving environment for your team and clients.