With business down and costs up, I have heard from many salons that are considering changing to an independent contractor arrangement as opposed to an employee arrangement. As I have said many times in this blog, independent contractor will most likely not pass muster with the Internal Revenue Service and with your State Departments of Labor.
Here is another reason that you want to stay away from this. This case involves a contractor, but the result will be the same in the salon situation. This individual was considered an independent contractor for a manufacturing company. He worked for the manufacturing company for three years and earned over $128,000. A 1099 was prepared for the individual, in that, they treated the person as an independent contractor.
Here is the problem. The Internal Revenue Service audited the individual and found that he had not paid any income taxes on money received. They also found out that the individual was not in a financial position to pay the tax. Because of this, the Internal Revenue Service looked at the business that was paying him and determined this person was actually an employee. As such, they should have withheld 28 percent federal tax and social security tax of 7.65 percent plus matching 7.65 percent. Before penalties, I calculated that the misclassification of the $128,000 cost the company over $164,000. Mind you, this is before any penalties and interest.
If you are using independent contractors in your salon (not booth renters), you are walking on thin ice.
Here is another reason that you want to stay away from this. This case involves a contractor, but the result will be the same in the salon situation. This individual was considered an independent contractor for a manufacturing company. He worked for the manufacturing company for three years and earned over $128,000. A 1099 was prepared for the individual, in that, they treated the person as an independent contractor.
Here is the problem. The Internal Revenue Service audited the individual and found that he had not paid any income taxes on money received. They also found out that the individual was not in a financial position to pay the tax. Because of this, the Internal Revenue Service looked at the business that was paying him and determined this person was actually an employee. As such, they should have withheld 28 percent federal tax and social security tax of 7.65 percent plus matching 7.65 percent. Before penalties, I calculated that the misclassification of the $128,000 cost the company over $164,000. Mind you, this is before any penalties and interest.
If you are using independent contractors in your salon (not booth renters), you are walking on thin ice.
