BOOTH RENTAL/INDEPENDENT CONTRACTOR

Q: My daughter-in-law recently attended a seminar at the Peel’s Show in IA where you talked about the IRS and Beauty Salons.  She came away with some information (or her interpretation of same) that has me somewhat confused.  Can you answer the following two questions for me to help clarify her understanding?

We have a Booth Rental-Independent Contractor Agreement that we purchased some time ago to be used in the Beauty Salon Business. With this agreement we allow our stylists to schedule their own time.  We want to be sure that the information we fill in on these contracts does not in any way jeopardize the relationship we have with our stylists. The stylists pay us a rent check.  However, the newer stylists would prefer their rent be a percentage of their sales, as opposed to a flat fee.  We want to be sure there is no problem with doing that.

(1) When having a stylist sign a Booth Rental/Independent Contractor Agreement, is it possible to have a % of the business the stylist does during the week be the Booth Rental amount, or is it required that this be a specific figure?

(2) When having a stylist sign that same Booth Rental/Independent Contractor Agreement is it possible to require a certain number of minimum hours to be spent at the salon without jeopardizing the integrity of the agreement, i.e. maintaining the Independent Contractor status for the stylist?

Obviously, we want to be sure we are following the correct procedures to stay within IRS guidelines, so answers to these questions will allow us to determine our direction with any stylists we retain.  Thanks in advance for any clarification you can provide.

A: Great questions!  When IRS or Department of Labor looks at a worker, they apply common law principles.  What this means is based on the “facts and circumstances” does the owner have so much control over this person that it makes the person an employee.  The main factors are:

·         The degree of control

·         The workers investment

·         The workers opportunity for profit or loss

·         Can the worker be discharged

·         Is the worker part of the regular business

·         The permanence of the relationship

·         What relationship did they think they were creating

There are several cases where the courts have ruled on worker versus independent contractor.  In all the cases except one when the worker paid rent based on a percent of income that person was determined to be an employee. 

Here is information from the IRS Audit Guide of Salons:

Revenue Rulings and Court Cases

The following revenue rulings and court cases 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. Determination: Employee
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 furnished 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 furnished heat, light, water, and supplies, hair stylist retains the money collected; hair stylist sets own hours of work. Determination: Independent Contractor
Wolfe v. United States, 77-1 U.S.T.C ¶ 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 stylist are not required to work on salon's customers. Decision: Employee
A Henry, d.b.a Center Beauty Shop, 78-1 U.S.T.C. ¶ 9433 (E.D. Tenn 1978)
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 Contractor

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."

I hope that this is helpful.

Larry Kopsa CPA