By Myra Irizarry, PBA Director of Government Affairs
The Internal Revenue Service (IRS) is the revenue service of the United States federal government. This government agency is a bureau of the Department of the Treasury, and is responsible for collecting taxes and the interpretation and enforcement of the Internal Revenue Code.
It is crucial to be familiar with the IRS and how this federal government agency works. A solid understanding of the IRS and what it means to you as a beauty industry professional will only help you to be more successful in your career. The IRS covers everything from auditing to tip reporting, therefore knowing your federal tax responsibilities is essential to your success.
Recently, the issue of worker misclassification has drawn more attention, possibly due to state and federal legislative proposals to further clarify who qualifies as an independent contractor. According to the United States Department of Labor, the misclassification of employees as something other than employees, such as independent contractors, presents a serious problem for affected employees, employers, and to the entire economy. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers compensation funds. Correct and accurate worker classification is crucial and is becoming a more prevalent issue in the US.
The PBA Government Affairs Team has compiled a comprehensive list of IRS resources for the beauty industry. Available on our website at probeauty.org/irs, resources include information on the difference between an employee and an independent contractor, the IRS definition of an independent contractor, and an audit techniques guide specific to beauty and barber shops. This helpful resource is split into two different sections: Resources for Employers and Independent Contractors (Self-employed/Booth Renters), and Resources for Employees.
Shop owners, booth renters and employees all have a responsibility to know their federal tax responsibilities as well as how to appropriately classify workers. In order to determine the correct tax responsibilities, the salon owner or individual must first understand who is an independent contractor. According to the IRS, a salon owner should consider the following questions:
• As the owner, do you establish the hours the salon is open?
• Who makes the determination regarding who works specific shifts?
• Do the licensed beauty professionals purchase their own supplies with their own money?
• Who determines the prices charged to clients?
• Do the licensed beauty professionals each set their own appointments?
• Who is responsible for expenses, such as insurance, advertising, etc.?
Shop owners, booth renters and employees all have a responsibility to know their federal tax responsibilities as well as how to appropriately classify workers.
These questions are not all inclusive, but they will provide insight. Think about the extensive instructions given as to when, or where to do the work and where to purchase the supplies—odds are if you are providing this direction, you are likely the employer and your worker is the employee.
The IRS has also provided questions for the independent contractor to consider in order to determine if the individual is correctly classifying their own tax status:
• Do you have a key to the establishment?
• Do you set your own hours?
• Do you purchase your own products?
• Do you have your own phone number and business name?
• Do you determining the prices you charge your clients?
Answering “yes” to most of these questions implies you are an independent contractor and you are responsible for your federal taxes. Licensed professionals that rent or lease a work station/area are required to obtain appropriate business licenses, a sales tax number if selling products, report their earnings (service, sales, and tips) directly to the IRS, and pay federal, state, and local taxes. According to the IRS, tips are reportable as taxable income. As an independent contractor, you may need to make estimated tax payments during the year to cover your tax liabilities, since there is employer withholding your pay.
The IRS has also published a brochure specific to the professional beauty industry entitled “Tax Tips for the Cosmetology and Barber Industry.” The purpose of this publication is to describe some of the Federal tax responsibilities that owners and workers must address each day. This brochure provides an array of information and tips, including tip income responsibilities for the employer or booth renter, as well as employee tip reporting responsibilities. A printout of this brochure is available at www.probeauty.org/irs. The purpose of this helpful brochure is to describe some of the federal tax responsibilities that owners and workers must address each day. Having this resource handy at your desk or work station may be helpful.
While issues dealing with the IRS including worker misclassification can seem overwhelming, the PBA Government Affairs Team is here to help. Please contact us at 1-800-281-0424 if you have any questions about our resources page.
About the Author
Myra Irizarry is the Director of Government Affairs for the Professional Beauty Association (PBA). PBA advocates for the rights of every member and is dedicated to tracking, introducing and responding to legislation at both the state and federal levels with potential to affect the beauty industry. Along with our Government Advocacy program, PBA provides our members with Education, Signature Events, Charitable Outreach, Research and Business Resources. Visit probeauty.org for more information.