Becoming an independent contractor is a valid career option and there are many successful independent contractors who take pride in operating a professional, compliant business. Most importantly, they are not disillusioned about the financial gain or the amount of work and the number clients they must maintain to make a clear profit.
Some licensed beauty professionals feel their current salon environment does not offer:
The risk of leaving to become an independent contractor seems low, so it is not a surprise that licensed professionals are being targeted by misleading advertisements that portray a “Grass is Greener” mirage of life as an independent contractor. Many of these marketing techniques are targeting stylists with the lure of easily making more money while working with a smaller number of clients in an independent contractor salon suite rental setting. The problem is they fail to provide key relevant information, including tax withholdings, wage and tip reporting, income reporting and mandatory health insurance costs, as well as other costs, which does not support the professionalism or integrity of licensed beauty professionals.
Breaking Down the Numbers
Many licensed beauty professionals express the potential for financial gain as their number one motivation to leave an employee based salon environment. For example, if a stylist believes he or she brings in $100,000 a year to a salon but only takes home less than half, they feel the opportunity for financial gain is worth the transition to work as an independent contractor. What may not be fully understood, or has even been vetted, is the compensation associated with running an employment-based salon versus the income of being an independent contractor. There are numerous existing factors to consider in addition to direct income as indicated in the chart. Visit probeauty.org/issues to learn more.
|Independent Contractor /
|Service Data Assumptions:|
|Avg. No. of Monthly Clients (assumes 60% of employee scenario)||75||125|
|Average Service Price||$65||$65|
|Estimated Financial Scenario Calculations|
|Total Service Revenue||$4,875||$8,125|
|Less Salon Service Charge||n/a||($813)|
|Total Service Revenue After Service Charge||$4,875||$7,313|
|Employee Commission Earned at 43%||n/a||$3,144|
|Retail Sales Revenue (3 per day, 20 days, $10 ea.)||$600|
|Retail Sales Commission (10%, 3 per day, 20 days, $10 ea.)||$60|
|Tip Income on Service Revenue at 15% Avg.||$731||$1,219|
|Total Revenue/Compensation Before Other Deductions||$6,206||$4,423|
|Avg. Fed., State, Local Income Tax and FICA Taxes||($2,288)||($1,025)|
|Healthcare Affordable Care Act Provisions||($150)||($150)|
|Avg. Suite Rental||($1,400)||n/a|
|Product Costs/Supplies (10% of Total Service Rev.)||($488)|
|Total Estimated Monthly Net Income/Compensation||$1,881||$3,248|
Other Factors to Consider: Are You Really an Independent Contractor?
An independent contractor can operate in different environments, in addition to a salon suite rental. There are factors outlined by the IRS to help determine if you are truly independent. Find more tax resources at probeauty.org/irs.
A few factors include:
1. a key to your own establishment
2. setting your own hours
3. purchasing your own products
4. having your own telephone number and telephone line
5. establishing your own business name
6. determining your own pricing for services
7. incurring all business expenses and you may be able to deduct certain business expenses
8. fully reporting your income (including tips)
9. paying your own state, local, and federal tax obligations
Fulfilling obligations as an independent contractor means you will operate your business as a serious, professional business owner. You must abide by all the legal local, state, and federal tax obligations, report all income (including tips) and maintain the appropriate licenses as well as personal liability insurance for your independent business.
What Do You Have, What Will You Lose, and What Can You Gain?
W-2 Salon Employees Commonly Receive:
1. unemployment benefits and worker’s compensation
2. short-term disability, health, dental and vision insurance
3. personal liability coverage through the salon
4. mentorship, training, continued education
5. access to brand name, high-end professional and retail products
6. retail commission
7. profit sharing
8. staff managed payment processing and appointment scheduling
9. employer shared cost of employee tax responsibilities
10. bonus pay
11. housekeeping (towels, capes, materials) and supply orders
12. consistent client base and opportunity for walk-ins or front desk referrals
13. maintenance of salon, including utility expenses
14. consistency and reliability
A successful licensed independent contractor:
1. reports and pays product retail sales tax
2. reports all income, including tips, and pays local, state, federal taxes (quarterly tax payments)
3. obtains personal liability insurance to protect yourself from being held financially responsible for injuries that may occur at your business
4. successfully retains clients
5. maintains appropriate healthcare insurance coverage as required by the Affordable Care Act
6. manages client scheduling and payment processing
7. develops and manages self-marketing
8. purchases and maintains adequate products, materials, and tools
9. seeks out continuing education and stays on top of current market trends
Client Retention: If You Leave, Will They Come?
The number one fear of a stylist considering a transition to a suite/booth rental opportunity is the ability to build a new client base and maintain their client numbers. Although salon rental ads targeting stylists may include messaging such as “you only need to retain 60% of your clients…,” stylists know this is not quite that simple. Are you a stylist that signed an employment agreement, or non-compete agreement provided to you by your current employer? If you are then you know taking your clients with you is not an option.
How will you maintain and build clientele from inside a salon suite? The appeal of becoming an independent contractor can be very alluring, but it is important to plan ahead on how you will build the level of clientele needed to exceed your current earnings.
Choosing the Right Path for You
There are successful independent contractors that have correctly managed to build clientele, operate their business, and meet the legal tax and reporting obligations required by law. If you decide that this is the path for you, know the facts and have a concrete plan of action. Familiarize yourself with the appropriate forms you will need to establish your business, a business name, quarterly tax payments, specific licenses, and other business obligations before you make your transition. Find a complete list of tax resources at probeauty.org/irs.
Most importantly, understand that like any major career move, taking the leap to becoming an independent contractor has many risks and benefits. If you do decide that stepping out on your own is what you want to do, be prepared and take an honest realistic inventory of what it will truly take to be successful as an independent contractor.
Professional Beauty Association (PBA)
Independent Contractor Policy Statement
Professional Beauty Association Background
The Professional Beauty Association (PBA) advances the professional beauty industry by providing our members with education, charitable outreach, government advocacy, events and research. PBA is the largest national organization of salon professionals with members representing salons and spas, distributors, manufacturers, and beauty professionals.
Licensed Professional Form of Business Choice
The Professional Beauty Association respects the rights of an individual licensed professional to choose their form of business. PBA supports the option of a licensed professional to work as an independent contractor within the beauty industry if all the requirements and legal business obligations are correctly met and maintained by the licensed professional. PBA recommends following federal guidelines as determined by the Internal Revenue Service.
Independent Contractor Definition
The professional beauty industry recognizes the use of multiple terms to describe the classification of an independent contractor such as a booth renter, chair rental, salon suite owner, and suite or loft renter. According to the Internal Revenue Service (IRS), A booth renter is someone who leases space from an existing business and operates their own business as an independent contractor. As a booth renter, or independent contractor, you are responsible for your own record-keeping and timely filing of returns and payments of taxes related to your business.
A few key factors as outlined by the IRS that help to determine the classification of an independent contractor include, an independent contractor will (1) have a key to the establishment, (2) set his or her own hours, (3) purchase products, (4) have his or her own telephone number and business name, and (4) determine prices to be charged.
An independent contractor is responsible for state, city, and local taxes which include but are not limited to city sales tax, state income tax, and federal tax withholdings. All income including tips is required to be reported and the appropriate forms should be submitted for business rent in excess of $600.00 per year.
The Professional Beauty Association encourages individual licensed beauty professionals to view additional IRS resources for guidance regarding classification and business responsibilities in accordance with federal laws. Please visit probeauty.org/irs to view the full version of the IRS guide, Tax Tips for the Cosmetology and Barber Industry.
1. Tax Tips for the Cosmetology and Barber Industry. (Publication 4902). Department of the Treasury Internal Revenue Service, pp. 1-10.