The IRS Could Be Looking At You!

The beauty industry is already on the radar of the IRS because most salons and barber shops are cash based businesses.  The IRS typically selects 1% of salons for random audits, and 3% if they are high earning salons.  I found a site that said there are approximately 250,000 salons in the US and that means 2,500 to 7,500 salons get audited every year.  In addition to looking for financial problems, the IRS has recently elevated their focus on employment classification issues to assess taxes and penalties for non-compliance.

My next question: Is that INDEPENDENT CONTRACTOR working for you really an EMPLOYEE?

Internal Revenue Code Section 3509 covers the penalties for misclassifying employees.  The penalty is based on variables such as if the misclassification is willful and if returns were filed.  If the employer filed a return with an error, they may only be responsible for paying 15% of the wages paid to the employee, 20% for social security and Medicare and 100% of the employer’s share.  If returns were not filed or there was willful intent to mislead the government, those amounts could double.

Below are 3 areas that you can review to ensure you are classifying your independent contractors and employees correctly.

  1. Your behavior can indicate whether a person is an independent contractor or an employee.  In a salon, who makes the schedule and determines when the shop is open? An individual would be classified as an employee if you have the right to control when they do their job and how they do it.  Also, if you implement a training program with them and carry out an evaluation system, they would be considered an employee.
  2. There are financial aspects that would also indicate that an individual is an employee. Does the salon owner determine the prices to be charged to customers?  The method of payment such as an hourly wage and/or commission, if you pay for their tools and supplies, reimburse expenses and provide benefits you would need to classify this person as an employee.
  3. Do you have a written agreement outlining the type of relationship, indicating that this person only pays rent and they collect their own payments from customers? If not, then you may have an employee and not an independent contractor.

If you are unsure of how to classify and individual, you can submit Form SS-8 to the IRS for review and they will assist you with this process.  However, be warned that this process may take up to 6 months to resolve and you will be responsible for any fees or back taxes due for a mistake classification.

For additional information go to https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

Categories: Tax Information

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