Misclassification of salon workers is something you hear more an more about in the cosmetology industry. I am sure you have seen colleagues asking on Facebook groups, “Am I an employee or an independent contractor?” Or, maybe you have seen an article about worker misclassification in salons, have a job offer, or want to fill a position in your salon and have some questions. I get it.
Misclasification isn’t something we discuss in our continuing education courses either. Sure, we are required to cover laws and rules each renewal period, but they deal with our scopes of practice in our state (Texas or Florida), not employment laws.
I am sure you can agree that our instructors in cosmetology school didn’t have the time or background to help us navigate all of the IRS and tax rules. This leaves many workers and business owners in our industry confused.
As I have said many times in articles, I am not a lawyer. Today, I invited Morgan Gallaway Daly to write about the differences between independent contractors and employees in the salon and cosmetology industry. I hope it helps workers and businesses better understand their roles and responsibilities. I know I do. Thanks, Morgan!
Many businesses, especially those in the cosmetology industry, are moving away from hiring “employees” and are instead are hiring workers as “independent contractors”. There are key differences between independent contractors and employees and these differences are important for both businesses and workers to understand. The following article seeks to explain:
- The key differences between independent contractors and employees
- Why these differences matter for businesses
- Why these differences matter for workers
- The pros of hiring independent contractors
- The pros of working as an independent contractor
- The cons of working as an independent contractor
- What the law says
- What an independent contractor should do if they believe they should be classified as an employee
What is an independent contractor?
The IRS explains that “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
In other words, an independent contractor is a worker that is not controlled by the payer. They work on their own schedule and under their own direction. They are hired to produce specific results or services but are not managed like a typical employee. Usually, we would call the person paying the worker an “employer” but because an independent contractor isn’t an “employee”, the IRS uses the term “payer” instead.
What is an employee?
The IRS explains that “an individual is an employee if the payer can control what will be done and how it will be done.”
In other words, an employee is a worker that is controlled by the payer. Here, it makes sense to call the payer an employer because there is an employer-employee relationship.
What are the key differences between independent contractors and employees?
There are a handful of key differences between independent contractors and employees that are important for both businesses and workers to understand. The two most important are “the right to control” and “taxes”.
- Control: Independent Contractors have the freedom to work on their own schedule and at their own direction. Employees are generally required to work on a schedule set by the employer and at the employer’s direction.
- Taxes: Independent Contractors are self-employed and are required to pay self-employment taxes. Employee taxes are paid through their employer.
In cosmetology, a nail technician may be hired as an independent contractor to come in and provide nail services at a hair salon. The tech would make their own hours, bring in their own equipment, and work under their own direction. In comparison, a nail technician may be hired as an employee if the business provides the clientele, equipment, schedules hours for the tech, and directs how the tech works.
Why do these differences matter (for businesses)?
For businesses, understanding these differences upfront will prevent headaches down the road. The IRS explains that “classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes.” Businesses could also become labile for paying unemployment and other benefits employees are required to receive under federal and state law. This can cause problems for businesses with smaller budgets or limited incomes because these costs were not planned for in advance.
If you are a business owner reading this article and are wondering if you have misclassified your workers, you can use IRS Form SS-8 to better determine how your workers should be classified.
Why do these differences matter (for workers)?
Workers should be aware of the differences between independent contractors and employees for tax reasons. Because independent contractors are “self-employed” they are required to pay self-employment taxes. Federal self-employment taxes total 15.3% of an individual’s self-employment income. This means, if you are making $45,000 per year as an independent contractor that you will owe $6,885 in federal taxes. (Individual state taxes may increase this amount). Many independent contractors are not aware of this tax because, historically, they have worked as an employee and their employers have taken taxes out of their paychecks.
Some independent contractors charge more than their standard rate in order to cover their tax payments.
The good news is, that individuals who are self-employed can deduct some business expenses when they file their taxes. You can learn more about business deductions here.
What are the pros of hiring independent contractors?
Some businesses prefer to hire independent contractors for multiple reasons. These reasons are mostly based on costs savings and are listed below:
- Independent contractors are responsible for costs associated with the job. (Examples: office space, Wi-Fi, computers, tools, technology, insurance).
- Independent contractors are not eligible for unemployment benefits or workers compensation.
- Independent contractors are not subject to tax withholdings and instead pay their own self-employment tax.
- Independent contractors are not entitled to join or form a union.
What are the pros of working as an independent contractor?
- Independent contractors have the freedom to work on their own schedule and make their own hours.
- Independent contractors have the flexibility to work for more than one company or business.
What are the cons of working as an independent contractor?
It is important to recognize that many of the pros of hiring independent contractors (for businesses) are cons for individuals working as independent contractors. Independent contractors are responsible for costs usually covered by an employer when they are an employee. Purchasing office space, computers, tools, technology, and insurance can be expensive. Independent Contractors also don’t have access to unemployment, workers’ compensation, or the ability to join a worker’s union to negotiate better pay or benefits.
What does the law say?
When businesses want to make sure they are classifying their workers correctly or a worker wants to make sure they aren’t missing out on benefits by being misclassified as an independent contractor, they should reference their state law. There are multiple tests that are used to determine whether or not someone is an independent contractor. You can learn more about the different tests and which test each state applies here.
What should an independent contractor do if they believe they should be classified as an employee?
First, the independent contractor should talk with the person or business paying them. They may be able to provide more clarification or assistance. When payers are not helpful, workers can contact the IRS.
Workers who believe they have been misclassified can use IRS Form 8919 to calculate and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.