Looking for information concerning booth rentals and filing taxes in San Diego? Well then, you have come to the right place! I have several clients who are hair stylists. Some of them are treated as employees by the salon they work at, and some of them rent booths at salons. The reason I am writing this post is because the other day a potential new client consulted with me who rents a booth at a salon and has also started her own studio where she is renting a booth to another stylist. So being the tax geek that I am, I decided to explore the rather fascinating world of salon booth rentals and share my findings with my existing clients and potential new clients. In general, this tax information will apply to cosmetologists, manicurists and massage therapists who rent booths at salons and the salon owners who rent the booths to them.
Booth Rentals and Filing Taxes in San Diego
The biggest concern facing salon owners who rent booths and the booth renters themselves, is the independent contractor / employee determination. If you are a salon owner who treats all of your staff as employees, or you are treated as an employee at the salon where you work, then you probably have nothing to worry about as far as the employee / independent contractor rules go. But you may want to continue reading because one day you may find yourself in a different situation, a situation in which having a good understanding of booth rentals and filing taxes in San Diego will keep all parties out of trouble with the tax authorities.
The Booth Renter
There are two reasons that hair stylists choose to rent a booth from a salon owner instead of being treated as an employee.
#1 The ability to keep more of the money that is being paid for your services. Just remember that you are going to have to pay all of your self employment tax, furnish your own supplies, be bonded, do your own bookkeeping, carry your own liability insurance, maintain your own business and professional licenses, make estimated tax payments and deal with a more expensive and complex tax return. Are you still sure you want to go with the booth rental route?
#2 The independence and ability to set their own work schedules as they see fit.
The Salon Owner
If, as a salon owner, you decide to rent booths out to hair stylists, then you must be aware that there are two governing bodies that must acknowledge the booth renter as an independent contractor. They are your state government and the IRS.
Contract Requirements
One of the most important aspects of a legal contractor / subcontractor relationship is the contract itself. Some form of a contract is required by both the state and the IRS. I highly suggest a signed contract composed and reviewed by a competent lawyer. A good contract should include the following components:
1) Adherence to state laws and regulations – The booth renter must be required to furnish their own business license, professional licenses and bonds. Monitor this.
2) Control over the end result – You as the salon owner cannot have any say in the control of the style of hair for the customer. Hair style decisions must be left up to the hair stylist.
3) Separate insurance policies – The booth renter should carry their own liability insurance to protect the salon owner, their clients and themselves.
4) Separate supplies – Booth renters treated as employees will use supplies provided by the salon owner. A true independent contractor will provide their own supplies. Make sure this is enforced.
5) Hours of operation – The salon owner can have no say over the hours the booth renter works except that they can be restricted to conform to the general salon hours.
6) Rents – Rents can be fixed or can be fixed with a percentage of sales included as well. Make sure that other amenities such as use of a receptionist, utilities and location in the salon are clearly defined in the contract.
7) Customer payments – This is probably the most important aspect of the contract. The booth renter absolutely must collect payment from their customer at the booth. From reviewing tax court cases it would appear that this is a major factor in determining a true contractor / subcontractor relationship. Do not deviate from this!
Here are a couple of court cases to drive home the importance of the booth renter collecting customer payments at their booth and understanding booth rentals and filing taxes in San Diego:
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
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
Many salon owners collect the customer payments for their booth renters, take their cut, and write a check to the booth renter. At the end of the year, the salon owner issues a 1099-Misc to the booth renter. This is a terrible mistake. What the salon owner has done in effect is made that booth renter an employee and set themselves up for financial disaster if they are audited by the IRS or are turned in by a disgruntled booth renter. Categorizing an employee as an independent contractor is one of the most costly and avoidable mistakes a salon owner can make.
At the end of the year it is the booth renter who is required to issue a form 1099-Misc to the salon owner for the amount of rent they have paid during the year.
If you are a salon owner, here is a link to the IRS that you should become familiar with:
I hope this information is useful to salon owners and booth renters. If you have any questions concerning booth rentals and filing taxes in San Diego, feel free to contact me.