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Issue link: http://beautystorebusiness.epubxp.com/i/141850
Beauty & The Law The IRS: An Online Resource Do you want more general information—not a specific determination for your situation—on proper worker classification? The IRS offers an audio presentation—as well as a printed version of it—online. Check it out at irsvideos.gov/ProperWorkerClassification. direct and control the service providers and in particular focused on whether the rental is a fixed amount or a percent of the renter's gross revenue. The court noted that the $80 minimum weekly rent meant that the service providers had a risk of losing money from their businesses. The court emphasized that is only one factor to take into account, and the determination must be made on the nature of the relationship as a whole. The spa argued that it did not pay the service providers at all, but merely passed through customers' payments. As a result, the spa said, it was the service providers' landlord and the service providers weren't even independent contractors. The court didn't agree and said that the checks the spa gave to the service providers were in fact payments—but were payments to independent contractors. The more of these criteria you can satsify, the more likely your booth renter will be an independent contractor. was primarily to offer massages to the public. They worked on-site. A spa employee made appointments and collected payments from every customer. It subtracted the booth-rental fees and charges for any supplies the service providers bought, and wrote checks to the service providers for the balance. And still other facts were neutral in the analysis. Some of these service providers had been at the spa for several years, but others rotated through. The spa did not require full-time work, and each service provider personally served their customers. The IRS classified the massage therapists, nail technicians and cosmetologists as spa employees, and the spa owner appealed. The tax court found that the spa had independent contractors and not employees and was not required to pay back employment taxes. It discussed each of the factors that bear on whether the spa had the right to CONTRACTS & THE INDEPENDENTCONTRACTOR RELATIONSHIP A contract can go a long way to support your classification of workers as independent contractors. The contract won't be the only factor a court will look at in deciding if you have classified workers properly, but it can require the parties to conform to the elements of an independentcontractor relationship. You should go through the IRS criteria and the economicreality test and incorporate as many aspects of independent-contractor relationships into your deal as you can, and then spell out the terms of that deal in the contract. You may be able to avoid paying unemployment taxes, but you need to evaluate that separately based on your state's requirements. Of course, even the best contract won't be meaningful if the parties don't fulfill their commitments in practice. It's always advisable to have a contract with a booth renter. To maxi- 102 August 2013 | beautystorebusiness.com mize the chances that a court will find that a booth renter is an independentcontractor relationship for minimum wage, overtime and federal tax purposes, you should build as many of these indicators of independence into your agreement with the booth renter as you can: • Your business has no right to control or direct how the booth renter provides services. • The booth renter can perform the services in any order at the booth renter's own discretion. • The rental payment includes a minimum payment and is not based solely on a percentage of the renter's gross receipts, so that the renter has a possibility of suffering a loss. • The booth renter has a key to the premises and access at all times along with the right to set his or her own working hours. • The booth renter can decorate his or her booth. • Your business does not specify how work is to be done, require meetings or supervise or train the booth renter. • You cannot require reports. • Any rules should be minimal such as no smoking or turning out lights when workers leave at night. • Ideally, customer payments—including credit-card payments—should be collected by the booth renter. • The booth renter sets his or her prices. • You do not provide any tools or supplies. • The booth renter can also work at other businesses. • The booth renter must have all required licenses, including her personal beauty license plus in some states an additional booth renter or beauty business license. • The booth renter acknowledges that she will pay her own self-employment taxes and will not have any benefits you provide to employees. • The booth renter must be responsible for damages she causes, and she must obtain her own insurance policy covering general liabilities as wells as tools. The more of these criteria you can satisfy and build into a contract, the more likely your booth renter will be an independent contractor. When businesses classify workers as independent contractors, there is always a risk that the worker is really an employee. The consequences of misclassification can be expensive, and if you are in doubt it is always prudent to treat workers as employees. However, there are many times when you can legitimately classify workers as independent contractors and expand your business without incurring liability for withholding income taxes or paying employment taxes. Your lawyer, accountant and state and federal agencies can help you classify your employees correctly. ■ This copyrighted article is intended to help make you aware of some of the issues that you may face, but it is not exhaustive and does not constitute legal advice. You should consult your lawyer for legal advice about the particular circumstances of your beauty business. Jean Warshaw is a lawyer in private practice in New York City. She provides advice on business and environmental law. She can be reached at 212.722.2240. Image courtesy of the IRS their own hours, came and went as they pleased, and some had keys. The spa gave some, but not all, of them written contracts. The service providers were free to decline any customer. The service providers were free to deviate from the spa's price list, and each service provider could choose whether to participate in specials and discounts. Massage therapists and cosmetologists bought their own supplies. Every massage therapist had an assigned room, and some decorated it and brought in their own music systems. The spa did not pay for service providers' required licenses and did not tell the service providers how to service customers. At the same time, there were a host of facts that would have supported the service providers' classification as employees. They were integrated into the main business of the spa, which