Originally published in Massage Bodywork magazine, December/January 2002.
Copyright 2003. Associated Bodywork and Massage Professionals. All rights reserved.
Distinguishing how to run your business is the most important thing you can do for professional peace of mind. A question frequently asked by concerned bodywork practitioners regarding their relationship to their employers is "What am I: An employee, a booth renter or an independent contractor? As frightening as it may seem, there are many who don't realize there is a difference.
The alarming truth is 90 percent of all businesses in the beauty and wellness professions are operating incorrectly under the wrong classification, which can lead to trouble for both the owner and the renter when facing taxes, not to mention unemployment and/or disability.
In May 2000, the IRS published an educational pamphlet detailing the differences between an independent contractor, employee and booth renter (Publication 3518, Catalog 73164X). Regardless, many are still unknowingly operating illegally. Let's take a closer look at the three categories in order to become more familiar with the similarities and differences.Employees
Most of us are aware of the business relationship between an employer and employee. The business owner pays an operator a wage, commission or salary, and pays all related taxes to the IRS and their state; employees are covered by workers' compensation and state unemployment. At the end of the year, the business owner serves the employee with an IRS Form W-2. The business owner also has total control over the services, actions, dress and behavior of the employee during their tenure.Booth Renter
When renting a booth, the business owner leases "space," be it a station, or esthetician or massage therapy room, to the operator for a flat rate of rent. This rented space is the primary location from which the operator conducts their business. At this time, they are small business owners, a mini-salon owner if you will, operating within the business owner's facility. The booth renter may come and go as they please (within the operating hours of the business), set their own prices, book their own clients, generate their own advertising and collect their own fees for services rendered. The renter pays his own taxes and is not covered by workers' compensation, employer matched unemployment or disability insurance. The booth renter serves the business owner with an IRS Form 1099 at the end of the year for all rents paid over $600. The renter can, however, make commissions on retail sales made by vending the business owner's products (provided the business owner retains retailing rights), in which case, the business owner would serve the renter with an IRS Form 1099 for amounts more than $600.Independent Contractor
Let me preface this classification by stating only half of 1 percent of the operators in the beauty and wellness industry qualify as an independent contractor. Having said that, let's examine this business relationship. Like a booth renter, the independent contractor operates their business independently of the business owner. However, the salon, day spa or wellness center is not their primary place of operation. They are not leasing space; they are not on the payroll. They are paid on a service-by-service basis and are responsible for all their taxes.
For instance, let's say as the business owner you have a client who requests the services of a massage therapist. You own the massage therapy room, but have no massage therapists on payroll, nor do you have anyone leasing the massage room at that particular time. You do, however, have the names of several licensed massage therapists in your area. You call several until one is able to service this appointment at your facility. You then book the appointment with the client, collect from your client after services are rendered, then pay the massage therapist from the salon account. You would then serve the independent contractor with an IRS Form 1099 at the end of the year for services rendered for amounts more than $600.Contracts and Agreements
Now let's examine how to prove your business relationship. I cannot stress enough the importance of a business foundation in the form of a contract, whether it is a business employment agreement, a space sub-lease for booth renters or an independent contractor's agreement. Regardless of how an owner operates the business, a contract will protect both parties in the event of a disagreement, even if it escalates to a court of law. A solid contract will most often alleviate those headaches, not to mention protect the business owner and the operator in the event of an audit by the state or IRS.
A business employment agreement will outline what is expected from the business owner and employee alike. The space sub-lease (or lease if the salon or day spa owns the property) will clearly show the business relationship between the business owner/landlord and the booth renter. A weak contract between owner and renter does not prove the parameters of the day-to-day business relationship of both parties. Weak contracts often depict an employer/employee relationship, rather than the clear-cut separation of two independent businesses, and is essentially useless if audited, making the business owner liable for all back employment taxes, including penalties and interest owed for the time period in question (usually a three-year time frame), causing a financial and legal nightmare. This scenario is coupled with the fact that once one agency finds you liable for back taxes, others are quick to follow suit.
The same applies with an independent contractor's agreement. A business owner should have the contract with the independent contractor clearly define the working arrangement between both parties. It is better to be covered for what might happen versus not being covered for what has already occurred.
I have only provided a small piece of the big picture of employment responsibility and whose role it is to pay all of the appropriate taxes in a business relationship. Whether you are a business owner, an employer/employee, a space renter, or in a few cases, an independent contractor, the single most important tool you should have is a solid contract. Whether it is a tax issue, a business issue, an unemployment/disability issue, or a dispute that ends up in front of a judge, the business agreement or contract is going to be the determining factor in 99 percent of most cases. It is important to know that not just any contract will work for you (i.e., writing one on your own). It is how the contract is worded that will protect you and give it the validity to withstand time. Improper or incorrect content is the No. 1 reason audits occur and fail. Protect yourself, your loved ones and your investments.Ken Cassidy has been a cosmetologist for 30 years, licensed cosmetology instructor for 18 years, business owner for 27 years and has operated businesses with both employees and contract labor. A writer and lecturer, Cassidy has been published in numerous journals and has worked across the country with distributors, salon owners and managers setting up their businesses for employees, contract labor and booth renting. Cassidy markets business education for the beauty industry that shows how to run a successful business for employees and/or contract labor and how to be more profitable legally. For more information about business agreements, space sub-leases and other business management issues, contact Cassidy by visiting www.kassidys.com.