W-2? 1099? Here’s What You Need to Know About Your Employment Status

Knowing your correct employment classification (1099 or W-2) is imperative, particularly come tax time.

Income TaxesA 1040 Individual tax form with calculator and pencil.

In the salon industry, confusion surrounding employment status runs rampant. Come tax time, techs often aren’t sure whether they should be receiving or filing 1099 forms (for independent contractors, or ICs) or W-2s (given to employees)—and salon owners, knowingly or not, are often misclassifying their workers. “In 25 years of experience, I’ve rarely encountered a salon that would survive audits of its labor and tax practices,” laments Jaime Schrabeck, PhD, owner of Precision Nails in Carmel, California. “Most would fail.”

It’s not just a matter of pesky paperwork; incorrect filing can lead to financial disaster for employers, while employees may find they’ve been robbed of both money and benefits. Here, experts clear up the confusion surrounding this all too common conundrum, so techs and owners alike can ensure compliance.

Filing Forms

When it comes to salon worker status, there are two classifications: independent contractor (IC) and employee. For tax purposes, ICs receive 1099 forms and are paid a full amount, without taxes withheld, so they’re responsible for paying self-employment taxes, notes Eric M. Sarver, a New York City-based employment lawyer for management and business owners in the service industry. Employees, on the other hand, have taxes subtracted from their paychecks and receive W-2s. Sarver says that employers’ and employees’ confusion over W-2 or 1099 status is one of his clients’ biggest issues.

Indeed, according to Tina Alberino, a management consultant from the blog This Ugly Beauty Business, based in Tampa, Florida, most salon workers are employees—however, she estimates that about 98 percent of them are misclassified as ICs. “ICs are freelancers, working for themselves and often for many different businesses; there’s no expectation of a continuing relationship with an employer,” Alberino explains. “But we often see in salons that owners use the IC classification while treating workers like employees.” For instance, booth renters are technically ICs, but only if they maintain a substantially high degree of autonomy over their work—including their schedule and appointments, money, purchasing supplies and more. (See “Independent Analysis,” right, for more specifics on what makes a contractor truly independent.)

One rarely seen exception is found at Alberino’s two-location nail salon, where she occasionally hires a permanent makeup artist on a contractual basis to offer services to clients. Or, techs might be hired as ICs to work on fashion runways, at photo shoots or on movie sets. But, generally, salons are staffing employees—often while erroneously doling out 1099s. “Everyone assumes that everyone else does it this way, so it must be OK,” Alberino says. “But if you’re the one who’s caught, you’re the one in trouble.”

RELATED: 6 Things You Need to Know Before Filing Your Taxes 

Potential Pitfalls

The bottom line: Salon owners looking to avoid taxes by designating employees as ICs are breaking the law. “‘Saving money’ by misclassifying employees would be comparable to ‘saving money’ by cheating on your taxes, or paying your employees in cash off the books,” Schrabeck says. Alberino stresses that this is a federal crime, amounting to tax evasion, wage theft and labor exploitation.

Of course, some salon owners simply aren’t aware of the rules. But excusing an error because of ignorance, confusion or oversight won’t appease the powers that be. Sarver notes that there are stiff penalties for misclassifying employees as ICs, at both the state and federal levels, issued by the IRS, the Department of Labor (DOL) or both. Those penalties could include fees for each non-filed W-2; a percentage of wages and FICA taxes (Social Security and Medicare) that were not withheld; matching FICA taxes the employer should have paid (plus interest accrued daily from the date they should have been deposited); criminal penalties of up to $1,000 per misclassified worker and one year in prison; unemployment and payroll taxes; fines for not having workers’ compensation coverage (in New York, up to $2,000 per 10-day period of noncompliance); and payment to the misclassified IC for the value of vacation time and benefits. Affected employees can even sue the owner, recovering all back wages owed to them (despite what they were paid as ICs), overtime pay if applicable and penalties of up to $10,000.

Alberino has seen salon owners owe hundreds of thousands of dollars due to misclassification—and adds that some cities, such as Chicago, may even revoke an owner’s business license, preventing future operation. Meanwhile, techs get the short end of the stick when they’re mistakenly classified as ICs. “They think they’re getting a great deal because they’re not paying taxes from their checks, but instead the employer is passing the tax burden on to them,” Alberino notes. “Instead of having 7.5 percent taken out of your check, you’re paying 15.3 percent in self-employment tax, plus penalties for not filing on a quarterly basis. And you’re missing out on so many benefits you’d get as an employee. You’re basically letting the owner take money from your pocket.” (See “Employee Benefits,” left, for more information on salon employees’ rights.) 

Furthermore, many experts believe that penalties will become more common in our age of transparency. A few years ago, Alberino explains, the IRS made it a top priority to monitor cash-based businesses like salons. They’ve made it easier for workers to file complaints and automated the system for auditing businesses—comparing what’s reported by a salon to the industry norms and flagging any accounts where numbers don’t match up. “As more beauty professionals become aware of their rights, salon owners will face increasing scrutiny from multiple government agencies at multiple levels, including the IRS, DOL, Occupational Safety and Health Administration (OSHA), and state labor and tax boards,” Schrabeck notes. “As a salon owner, your business must be able to withstand that level of scrutiny and be above reproach.”

It may sound potentially scary, but Schrabeck offers this simple advice to owners: Don’t employ staff unless you can commit to doing so legally—meaning full compliance with state and city labor laws (these can be significantly more demanding than federal laws), which dictate an employer’s responsibilities. Furthermore, compliance with labor laws has a direct impact on compliance with other laws. For example, OSHA laws apply to salon employees, but not to booth renters, while properly classifying workers is affected by all tax laws, such as tip reporting. As long as you file appropriately from the start, you’ll avoid an accounting nightmare, among many other issues.

Independent Analysis

Confused as to whether or not a nail tech should be classified as an independent contractor (IC)? Here, New York City employment and business attorney Eric M. Sarver offers eight key ways to pinpoint a self-employed individual. “This is not an exhaustive list of all factors, so it’s wise to consult with an employment law attorney to be sure,” Sarver notes. However, if any of these do not ring true, chances are the nail tech is, in fact, an employee.

1. An IC uses her own equipment to do the job.

2. An IC pays all job expenses: products, tools, equipment maintenance.

3. An IC is paid on a project-by-project basis, not on a salaried or hourly basis.

4. An IC sets her own work schedule.

5. An IC is free to accept requests for other jobs, work assignments or projects from multiple clients, or directly from her own customers. (If there is a professional conflict
of interest with the salon and other projects, this should be addressed in advance.)

6. An IC is not required to wear a company uniform nor to comply with any other guidelines on appearance.

7. An IC does not have to sign non-compete agreements. (Nondisclosure or
confidentiality agreements regarding a company’s private or proprietary information
are acceptable, however.)

8. An IC determines how her work is completed and does not have to comply with company-specific training.

Employee Benefits

While employees have less autonomy than independent contractors—for instance, they must take direction on where and when they work, and may not be permitted to do the same work elsewhere—they are also entitled to all sorts of perks and protections. The U.S. Department of Labor (DOL) offers these insights:

• You must be paid for all work performed, whether or not the employer approves the work in advance. (This includes time spent in training, traveling from site to site during the day and any work performed “off the clock.”)

• You must be paid at least the federal minimum wage of $7.25 per hour.

• Even if you are paid by the day or at a piece rate, your total wages must amount to at least the federal minimum wage for each hour worked.

• Your employer may make deductions for job-related expenses, such as uniforms, equipment rentals or tools, but such deductions cannot reduce your pay below the federal minimum hourly wage.

• Some state laws require higher minimum wages and greater employee protections; employers must comply with those laws as well as the federal rules described here.

• Generally, you must be paid 1.5 times your regular rate of pay after 40 hours of work in a seven-day workweek.

• It is illegal for your employer to fire you or retaliate against you in any way for contacting the DOL or exercising your rights.

To learn more, visit dol.gov/whd/nailsalon

-Tracy Morin is a freelance writer and editor based in Oxford, MS.

[Photos from Getty Images]

This article was originally published in the January 2018 issue of NAILPRO.

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