Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are.
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.There is no hard and fast rule or checklist to determine whether a stylist is an independent contractor or employee. The IRS looks at Behavioral, Financial and Relationship factors to make their determination. Those factors are all listed below and I encourage you to take the time to read them.
Some stylist/owner relationships are fairly easy to figure out. If a stylist is paying booth rent to an owner and keeping his or her sales, it's a pretty safe bet that they are an independent contractor. The stylist has financial risk of loss - they are paying rent (just like a business owner) and if their sales aren't enough to cover their rent and other costs, they can incur a loss. Employees don't have risk of loss.
On the other hand, a stylist being paid hourly and working hours specified by the salon owner is almost definitely an employee.
The gray area is the commission stylist and the IRS will look at how much control the salon owner has based on the factors below. It's important to remember that you cannot claim independent contractor status based on a written contract that says the stylist is an independent contractor and is responsible for their own taxes. The IRS will always look at the relationship, not that piece of paper.
Here are the behavior factors the IRS looks at when making a determination: (with my comments in blue)
Types of Instructions Given
Degree of Instruction
TrainingIf the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.
Here are the Financial factors the IRS looks at: