This is something we get asked quite often. Surprisingly, many beauty industry professionals don’t know the difference, and there are a lot of businesses that are operating under the wrong classification. To avoid potential problems with taxes and insurance, here is a simple overview of each role.
An employee receives a wage, salary, or commission from the business owner who pays all applicable state and IRS taxes. An employee is covered by workers’ compensation and disability in the event of illness or injury, and unemployment through the state. A W-2 form is received at the end of the year which states all money earned for that year, as well as taxes withheld.
A business owner dictates the services and prices, and enforces the behavior, actions, and dress of the employee. They also provide product and equipment.
An independent contractor essentially means one is self-employed. They operate their business independently of the business owner, which means unlike an employee, they do not have to adhere to a schedule. Independent contractors are paid on a service-by-service basis, as opposed to being on a business’ payroll, and are responsible for all of their own taxes and insurance. A 1099 form is received at the end of the year for the total amount of services rendered ($600 and over), with no taxes withheld.
A business owner usually dictates the services and prices, and supplies the product and equipment. However, an independent contractor isn’t required to do anything other than the service they are contracted for.
As a booth renter, one is leasing space from a business owner—usually a room or a station—for a flat fee (rent). Your business is separate from the business you are leasing from. Booth renters must pay all of their own taxes and insurance, and at the end of the year, supplies the business owner with a 1099 form for all rents paid over $600.
Even though booth renters are operating within the facility of the business owner, they set their own hours and prices, book their own clients, and collect the fees for their services. They are also responsible for supplying their own product and equipment.
No matter what business relationship you enter into, it’s important to have a written contract or agreement in which the working arrangement between both parties is clearly defined. It can end up saving you a lot of headaches in the future.