W2 or 1099, Behind the Scenes of Payroll Taxes
By Heather Bagby
Every year salon owners attend The Summit and disclose that they employ 1099 service providers. First, it is impossible to “employ” 1099 service providers, as the definition of 1099 is a tax form that reports the year-end summary of all non-employee compensation. In fact, the form is titled “1099-Misc” which implies miscellaneous income.
As an owner and leader of your company, it is your responsibility to understand and comply with state and federal employment and tax laws. As a simple test, consider this: in most cases, if you set the prices (determine how to charge the customers) and the hours of the salon, your service providers will be classified as employees and should be issued a W2 on an annual basis.
Employers are responsible for remitting taxes and matching FICA on behalf of their employees. FICA is the acronym for Federal Insurance Contributions Act. It requires employers to withhold Social Security and Medicare taxes from their employees’ wages (wages, salaries, commissions, bonuses, etc.) and to match the amounts withheld.
You need to educate yourself and make intelligent decisions regarding your business. This ten-question test from Intuit will provide clarity. Within five minutes of submitting the test, you will receive a classification recommendation based on the Internal Revenue Service (IRS) guidelines. Send the results of this quiz to your accountant to ensure that you are managing your business properly.
1099 or W-2? Within five minutes of answering these questions, you’ll know the difference. Take the test here.
How do you report tip income?
Salon owners are also responsible for reporting tip income on behalf of their employees. I realize this means that you will have to match FICA on money that did not contribute to your company. Regardless of your opinion on this point, the IRS considers tips to be taxable income, which is subject to federal income tax. Tips that your employees receive directly from customers are generally subject to withholding as well.
The IRS mandates that tips be reported to you by the tenth day of the month following the month in which the tips were received. Tips are to include amounts that you remitted to your employees from credit card and debit card receipts, as well as tips that customers gave directly to your employees.
If you want more information on how to appropriately report tips, IRS Publication 4902 provides an overview based on the Cosmetology and Barber industry, click here.
Summit Salon Business Center (SSBC) has a deep personal commitment to keeping the independent salon thriving and profitable. SSBC’s definition of profit includes paying all required state and federal taxes. If your salon company can only be profitable by ignoring your tax liability, it’s time to reevaluate your business model. There is a way to comply with all state and federal laws while simultaneously enjoying the benefits of owning a profitable salon company.
If you need help with your compensation plan, please contact SSBC at 800-718-5949.
This article is written for salon owners based in the United States. Heather Bagby is not an accountant and garnered information for this article from the following resources: IRS Publication 1779, Independent Contractor or Employee?; IRS Publication 4902, Tax Tips for the Cosmetology and Barber Industry; IRS Publication 15 (Circular E), Employer’s Tax Guide; IRS Publication 531, Reporting Tip Income.
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