Spa Business: Employees vs. Independent Contractors
Correctly classifying workers can save your spa money—and a headache—during tax season.
Tax season is in full swing. As you spa pros know, there are many key aspects of your business to consider when filing your taxes. If there’s one gray area that causes spa owners annual confusion and consternation, it’s the question of whether to classify individuals working for them as employees or independent contractors. If you have employees, you need to pay employment taxes on each of them. But for independent contractors, you simply send them an IRS 1099 form in January, and they are responsible for their own income taxes.
So, which do you have? Before answering, make sure you understand the IRS’ definition of independent contractor. The IRS defines an independent contractor as someone who controls how a job is to be done, and what specific tasks are carried out. (This would not apply to a therapist who uses your booking system and takes protocol orders from you.)
Michele O’Donnell, HR Services Manager for MMC, Inc., a Los Angeles-based human resources consulting firm, cautions spa owners against carelessness when it comes to these definitions. “Owners should ensure that anyone classified as an independent contractor actually meets that criteria, at both the federal and state levels,” she says. “The IRS has a very specific set of guidelines on the topic and many states have their own, too. If an employee is incorrectly classified as an independent contractor, the employer may become liable for all the taxes related to that person—this might include both the employer and employee portions of payroll taxes.” She adds that employers can also expect severe penalties for incorrectly classifying a worker.
Another hot button is the issue of tips. If the individuals working for you are employees, all tips must be accurately recorded. Monte Zwang, principal with Wellness Capital Management, emphasizes, “You’re responsible for recording any income your employees receive—not just the tips that appear on credit card receipts.” No matter how much your employees balk at your diligence in reporting tips, the avoided penalties to your business will outweigh the trouble. O’Donnell agrees: “Owners are required to report employee tips and employees are required to pay taxes on them,” she says. Also, remember that tips are indeed subject to not only income tax, but social security and Medicare taxes as well (see IRS publications 1244 and 531).