In a recent Tax Court case, a salon owner in Ardmore, OK prevailed against the IRS in classification of her salon technicians and massage therapists. The IRS had tried to establish that these individuals were in fact employees and the salon, therefore, was liable for all of the unpaid payroll taxes.

Factors that the Court said were in favor classifying the individuals as an independent contractor:

  • Service providers were required to pay a percentage of their revenue as booth rent, but never less than $80 per week.
  • There was no minimum guaranteed level of payment.
  • The spa did not pay for any of the service provider’s business or travel expenses.
  • The service providers made a significant investment in outfitting and decorating their spaces, and therefore bore the risk of net losses.
  • The spa did not tell the service providers how to provide their services.
  • The service providers were all licensed professionals.
  • The service providers kept their own schedules and were not required to work specific or a minimum number of hours.

Items that the Tax Court said favored the position that the individuals were employees:

  • The services were mostly, if not entirely, performed on the spa’s premises.
  • The spa provided some informal training to new providers.
  • The service providers did not make their services available to the general public.
  • Spa employees assisted in booking appointments and in receiving payments.
  • The customers paid the spa, not the service providers.
  • The spa had control over the funds until it distributed to the service providers’ weekly.

This area of the tax law is one that the IRS continues to pursue aggressively. It is imperative that you address these questions for your business!

For a more detailed list of the issues that the IRS looks at when making these determinations, visit our Learning Center and the Independent Contractor Checklist (http:/wp-content/uploads/2017/02/Independent_Contractor_Checklist.pdf).

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