Article reprinted from Massage Today 2006 Vol 6 Issue 03
By Dixie Wall, Contributing Editor
The IRS is cracking down on spa owners for classifying their
therapists as independent contractors when, in fact, they are employees.
The
penalties for this violation are severe and can equal 100% of the tax that
should have been withheld, or more.
This punishment can be held against both the spa owners and
the massage therapist.
The reality is that, in this business, it's estimated
that up to
99% of spa and wellness center owners with booth rentals or
independent contractors would not pass an IRS audit.
Many businesses have been gravely affected by audits due to
their ignorance of tax laws and bad legal advice. The choice of whether to
classify a massage therapist as an employee or an independent contractor
depends on several factors, such as the specific goals of the business and the
personalities of the individual therapists.
This important difference between an employee and an
independent contractor is determined through strict IRS regulation and under
common law. Each factor depends on the degree of control shown in the
relationship between the business and the independent contractor or the
employer and the employee. It's not imperative that he or she actually exercise
this control, but that he or she has the right to do so. There are three degrees
of control and independence: behavioral, financial, and finally, the parties'
relationship.
Attempting to "simply" follow each specification
of the IRS's 20-point test will produce a large gray area of misunderstanding.
Nevertheless, to follow each of the 20 specifications to a T would be like
driving in exact accordance with the Department of Motor Vehicles handbook it's
nearly impossible.
In the behavioral category, a business determines whether it
has a right to direct and manage the employee or independent contractor. Any
instructions given to the worker, including when, what and in which order to do
the work, which tools to use, what workers to hire, and where to purchase
supplies, are all contributing factors.
Since an employee usually receives formal
training from the employer, the key question is whether the business has the
right to control the details of workers or whether the independent contractor
uses his or her own methods.
The financial control category of an employee usually is
seen as an extension of the employers set business structure. Independent
contractors are more likely to have non-reimbursed expenses and an investment
in the facilities he or she uses. Moreover, the method of payment from the
business to worker is paid as a flat fee, rather than an hourly wage.
Ken Cassidy, of Cassidy's Management Consulting, has been
working with the IRS to make them more familiar with the spa/salon independent
contractor system. "Typically, at the end of the calendar year, the
salon/spa owner provides the independent contractor and the IRS with a 1099 tax
form showing how much he or she has been paid in fees. The IRS would be
unlikely to consider a massage therapist who worked at the same spa every day
an independent contractor," Cassidy said. "According to the IRS,
99.5% of spa workers don't qualify as contract laborer people, or independent
contractors. Independent contractors don't work on a regular schedule, with
regular hours, and they usually work for multiple businesses." So, when
you find you're in a 9-to-5 monogamous relationship with your employer, you are
an employee.
The category that defines the parties' relationship is
determined by written contracts. If the business provides benefits such as
insurance, a pension plan, vacation or sick pay, it would indicate an
employee-type relationship. The permanency of the worker at the location and
the extent that the individual has freedom to conduct his or her own separate
entity also is a contributing factor. The spa owner must save all those fringe
benefits for the employee, because an independent contractor trades in
benefits, as well as financial security, for their freedom.
Ultimately, to share a common interest in the same business
would imply an employer or employee arrangement. An example of this setup could
be paralleled with a dance teacher who works at a dance studio. She brings all
her own music and decides exactly what and when she will teach. Since the owner
of the dance studio and the dance instructor are in the same type of business, the
IRS considers them integrated. However, if the dance studio hires a plumber to
fix the toilets every week, the plumber is still independent because he is in
the business of plumbing, not the business of dance.
Another system of dealing with these issues, the Licensee
System, was developed by Ahmos Netanel, president of Lucrative Spas. The
Licensee System utilizes an outside company as a middleman between therapists
and their clients. "This method has survived four different tax
audits," Netanel said. "The system appeals to spa owners to work with
self-starting therapists who don't require a lot of management."
In the end, the booth-rental system may save the business
owners overhead costs by saving the money otherwise spent on taxes. Many
start-up salons recruit these booth renters due to their tendency to be more
productive than employees. Becoming a booth renter gives the therapist a
greater sense of flexibility to conduct business when and how they choose. Some
salon and spa owners recoil at the thought of receiving only rental income,
while others feel uncomfortable with the loss of control. This usually can be
avoided by putting together a contract for all parties involved, which states
all requirements and establishes a standard of professionalism, such as
discussions of termination issues and any other specific recoup costs.
Your choice of whether to have employees or independent
contractors should depend on factors that would make one outcome favorable to
another. To ensure the success of the individual employee and small-business
owner, their personalities, long-term goals and their finances must be
carefully and clearly contracted. In the age of the paper trail, it's wise to
document everything, in full, with adequate legal advice. Remember, if you misclassify,
you are eligible to be pulled aside, and unlike the DMV, the IRS will stick you
with more than a speeding ticket.
__________
For the record- All Sage Spa Staff are EMPLOYEES, Not Independent Contractors. As such, they receive disability insurance, and unemployment benefits.
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