Three Types of Salons/Spas: Employee-Based, Independent Contractor-Based and Hybrid
If you're a salon or spa professional, you have the option of three types of salons/spa business models: employee-based, independent contractor-based and hybrid. How you pay your team will be determined by which business model you choose. They are not the same and it can sometimes be confusing, so we want to break everything down for you here to help you stay compliant and run a successful business.
A salon owner with employees and a rental salon owner with independent contractors are two very different business models regarding the law and it’s important to know why.
Salons/spas that classify workers as 1099 and treat them as employees can be a problem in this industry, which hurts all salons/spas that are tax compliant. If you are misclassifying workers you will be the one responsible for back payroll withholding taxes, interest and penalties.
Learn about the three types of business models for salons/spas:
Employee-Based Business Model
A salon owner with employees is the only salon owner in the company. They pay for and manage the expenses and supplies for everyone in the building and they legally have a say in schedules, products, and pricing.
Most of the time these salons/spas are commission-based salons, team-based pay, hourly or a blend of all three. Employees will receive a W2 form.
Commission-based salons/spas offer a guaranteed hourly wage to stay compliant with the IRS, and some offer a commission percentage split such as a 40/60 or 50/50. Services are performed in brick-and-mortar businesses, employees receive paychecks and sometimes benefits. In this model, stylists don't have the pressure and responsibility of running their own business.
Team-based salons/spas offer a guaranteed wage, sometimes a salary to team members and bonuses. Med spas often offer the team-based pay model while salons have not used this model as often.
Hourly salons/spas model has two options: 1) Corporate Models - Hourly wage with tips, benefits and the support of a franchise to help you build a client base. 2) Hourly Pricing: A newer practice in the industry is charging by the hour, and getting paid based on your time. Tipping is not allowed in this particular model but this salon/spa business plan encourages professionals to price to include what they would make in tips.
In this model salon/spa owners have control over the quality of services, retail and customer experience, with an opportunity for high profit margins.
Independent Contractor-Based Business Model
A rental salon/spa owner is a self-employed business owner. Every renter that works at the salon/spa is also a self-employed business owner. A rental owner is the landlord that has a leasing agreement for each business owner that rents a chair in their space - the renters. A rental owner doesn’t legally have a say in schedules, what products to use, or pricing.
The salon owner’s business finances are completely separate from the other business owners in their salon/spa. They are not responsible for compensating the renters, but the renters pay the owner a weekly rent based on the lease. Non-employee, independent contractors file 1099 forms.
The Three Types of Salon/Spa Self-Employment:
Open concept: An open concept booth rental salon is where stylists or nail techs are working in the same room.
Salon/Spa Suites: Rented rooms for performing services. These can be single, double or large suites that accommodate multiple people.
Freelancers: Freelancers travel for work on-location events - weddings, movie sets, photo shoots, etc.
How to File 1099 Taxes As An Independent Spa or Salon Contractor.
Hybrid Salons/Spas
A hybrid salon/spa business model is a blend of hourly, commission, 1099 and or booth rental options all in one place of business. A business model that is growing in popularity, this can be a stable work environment for owners and employees that offers the best of all worlds.
For example, there is the flexibility and freedom for those who are trying to build their business at a salon to start out as an employee making a certain, guaranteed amount each week - and then once their clientele is built up, they can switch to commission or straight 1099 – ultimately they have the ability to wait until they know they can make the most money by switching… because, let’s be honest, building a clientele is hard.
We hope you found this resource helpful and informative as you run your salon or spa business. HarQuin offers affordable bookkeeping, payroll, sales tax and 1099 services - get a free estimate!