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Instead of writing my regular column concerning
the choices of employers and booth renters I’d like to present the
information I received in a meeting with the Internal Revenue Service (IRS).
The message was very clear to me that the IRS will be concentrating on
auditing the beauty and barbering industry after April 15, 2004 and the
reason is very clear as I see it.
As a stylist for the past 33 years and as a licensed cosmetology instructor
of the past 24 years I have watched what has happened in our industry. What
the IRS wants to do will affect every area of our industry from the
manufacturers, distributors, sales consultants, business owners, their staff
of employees and all the independent owners out there whether you call
yourself a booth renter or an independent contractor or whatever creative
title you have given yourself or your staff.
The truth is the IRS would like to see that everyone is in an
employee/employer relationship for one simple reason: The government is out
to collect as much unreported income as they can from every industry but
specifically the beauty and barbering industry.
So here is their plan of action. First and foremost it is unfortunate that
so many our industry does not declare tips as income. The IRS and more
states are looking to have you declare anywhere from 7.5% to 20% of your
income as having been derived from tips or gratuities. The IRS thinks they
are losing anywhere from 17 to 20 million dollars from unreported income
based on a study made several years ago. They believe that a large portion
of that revenue loss is derived from tips and other sources that are
unreported.
Our industry shifted into the booth rental market in the early 1990s because
of two distinctive market reasons; one being the economic recession, the
other reason, the major shortage of people entering into the beauty
industry. This booth rental explosion caught on so fast because it was a way
to save salon owners from losing everything they had worked so hard for
financially in their lives. As an industry, we lost over 60% of the beauty
schools and over 10,000 salons in the 90s and are continuing to lose me even
today.
Booth renting, as it was becoming to be known in our industry, was a
completely different structure than the IRS had ever known or existed in any
other industry. To them they only had tax auditing guidelines in the area of
contract labor. Seven years back the IRS created a division to oversee cash
based businesses which included the beauty industry. The IRS has a tax
compliance division to offer guidance and compliance for the salon, spa and
barbering industry.
The IRS has organized several areas of that compliance. First they have been
teaching tax compliance workshops at all the major trade shows for the past
3 years to make us aware of our tax responsibilities as an employer, an
employee and as a booth renter/independent contractor (self-employed.)
The IRS had created a manual several years back which has been updated, to
audit the beauty and barbering industry. The auditing agents do not care
about what hat you are wearing or what title you have given yourself. In an
audit with an employer with employees for instance, they will ask three main
questions: One how many hours and days of a week are you open? Secondly what
do you charge for services? And thirdly, how much time do you allow for an
appointment?
After they retrieve your banking records to uncover the tip percentage and
any other income you should have declared among other things, the rest is
history from the employer/employee side. From the Booth Rental side all of
the same rules apply with the exception that IRS and your State wants to see
a clear cut separation between the business owner/landlord and the booth
renter when it comes to three main issues: Number one who has Financial
Control, number two who has Behavioral Control and number three the
Relationship Control to determine whom has the tax responsibility.
Many business owners have their staff misclassified tax wise, which
according to the IRS and your own state this would be financially
devastating from the amount of money owed in back taxes, penalties and
interest that would occur from an audit. That is only the tip of the iceberg
because those agencies we have been mentioning through this wake up article
will demand that you make all those misclassified individuals employees
immediately. What do you think most of those staff members will do? Our
educated view is that they will leave your establishment or be forced to do
the same because they also can and will be audited.
Last on our list is the Contract Labor title, even though the greatest
percentage of our industry does not qualify in the true sense of this
category tax wise over 99.5% are incorrectly classified. The IRS is
including the category title of booth renting and placing it under contract
labor. They would like to see it disappear mostly because of the unreported
income, the handling of and how it is not being done correctly. It is all
about a paper trail and who really has the tax obligations to pay and by how
much, for us this is the real problem.
The final Stage of auditing the beauty and barbering industry is the
agreement of the exchange of information that is taking place between the
IRS and other states, like who has or has not done the filling of taxes and
who is licensed.
We in the beauty and barbering industry need to get our act together on the
fundamentals of running a business as a business. Only when we are doing
business as a business will the IRS and your state tax issues disappear for
the most part—remember three years past.
But wait a minute! Our industry does not have to take all the blame for what
has not been working when it comes to being in tax compliance. In the last 8
years we have been in communication with the IRS these tax issues that are
plaguing our industry. We have repeatedly requested in writing what they
mean by the confusing statements that they have published, to give our
industry clear cut definitions on what is and is not acceptable in the tax
arena of running a business, especially when it comes to booth renting and
contract labor guidelines. On their behalf I must say they are trying to do
the right thing in their quest to get us in compliance. They could use the
example of the California Franchise Tax Boards guidelines as they are very
clear on tax issues.
I’ve traveled all around the United States of America and the one thing in
common in the beauty industry is that most people in this great country of
ours wants to do things right. They are good law-abiding citizens. All they
want to do in playing the game of business is to know what the rules of the
game are so they can comply.
As an industry we need to be united. The best way is through some great
organizations nationally and through your own state. Get involved in the
political movement if in no other way donate some funds to help support the
very people that are trying to support you and our industry: TSA,
Professional Beauty Federation, especially the California, Chapter, BBSI,
ABA, NCA and your own State Chapters.
Ken Cassidy is president of Kassidy’s Management Consulting Company.
We welcome your questions and comments. You may reach Kassidy’s Salon
Management Consultants Company at (562) 432-4462 Fax (562) 439-6692
www.kassidys.com . Write to us at 5740
East Second Street - Long Beach, CA 90803 E-mail
kassidy122@earthlink.net
or through this publication.
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