The Moments of Business

There are teaching moments, learning moments, inspirational moments, and moments where we should sit back and take in the moment. The hard part is figuring out which moment it is, especially when you’re in the moment.

Thomas Edison said, “I failed my way to success”. I guess one could say I’m in good company if Edison’s success came through failure.  My education has been more costly than medical school, and twice as long.

With that said…. a defining moment of success through failure was through a long and grueling tax audit. I have heard it said, it’s not a matter of if you will get audited, only a matter of when. If your salon stays in business long enough when will supersede if, and you best be prepared with an arsenal of documentation. If not, your moment will be of the learning kind, as well as stressful and expensive.

My audit story is long, most find it unbelievable, and without getting too deep into the particulars I was forced by the State to make all my booth renters employees. The States determination was based on my logo being on the Independent Contractor’s business cards, a centralized booking system, and utilizing marketing tools to drive new clients.  They argued these three facts alluded to my control over my Independent Contractor’s businesses, thereby making them employees.

The State forced me to issue W2s instead of 1099s, my entire staff left to continue business as usual at another booth rental salon. Not only did I lose my staff, I paid all unpaid state taxes, unemployment, and disability for Independent Contractors who worked for me over a period of 8 years. We appealed the decision 3 times, the audit latest 4 years, thousands of dollars paid to accountants and attorneys, only to end in selling my home to pay off the state, and a valuable lesson…. a learning moment, and now a teaching moment.

At the time I thought I was aware of the laws around Independent Contractors. I sought advice from accountants and lawyers, and I followed their advice. As I understand it now, the professionals I hired felt it was their job to save me from paying taxes. Their advice did just that. I left the responsibility of reporting income, and paying the required taxes, to the Independent Contractors that worked in my salon. I paid no federal taxes, state taxes, social security, unemployment, disability, or workman’s compensation on their income at all. They all claimed to have filed, and paid the appropriate taxes.

Ok so here’s a teaching moment…. DON’T ALWAYS BELIEVE YOUR ACCOUNTANT AND ATTOURNEY, educate yourself. Ultimately most will drop and run, a few will even lie, so do yourself a favor and study up, ask questions, do what you think is right. What is right is not always what saves you money. Hired professionals are protected by their insurance agencies, and their engagement letters, which actually should be termed disengagement letter.  You’re protected by no one; it’s your business, your money, your responsibility.

It’s interesting that for the most part tax laws are not enforced within the salon industry. It would seem we have established our own laws regarding Independent Contractors.  We are largely unregulated by the government, but there are very clear laws that exist. I would venture to guess, that if all booth rental salons were audited, the auditing agency would determine the majority operated with employees and not Independent Contractors. Furthermore, if the government actually collected all unpaid back taxes from our industry, I am sure we could put a pretty big dent in funding the controversial health care reform, yet if they tried to collect unpaid taxes from the booth renter they wouldn’t be able to fund the birth of our politicians’ next indiscretion. Ask yourself this, who has more to lose, you or your booth renter? The answer to that question will answer who they will audit, and who they will collect from.

Another teaching moment… if you are a booth rental salon know the law, and follow it, or you will be held accountable for ALL UNPAID TAXES OF YOUR BOOTH RENTERS. Also, MOST BOOTH RENTERS DO NOT PAY TAXES ON 100% OF THEIR INCOME, I had some that never filed taxes at all even though they stated yearly they had. Now I did say most, I am sure there are a few honest Abes out there reporting tips, cash, and not cashing checks, but if you are the owner of a booth rental salon protect yourself. Unfortunately the only way to protect yourself 100% is to report income (including tips), and pay the taxes yourself.

A salon owner called me the other day asking where I go to hire my interns. She owns a booth rental salon, and began expressing her frustrations with educating and growing interns, contemplating converting her staff to employees. Her comment to me was, “I’m just not sure I want to work that hard”. My thought when she said that was, “well maybe if you don’t want to work hard you should retire, or go work for someone.”  I also thought ….that if you have interns chances are your Independent Contractors are employees by law. I have actually had these conversations with her, and she always has an answer to how her salon is different, and how she is going to get away with what I couldn’t get away with….ok well good luck with that! Remember what I said in the beginning…it’s not if you get audited, only a matter of when.

Too many salons are opened because owners don’t want to work for someone, but they fail to realize the responsibility of owning a business. As business owners we have a fiduciary responsibility, making sure laws are followed, and taxes are paid. If you own a booth rental salon you still own the salon. Owning a business is work, worry, and risk. If you don’t want the trouble, don’t own a business.

I am told the smaller the government agency auditing the tougher the audit. Each agency also has its own laws regarding Independent Contractors for each industry. I have posted links below to federal laws as well as California’s laws. Each state has their own laws regarding Independent Contractors versus Employees, and the state law will supersede the federal law if your audit comes from a state agency. Also, be aware that each government agency has its own terms for determining Independent Contractor versus Employee, as does each auditor. Simply put you piss off your auditor you are in big trouble. Mine was in a constant state of PMS.

My tax audit was a learning moment, and I hope I can spare many in my industry the same financial and personal devastation I experienced.

The very best way to protect yourself is to pay the taxes for your staff. It may cost you now, but save you in the long run so you may have more inspirational moments, and moments to do nothing at all….Peace of mind sometimes comes with a price.

If you are contemplating converting from 1099’s to W2’s, and need a moment of learning The Sage Society can help. Please send us an email through the “contact us” tab on The Sage Society’s website.

Feel free to post your sagely experiences and comments below.

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Listed below are the appropriate links for determining if your people are Independent Contractors or Employees.

http://www.irs.gov/businesses/small/article/0,,id=210745,00.html#7

http://www.edd.ca.gov/pdf_pub_ctr/de231c.pdf