There are some industries, like beauty salons, that tend to have a lot of independent contractors. Or, at least, there are owners who want to treat the people who work there like independent contractors.
Today, I have a question from a salon worker regarding deductions she can take as an employee versus independent contractor. But, first let’s look at what it takes to truly be an independent contractor.
The IRS uses three general common law rules to determine the status. These are:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer?
Type of Relationship: Are there written contracts or employee benefits?
That just the outline of the questions; there is a lot more to consider for each of these topics. For a salon worker, some of the items to consider is who collects the money, who sets the hours, who determines how the work is done, etc.
An independent contractor is a business owner. They don’t have payroll taxes withheld from their check. And they have to file a Schedule C (Sole Proprietorship) unless they have a business structure. An employee has payroll taxes withheld and possibly federal and state income tax withholding as well. The employer must also pay payroll taxes. An employee can only take some deductions through Schedule A. These go under miscellaneous deductions – employee expenses, but most likely you can deduct very few items, if any.
With that background, let me get to the question from a USTaxAid Community member.
“I currently work in a nails salon and they pay me 50/50 commission. If they’ve already covered my taxes what else do I fill out on the Schedule C other than my income?”
From the statement “they’ve covered my taxes”, I’m assuming you are paid as a W-2 employee. That means you cannot fill out the Schedule C for a business. You are an employee, not an Independent Contractor. On the other hand, if you are an Independent Contractor, don’t assume that they paid your taxes. In fact, it’s almost 100% certain that they did not. If you receive a W-2, you were an employee. If you receive a Form 1099-MISC, you were an Independent Contractor.
One of the things to figure out whenever you start working for someone is to know whether they consider you an Independent Contractor or an employee. If you’re not an employee, be prepared to keep track of your expenses for the deductions.