Understanding Booth Rental
One would think that a practice as old and widely used as booth renting would be well-documented and standardized. But it is one of the most misunderstood, misused, and abused practices today. The premise of booth renting is simple: the salon owner provides work space and amenities to beauty and barber technicians in exchange for rent.
Each technician operates a business within a business.
They are usually responsible for promoting their own services, building their own clientele, providing and selling their own products, as well as handling their own accounting and employment tax obligations. It takes a disciplined, business-savvy person to make a booth rental operation successful.
Oftentimes, cosmetologists and barbers who fail to have viable and lucrative careers have chosen the wrong work arrangement. A great stylist does not necessarily make a great businessperson. Sometimes the freedom to excel at one’s craft is worth giving up some control in the work environment. Any operator who finds him/herself in this situation should consider working as an employee with fewer administrative responsibilities. For the individuals who possess both technical and business skills, booth renting can be a rewarding career experience or a great intermediate step to full-scale salon ownership.The Tenant-Landlord Relationship
The true spirit of booth renting is a tenant-landlord relationship. Any attempt to supersede the basis of this relationship with some other vision can be catastrophic, and in many instances-- it is. Failure to respect the basic premise of booth renting is the number one reason why there is so much confusion associated with booth rental salons. Booth rental salon owners have a tendency to confuse their landlord role believing it to be something more than it really is; and booth renters almost never think of themselves as tenants.
Booth renters across the United States have very mixed thoughts about their role in the salon. Some consider themselves to be employees to the owner. Others regard their position much like a freelancer who comes and goes at will with no obligations whatsoever to management. The rest have a hybrid of viewpoints that fall between these two extremes.
Many booth rental salon owners are also confused, which perpetuates the confusion in this segment of the industry. They hold the power to end the chaos. It’s simply a matter of taking the time to research and understand the booth rental model and then implementing proper management systems that are congruent with that model. Success in booth rental management really is as simple as that!
Legal Structure:| Now, let’s look at why all business practices within the beauty and barbering industry lack three very important factors to be successful. They are, very simply, the lack of a legal structure, the lack of a profitable structure and the lack of a management structure. Lacking any one of these structures is enough to keep a business from being as successful (profitable) as it has the legal right to be. Worse case scenario, you go out of business. |
|
|
The methods we use to conduct business we call “working options”. When it comes to paying taxes there are three working options or categories from which we must choose - employee/employer, booth renter and independent contractor. Over 60% of workers in our industry have placed themselves, or their business, in the wrong tax classification and, in so doing, generated serious consequences.
The employee/employer relationship is salary based, hourly based, commission based or some combination thereof. Most businesses understand the tax responsibilities in this category but lack the protection to insure their success legally, financially or from a management structure. Contact us for more information on these issues. The same thing is true when it comes to booth renting, with one exception - most owners/landlords and the booth renters themselves, do not know their tax responsibilities. Or, if they do, they don’t practice them and lack the legal structure necessary to protect their businesses. That is why 99% of all practicing this concept of booth renting could not pass an audit today by their own state, the IRS or a judge. The last working option category is contract labor. This is a completely different category tax-wise, and the IRS says only
0.5 % of all people practicing within the beauty and barbering industry qualifies for this classification. Therefore, pretty much all those practicing within our industry fall into only 2 tax categories - employee or booth renter, period.
In future articles, we will be covering all three of these working options from the legal, profitable and management points of view. We’ll provide guidance and direction to help you become more successful. The trend towards combinations of business practices looks to be a lasting part of our industry, especially if you, as an owner, want to continue to grow your businesses. For now, let’s examine the independent contractor classification. Why is it that 99.5 % of all beauty and barbering industry related personnel do not qualify for this tax category according to the IRS? Look at the ground rules for being in this classification. To qualify -
|
| | | The worker must be completely independent from any other business. That means that they work at no particular place of business. They work at more than one location, usually many. They do not work on any regular days of a week or month. They do not work on any regular hours of a day or week. There is only one exception to this rule, up to this point, and that would be renting a private suite with a separate entrance.
| | • | An Independent Contractor Services Agreement/contract can be negotiated for any form of compensation such as a percentage of services performed or a flat dollar amount on services performed.
| | • | A tax form 1099-Miscellaneous would be issued to the independent contractor on any dollar amount over $600.00 paid to that individual during that calendar year. This is totally the opposite from the way a booth rental business is run and the biggest reason why the IRS says that few individuals in the beauty and barbering industry qualify as an independent contractor.
|
| | |
| | | | | | | | | | | In layman's language, the IRS defines an independent contractor as someone who has no particular location, schedule, hours or days that he or she works. At the end of the year, an independent contractor will receive 1099 forms from anyone who paid him or her over $600 that calendar year. Most booth renters, on the other hand, work at the same location and, at the end of the year, they give a 1099 form to any owner to whom they've paid over $600 in rent. The owner, in turn, should provide 1099 forms to renters whom he or she has paid over $600 in commission on retail.
"Being a renter is totally opposite of being an employee," says Cassidy, adding that this means "the owner and renter must document in a contract all the services that are being provided and have a separate charge for each to create that separation from the traditional employee situation."
A GOOD TRACK RECORD
As a renter, this means you are your own small business and should keep track of any income as well as any business expenses being paid out, such as a telephone line rental fee, if you don't have your own phone line, credit card processing fees, janitorial services, etc. You can pay an owner with one check for rent, janitorial services and reception, but your records should indicate that a separate fee is being paid for each service. This can be accomplished simply by writing directly on the check "$1000 for rent, $100 for telephone, $100 for janitor." At the end of the year, you'll have an accurate account of how much was paid for various expenses taken as deductions. It is the renter's choice how to conduct his or her business, adds Cassidy. So, if you'd rather have your own phone, then go ahead. Or, if you'd prefer to have the salon's receptionist handle your appointments, fine. But, just remember, in either case it is your responsibility to document the fees you pay every month for phone and other services.
"Some renters don't keep accurate records because the creative mind often doesn't go in that direction," says ROBIN WHITE, the bookkeeper for a salon in California's San Fernando Valley. She suggests buying a book-form calendar with pockets, jotting down your appointments, how much money you received, how the client paid and for what services. Then put all the receipts you received for any business expenses you incurred in that month's pocket. This calendar plus your cancelled checks showing how much you paid the salon owner and for what, is in effect your own simple profit and loss statement.
"If you accumulate paperwork in a semi-organized fashion, then you can have someone else put it together," notes White. This would also suffice as proof of your income and expenses for the IRS should you ever be audited, adds Cassidy.
LOOKING TOWARD THE FUTURE
The benefits of keeping records like this, explains White, is that it enables you to catch any mistakes the owner's bookkeeper may make. It also lets you know "where you're going and where you've been," says White, adding that renters often complain at the end of the year that they have no money left. "But if they kept records, they could plan for the future by keeping track of how much money is coming in and how much is going out." What is often confusing for renters is the fact that some owners include certain charges as part of the rent. For example, at the salon White works for, the receptionist and phone are covered by rent. But, renters are charged a fee when the salon processes credit card charges.
"If the renter is paying for a service, then he or she needs to record it," she explains. "If the service is inclusive of the rent, then they don't need to." This scenario is accurate with regard to figuring out what taxes you owe, but if the owner or renter were ever audited, it wouldn't meet IRS standards, according to Kassidy. "The owner must charge for and list each item separately in order to keep the separation from a traditional employee situation," he explains.
The best way to avoid any confusion is if the renter has his or her own phone line, credit card machine and supplies, says PEARL FOY, who owns AGAPE SALON in Chandler, Arizona. "I really encourage them to do their own business," says Foy. Handling all the services related to your business yourself is not only the simplest way to do business; it can also eliminate many of the headaches of dealing with an owner. "When owners get frustrated with renters it is because they babysit them," notes Foy.
Of course, a good contract is the best way to insure that renter and owner clearly understand what each party's responsibilities are, but that's a topic for another article. |
| | Email Link! |
|
| | |
|
