When you make the decision to hire employees, there are a vast number of things you need to be aware of before you open your salon or spa business. My first and best advice is to consult a tax professional before you get started. It may cost you a few dollars up front, but in the long run, it will be well worth it to protect yourself, your employees, and the future of your business.
Get Your Taxes in Order: Salon Business Priority
The IRS website can be a tremendous help in gleaning information on what you need to know when it comes to paying taxes for your business. Those of you who are not in the US should have a similar government institution that will provide you with this information.
As another helpful tool, many payroll companies will walk you through the confusing maze of paperwork and monetary deductions necessary to keep compliant with the tax responsibility of your business.
You see, you just can’t go out, hire people and open your doors to clients without having all your ducks in a row. You need to set up a bank account that you use specifically for your tax obligations. If you use a payroll company, they will walk you through the proper steps to make sure you have enough money to cover the payroll deductions.
What Kinds of Taxes do You Pay in a Salon Business?
In the US, your employee will receive a paycheck stub with the breakdown of what they have earned and what you, as an employer, have contributed to their future income.
Some of the taxes you might see include:
- Federal Tax
- Social Security Tax
- Medicare Tax
- State and Local Tax
- Federal Unemployment Tax
If this seems a bit daunting, just wait..there is more!
Deposit and Report all Employment Tax!
You must also cover your employees for workman’s compensation and unemployment insurance. You have to deposit and report employment tax to the government when the times comes to cough up the cash!
It seems like a lot of responsibility and, it is. You also need to file certain tax payments quarterly –this is non-negotiable. The last thing you want is to fall behind on payments to the government. You have to keep in mind that this is not your money. It was difficult at first for me to do this when I had 23 employees to keep money aside for when paying taxes.
Don’t Spend Money That Isn’t Yours
It can be tempting to use those funds to purchase more stock, advertise, or do any number of things that might come up in your business. I had a bad habit of getting distracted by the newest shiny thing my vendors would show me on their bi-weekly visits. I wanted everything and would irresponsibly spend money.
I will never forget the first time I had to come up with several thousand dollars to send into the Tax Man. I wasn’t prepared. I spent the money on “stuff” instead of holding it to pay the government what I owed. I actually had to borrow money from my Mom. Let me tell you, that was depressing.
It was the hardest debt I have ever carried. I paid her back ASAP and made a vow to myself that I would never get caught in that scenario ever again.
Find a Payroll Company to Handle Your Tax Obligations
To make sure I never made the same mistake again, I sat myself down with a payroll company and they took control for me. They calculated my obligations, sent out my employees paychecks, and sent the taxes to the government on my behalf.
The cost of this service was minimal compared to the hours I was spending on all the paperwork. It was in my opinion, well worth it. At the end of every week, I would send all the data to this company and they made my life so much easier. As long as we submitted the correct information to them, there were no issues.
Every once in a while, a number got transposed but this happened rarely. So, if you don’t have accounting and payroll experience, don’t try this on your own until you consult a pro.
How Employees Differ from Independent Contractors
In our Starting From Scratch series, we covered the difference between an independent contractor and an employee. If you didn’t read it, I’ll do a short recap here. Independent contractors can have all the flexibility here – you cannot dictate their hours, scheduling, product usage, dress code, and a variety of other different working codes.
Employees do not fit into this category. You control an employee’s schedule as well as the products and equipment they use. You provide a code of conduct and can have them treat your clients how you want them to be treated. You have control over the cleaning, laundry, education, bonuses, vacation time, etc. All these should be covered in an employee handbook and signed off on by the employee so there is no confusion in the future.
Your employees may have to be paid minimum wage for any time you have meetings or educational classes. If you overlook these things, you may be in violation of wage laws. Most new salon owners aren’t aware of this although there are very specific rules on this. Make sure you are doing everything by the book.
I have seen disgruntled employees who have been let go or that have retaliated against employers for not compensating them for training or overtime.
Independent Contractors and Taxes
Unlike with employees, you will not have to pay any employment taxes for independent contractors. If you hire independent contractors, it is important you do not set their hours or specify how their work should be done. If you fail to keep your hands off your contractor’s work regime, you might be subject to paying employment taxes you didn’t expect. You can also get in serious trouble with the law.
Get a W-9 form and an independent contractor agreement signed by your new hire so you can avoid legal and tax problems down the road.
Stay Informed and Build a Bangin’ Business
Now, I hope this wasn’t all too overwhelming. If you start out with all the information you need, you will get things off on the right foot. You will never have to look back and think “I should have known this. Having all of these details set in place before you even hire your first employee will make the whole process smoother and easier.
I have been an independent contractor, booth renter, and an employer. There are benefits to all of these types of employment depending on which one you choose. However, as a business owner, you have the most control of your business and your employees as a W-2 employer.
When you hire employees, you get to set the standards you want your business to project. You choose what products you want to use on your clientele and you get to choose what products you want to sell. You get to offer your staff a wage and terms that are comfortable for your business. You get to set the dress code and code of conduct that suits your business, too.
Owning a new business can be rewarding and exhilarating. It is challenging and fun when you take the first steps to set yourself up for success.
So, do your research and get compliant before you put that key in the door of your new salon business. Good Luck!
Do you have any extra advice to help out fellow entrepreneurs on how to build a lash business from the ground up? Is there anything else you want to learn that we have not covered in our series? Let me know in the comments section below so we can cover any more questions you have!