The IRS common law test: behavioral control, financial control and the relationship
If you are a stylist renting a chair or a salon owner offering rental space, the title on your contract does not decide whether you are truly an independent contractor. The IRS applies a common law test built on three broad categories: behavioral control, financial control, and the overall relationship between the parties.
Behavioral control covers the right to direct and control how the worker does the task. If the salon owner tells the stylist when to arrive, how to dress, what techniques to use, or requires attendance at mandatory meetings, those are signals of an employee relationship. True booth renters set their own schedules, select their own services, and choose their methods and products.
Financial control looks at who decides how and when the worker is paid, and who bears the risk of profit or loss. Independent contractors pay their own rent and expenses, buy their own supplies, and collect payment directly from clients or with minimal involvement from the salon. Employees typically receive a wage or commission on a regular schedule, and the salon handles more of the billing and supplies.
The relationship is about written agreements, benefits, and the expected duration of the arrangement. If the booth rental agreement reads like a lease, with clear independence on both sides and no expectation of ongoing employment, it supports contractor status. Offering health insurance, paid time off, or other benefits can signal an employment relationship, even if the contract uses the word "renter."
Keep reading: Anatomy of a No-Show Fee Chargeback, Start to Finish
What a compliant booth rental agreement has to spell out
A valid booth rental agreement goes beyond the rent amount. It must spell out the independence of the renter and define the limits of the salon's control. This protects both the salon owner and stylist from audits and disputes later.
Key terms include the specific chair or space being rented, the fixed rent amount and payment schedule, and the stylist's right to set their own hours and service prices. The agreement should state that the stylist supplies their own products and tools, handles their own booking, and is responsible for paying taxes and insurance.
Clauses that give the owner power to dictate business operations, such as mandatory use of certain products, required attendance at meetings, or rules about time off, can undercut the argument for independent contractor status. The agreement should also clarify that the stylist is not entitled to company benefits or unemployment insurance, and that each party can terminate the lease according to its terms, not at will like employment.
Successful agreements often include language about the stylist's responsibility for client relationships, liability insurance, and compliance with state licensing. If the agreement allows the stylist to hire their own assistants, that also supports contractor status.
State tests that go further, including California's licensed cosmetologist exemption
Some states have stricter tests than the IRS for deciding who is an independent contractor. Many use the ABC test, which sets a higher bar for proving independent status. Under the ABC test, a worker is an employee unless:
- The worker is free from control and direction in the work performed, both under the contract and in fact.
- The work performed is outside the usual course of the hiring entity's business.
- The worker is customarily engaged in an independently established trade or business of the same nature as the work performed.
For most salons, the second prong can be the hardest: stylists cutting hair in a hair salon are usually seen as part of the usual course of business.
California's Assembly Bill 5 (AB5) brought the ABC test to the state and created confusion for booth rental salons. However, there is an exemption for licensed cosmetologists, barbers, estheticians, manicurists, and electrologists who meet specific criteria. To qualify, the stylist must:
- Set their own rates and hours.
- Pay their own rent directly to the salon owner.
- Be paid directly by clients.
- Set their own appointment schedules.
- Maintain a separate business license, if required by the city or county.
Other states, such as New Jersey and Massachusetts, enforce similar strict rules. In some cases, even a detailed agreement is not enough if the facts on the ground do not support contractor status. Salon owners and stylists should check their state's labor department guidance or consult a qualified advisor.
Keep reading: Salon Suites and License Reciprocity: What Is Changing for Renters
Rent, hours, pricing and product supply: the facts that get weighed
Auditors look past contracts to how the business actually runs. Four areas draw the most attention: rent, hours, pricing, and who supplies products.
Paying rent directly
A true booth renter pays a fixed fee for space, usually weekly or monthly, regardless of how many clients they service. If rent is waived, delayed, or based on a percentage of sales, it can look more like a commission arrangement, which points toward employment.
Control of hours and scheduling
Independent contractors set their own hours and may work as much or as little as they wish. If the salon posts a schedule, requires attendance on certain days, or restricts when a stylist can take time off, this is more like employment. Having a key to the building and access outside regular business hours helps support independent status.
Setting service prices
If the stylist sets their own prices and controls their own menu of services, that is evidence of independence. If the owner sets client prices or requires discounts or packages, it can signal employee control. Many compliant salons post signs showing that prices vary by stylist and that clients book directly with each professional.
Product supply and branding
A contractor is expected to provide their own scissors, brushes, color, shampoo, and other products. If the salon supplies everything, especially at no charge, the line blurs. Some salons rent a bare chair and a mirror, while others charge extra for shared backbar or laundry facilities. If stylists are required to use only certain brands, that can also present a problem.
Marketing is a gray area. A website or sign listing all stylists as "staff" may be cited in audits. Independent stylists usually need a business card, their own booking system, and a way for clients to contact them directly.
Forms in play: W-9, Form 1099-NEC, Schedule C and Schedule SE
The paperwork side is another audit trigger. For booth renters, the main tax forms in play are the W-9, Form 1099-NEC, Schedule C, and Schedule SE.
W-9 and Form 1099-NEC
Salons that pay booth renters for anything other than space, such as commissions or bonuses, might have to issue a Form 1099-NEC at the end of the year. However, pure rent payments are usually reported on Form 1099-MISC if the landlord is not a corporation. Most salons do not issue a 1099-NEC to stylists renting a chair, as they collect rent from the stylist, not the other way around.
Stylists who rent a booth and earn more than $600 in a year from another business (for example, freelance work or education sessions) may be asked to fill out a W-9. This provides a taxpayer identification number for reporting income.
Schedule C and Schedule SE
Independent stylists report their earnings and expenses on Schedule C, filed with their individual tax return. They can deduct booth rent, supplies, insurance, and other business costs. Self-employment tax is calculated on Schedule SE, which covers Social Security and Medicare contributions. Employees, by contrast, only fill out a W-2 and do not file a Schedule C or pay self-employment tax on their wages.
Keeping accurate records of all income, rent paid, and business expenses is crucial. If the IRS or a state agency audits, they will expect to see receipts, bank statements, and appointment logs to support the numbers.
See how ShearHold handles this for beauty and salons
What misclassification costs the salon owner and the stylist
Getting worker status wrong can be costly. If an audit finds that a stylist classified as a booth renter was actually an employee, the salon owner may owe back payroll taxes, penalties, and even interest. These can stretch back several years. The IRS may also apply fines for failing to withhold income tax and pay the employer portion of Social Security and Medicare.
State agencies can assess their own penalties for unpaid unemployment insurance, workers' compensation, and state disability insurance. Owners may be responsible for wage-and-hour violations, such as unpaid overtime or missed meal breaks, if the stylist was actually an employee.
Stylists can also lose out if misclassified. Employees are eligible for unemployment benefits, workers' compensation, and sometimes health coverage. If a stylist was actually an employee but not treated as one, they may miss out on these protections. In a dispute or legal claim, the written contract will carry some weight, but agencies look at the facts of how work was performed.
Both sides should also consider liability issues. Employees are covered by the salon's insurance; independent contractors often need their own. If there is a claim, misclassification can complicate coverage and defense.
Form SS-8 and how a status determination actually begins
When there is uncertainty or a dispute about a worker's status, either party can ask the IRS for a determination using Form SS-8. This form collects detailed information about the working relationship and asks about control, payment, scheduling, and more.
The IRS reviews the facts and issues a written determination. This process can take several months and is often used after an audit or when a worker files for unemployment or workers' compensation. State labor departments have similar procedures, and the result can trigger back taxes or benefits owed.
In practice, few salons or stylists file Form SS-8 unless there is a breakdown in the relationship or an audit begins. Most status determinations start when a worker applies for unemployment or files a complaint. At that point, auditors will look at contracts, payment records, appointment logs, and even social media or salon marketing materials. Consistency, between paperwork and day-to-day practice, is the strongest defense.
To keep contractor relationships clear, many salons now rely on booking systems that collect deposits, enforce no-show fees, and support independent rebooking. These tools help document that stylists manage their own business, strengthening the case for genuine booth rental status and reducing audit risk.
