Are you an Employee or an Independent Contractor? (Self Employed)
To help you determine if you are an employee, three classifications have been identified by the Internal Revenue Service that indicate whether sufficient “control” is present to establish an employer-employee relationship. Behavioral control, financial control, and relationship to the parties were the categories developed.
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of —
Instructions the Business Gives the Worker
An employee is generally subject to the business’s instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved.
Training the Business Gives the Worker
An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Facts that show whether the business has a right to control the business aspects of the worker’s job include:
Extent to Which the Worker has Unreimbursed Business Expenses
Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.
Extent of the Worker’s Investment
An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not required.
Extent to Which the Worker Makes Services Available to the Relevant Market
How the Business Pays the Worker
An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
Extent to Which the Worker Can Realize a Profit or Incur a Loss
An independent contractor can make a profit or loss.
Types of Relationship
Facts that show the parties’ type of relationship include:
- Written contracts describing the relationship the parties intended to create.
- Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
- The permanency of the relationship. Engaging a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally considered evidence that your intent is to create an employer-employee relationship.
- The extent to which services performed by the worker are a key aspect of the regular business of the business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and will have the right to control or direct that work. This indicates an employer-employee relationship.
For Internal Revenue Service help or federal tax information, contact the IRS at 800-829-1040. If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
Paul Pick, a barber, signed a lease agreement with Larry Lord, the owner of a barber shop, to use a chair in Larry’s shop. Larry bears all the shop expenses, including rent, utilities, advertising, linens, and other supplies.
The agreement provides that 70 percent of the receipts from Paul’s chair go to him and 30 percent go to Larry. All receipts are put in Larry’s cash register. At the end of the week, he pays Paul the agreed percentage of the receipts.
Shop hours are displayed on the shop door. Paul is expected to comply with them. He must take customers in turn, maintain clean premises, use clean towels and sterile equipment, and keep a clean personal appearance. Although Larry does not supervise Paul, Larry can dismiss him for acting in a manner that would cause the loss of patrons, or for any other reason.
Larry does not direct or control Paul in the actual performance of his services, but he has the right to do so and to discharge him. Larry’s income depends on a percentage of Paul’s receipts. Thus, Larry retains the right to direct and control Paul to protect his investment and to be assured a sufficient profit from the shop. Paul has no investment in the shop, assumes no liability for its operation, and furnishes nothing except his personal services. Paul is an employee of Larry.
Cosmetology Salons, Inc., leases space for beauty shops in department stores. Each department store pays the wages of the salon manager and operators on the basis of payrolls prepared by the manager. The department stores receive a fixed percentage of salon receipts as rent. Although a department store can request removing an operator or manager from a particular store, Cosmetology Salons, Inc., controls the hiring, training, transfer, and dismissal of all cosmetology salon personnel. The managers and operators employed in the shop are employees of Cosmetology Salons, Inc.
Charlie Blue, the owner of a barber shop, and Sally Gold have an agreement under which Sally, a professional manicurist, furnishes manicuring services to shop patrons during business hours.
According to the agreement, Sally regulates her own hours, furnishes her own equipment and supplies, and keeps the proceeds from her work. She does not use the shop cash register nor does she report her earnings to Charlie. She does not have to perform her services personally but can hire a substitute. Charlie cannot direct the way she performs her services. Either party to the agreement can end the arrangement at any time.
Although Charlie has the right to dismiss her by ending the agreement, and although he furnishes her a place to work, he does not have the right to exercise over her work the degree of direction and control necessary to establish an employer-employee relationship. Therefore, Sally is self employed.
If You Are an Employee...
Your employer will withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay federal and state unemployment taxes on wages paid to you. This is true on commission, tips, and salary income and if you are a family member of the employer. The employer will also collect and remit sales tax from the services you perform.
If You Are an Independent Contractor (Self Employed)...
If you are self-employed, you are responsible for making estimate payments of state and federal income taxes, and paying Social Security and Medicare taxes. Independent contractors must have a sales tax permit and also collect Iowa sales tax on sales of tangible personal property and taxable services.
If You Are an Employer...
If you have employees, you need to be registered with the IRS and with Iowa as a withholding agent.
First register with the Internal Revenue Service to obtain a Federal Employer Identification Number (FEIN). There is no fee for registering.
Then register online with Iowa -- Iowa Business Tax Registration. There is no fee for registering. Please allow four to six weeks to process your application.
Basic Returns and Schedules to be Filed:
1. 1040 / IA 1040. Used for filing individual income tax.
- 1040ES. Used for remitting federal estimated income tax, Social Security, and Medicare. It is mailed to IRS with the taxes due on a quarterly basis.
- IA 1040ES. Used for remitting Iowa estimated income tax. It is mailed to the Iowa Department of Revenue, with the tax due on a quarterly basis.
- Schedule SE. Used for figuring Self Employment Tax (Social Security and Medicare). It is attached to and filed with your federal 1040.
- Schedule C. Used to report your profit or loss from self employment. It is attached to and filed with your federal 1040 and your Iowa IA 1040. (This schedule is used to report the profit or loss for sole proprietors only. Partnerships and corporations must file different schedules.)
2. 1120 / IA1120. Used for filing corporate income tax.
- 1120ES. Used for remitting federal estimated corporate income tax.
- IA 1120ES. Used for remitting Iowa estimated corporate income tax.
3. 1065 / IA 1065. Used for filing partnership or limited liability company income tax.
- 1065. Used for remitting federal partnership or limited liability company income tax.
- IA 1065. Used for remitting Iowa partnership or limited liability company income tax.
4. Iowa sales tax return.
Businesses that are registered to collect Iowa sales or retailer’s use tax are using eFile & Pay to electronically file their return information. Payment of the tax due may also be made electronically through eFile & Pay, although payment by paper check with a payment voucher is an option for most taxpayers. eFile & Pay is available online and by touchtone telephone. Paper forms are not mailed.
5. Iowa withholding return if you are an employer.
Electronic filing and payment of Iowa withholding is through eFile & Pay, either online or by touchtone telephone. Both are safe, secure systems. Paper deposits and returns are not provided. However, you will receive paper vouchers to use if you choose to pay with check or money order, unless you are required to pay electronically.
Reporting Income From Tips
All tips are taxable income and subject to income tax. This includes tips received directly by you, through charge cards, and through tip splitting arrangements. If you are an employee and in any month your tips total $20 or more, those tips are subject to the withholding of federal and state income tax, Social Security tax, and Medicare tax by your employer. Consequently, you must report those tips to your employer by the 10th of the next month. If you are self-employed, then any tips are a part of your gross receipts that you report on your federal Schedule C. For further information on tips, call the Internal Revenue Service at 800-829-3676 and ask for Publication 531, “Reporting Income From Tips.”
What is Subject to Iowa Sales Tax?
Barber and beautician services are subject to Iowa sales tax and to local option sales tax if the service occurs in a local option jurisdiction.
You must register for a sales tax permit and remit the tax on your sales of tangible personal property and services. Tax is collected on the sales price charged to the customer. The amount of tax collected must be remitted to the state on the sales tax return. No deduction can be taken on the sales tax return for expenses.
A sales tax permit does not automatically give the permit holder absolute exemption from sales tax on purchases. Supplies may be purchased exempt from tax if they are for resale; the permit holder completes an exemption certificate to give to the supplier.
Oftentimes a business will remove items from inventory for its own use, not to resell to a customer. If the inventory was purchased tax free, the business owes sales tax on what it uses in the course of business. The sales tax is reported on the “goods consumed” line on the sales tax return.
For example, the business must pay sales tax on the shampoo used while shampooing and styling a customer’s hair. Shampoo that is sold by the bottle to a customer is purchased tax free from a supplier by the business. The business charges the customer sales tax on the selling price.
Following are items that are taxable...
when used in the performance of barber and cosmetology services and when used to maintain the business. This list is not intended to be complete. Questions about the taxability of an item should be directed to Taxpayer Services or call (515) 281-3114 or 800-367-3388 (Iowa, Rock Island, Moline, Omaha).
hot curling irons
hot oil treatments
nail polish remover
Local Option Sales Tax
Most communities have a local option sales tax in addition to the state sales tax. The tax is not statewide and the local option tax only applies in those jurisdictions that have imposed it.
Local option sales tax applies to the same goods and services that are subject to sales tax. Products, services, or organizations that are exempt from sales tax are usually exempt from local option tax.
The local option tax should be collected if the product is delivered or the service is performed in a local option tax jurisdiction. The same services or supplies that a barber or hairdresser provides that are subject to sales tax are also subject to local option sales tax if the service or product is performed or delivered in a local option tax jurisdiction.
There is no special application or permit number for local option tax. It is paid with any sales tax that is due on the quarterly sales tax return. Monthly sales tax filers should accrue or save the local option tax they have collected through the quarter and pay the tax at the end of the quarter.
Consumer's Use Tax
Barber and beauty shop operators are responsible for consumer’s use tax on items not purchased for resale. These items are usually purchased outside of the state for use in Iowa and tax has not already been paid.
You must register for consumer’s use tax and remit the tax on the purchase price of tangible personal property and taxable services. This tax is imposed after the sale takes place and only on items on which sales tax has not been paid. You may register for this permit at www.state.ia.us/tax/
Taxable supplies generally include capital or business assets that are used in the course of the barber’s or cosmetologist’s business that are not resold. Magazine subscriptions, professional journals or publications, office stationery, furniture, barber chairs, combs, brushes, hair dryers, and other barber shop and hair salon equipment are all examples of capital assets that are taxable to the hairdresser or barber as they would be the final consumer or end user of those items.
EXCERPTS from the Rules and Regulations of the Iowa Department of Revenue.
Resale Items Treatment
RULE 701-18.31 (422,423). Tangible personal property purchased by one who is engaged in the performance of a service.
RULE 701-18.31(1). In general, effective July 1, 1990.
On and after July 1, 1990, tangible personal property purchased by one who is engaged in the performance of a service is purchased for resale and not subject to tax if: (1) the provider and user of the service intend that a sale of the property will occur, and (2) the property is transferred to the user of the service in connection with the performance of the service in a form or quantity capable of a fixed or definite price values, and (3) the sale is evidenced by a separate charge for the identifiable piece or quantity of property.
Tangible personal property which is not sold in the manner set forth is not purchased for resale and thus is subject to tax at the time of purchase by one engaged in the performance of a service. Such tangible personal property is considered to be consumed by the purchaser who is engaged in the performance of a service and the person performing the service shall pay tax upon the sale at the time of purchase.
Iowa Sales Tax
RULE 701-26.9(422) Barber and Beauty. Persons engaged in the business of hair cutting, hair styling, hair coloring, wig care, manicuring, pedicuring, applying facial and skin preparations, and all like activities which tend to enhance the appearance of the individual are rendering a taxable service. Each “barber, beauty or other beautification shop or establishment” shall receive only one permit and remit tax as one enterprise, when operated under a common management.
When an operator leases space and is an independent operator, the lessee shall notify the Department and secure a sales tax permit whereby the lessee will be responsible directly for the sales tax due. In order to be considered independent, the lessee must also be independent from the lessor for the purposes of withholding of income tax, unemployment compensation, and Social Security taxes.
The lessor who has leased a part of the premises shall report to the Department the names and addresses of all lessees. If the lessor is accounting for the lessee’s sales, the lessor shall, after the name of each lessee, show the amount of the net taxable sales made by the lessee on each report to the Department, and which net taxable sales are included in the lessor’s return.