By Jennifer Bishop-Jenkins, ICMG
In the last four decades our grooming industry has experienced a notably rapid rise from relatively undervalued to highly professionalized. The impressive industry expansion and professionalization speaks well of all of us. I give special credit to our industry leaders who have urged us all to adopt better business acumen and best practices every step of the way.
Rapid change can also contribute to some confusion and uncertainty. One ongoing area of confusion and misinformation remains the appropriate use of the status of “Independent Contractor” as versus “Employee” in a grooming business. I had heard so many different opinions and interpretations of what the law allowed, that when I opened Love Fur Dogs in 2014, I started making phone calls to get some of my questions answered.
Here comes the disclaimer: I am a Master Groomer, not a tax lawyer. This article is no substitute for legal advice from a tax attorney. But I have interviewed staff at the IRS and state tax agents in my home state of Illinois, private tax lawyers, and CPA’s (Certified Public Accountants). I pass on here what they have told me for general educational purposes, while of course urging everyone to consult their own business attorneys for legal advice in their own individual situations and states.
Many groomers across the county are still being paid as independent contractors, but several experts I interviewed observed that many may not be doing so within the boundaries of the law or even within their own best interests. IRS Employees, or your state tax administrators, are always available to answer your questions. And there are many excellent and affordable tax lawyers and Certified Public Accountants (CPA) who will guide you in the law, and advise you for your own professional benefit.
DON’T LET THIS HAPPEN TO YOU
A story from personal experience illustrates the importance of getting this right:
A few years ago I helped out temporarily at a grooming shop in a nearby town, filling in for an absent groomer for two days. While scissoring away at my grooming table, I made conversation with the very talented groomer next to me.
She told me she had been working there for 29 years. I let her know how impressed I was—staying at one business that long! Since we were fairly close in age, both in our 50s, we started chatting about our mutual dreams for retirement, during which she stated, “Yes, I am going to have to start saving for that pretty soon!”
She then revealed to me that in three decades of working as a commissioned groomer there, being paid cash under the table, she had never paid into social security, and had no health care nor retirement savings. None.
As we chatted it became clear that she did not even know that we all only receive Social Security at retirement if we have been paying into the system all our working life. She thought she would be collecting at retirement—but had never paid into it. She had been working for cash all her life, was 59 years old and needed knee replacement. Speechless and sad, I could only wish her well and gave her the name of my wonderful CPA.
This groomer was neither legal employee nor legal independent contractor. This groomer had, however, cooperated for three decades with a system orchestrated by her employer that was completely illegal for both of them. But she was the one likely to suffer the most devastating consequences.
The definition of an independent contractor at the federal level, surprisingly, is not spelled out in statute—it is defined only by case law. There have been approximately 20 or so cases where courts have ruled on a dispute over whether or not a worker was an employee or an independent contractor. Those rulings have been turned into a set of questions on an IRS form that spells out the criteria for anyone claiming work as an independent contractor.
The form needed is the SS-8 and is available at www.irs.gov by typing SS-8 into the search box at the top of the IRS home page.
The form asks questions around the central theme of CONTROL – Who makes decisions? Which direction does the money flow? How does the worker receive assignments? Whom does the customer pay? Who provides the customers? Who sets the hours and the rules of the business? The independent contractor should be the one in control, who receives all the customer monies directly, who owns and provides the customers, etc.
Here is one example of a federally legal independent contractor: The groomer could rent a station from a facility owner for a flat fee, do their own advertising, set their own hours and work standards, and not report to the owner of the facility. There could be a written contract defining the relationship and, most importantly, the groomer would collect monies directly from customers.
In that same facility, there would be no salaried employees, only other independent contractors. One expert told me that if other employees at the business are paid as employees, not independent contractors, and they are all working in the same grooming business, then likely no employee involved in grooming there can legally be an independent contractor.
Business owners must remember that the Independent Contractor always “owns” the customers and the customer information, not the shop, and can take the customers with them if the Independent Contractor chooses to leave that grooming shop.
FEDERAL AND STATE LAW
All of us in the United States operate our working lives under the controls of several different levels of government—national, state, and local laws all have jurisdiction and can vary widely. In order to be compliant with the law and to protect yourself as a worker, or if you own your own shop, to protect your business, you have to know what differences might exist in your own state. And you have to obey ALL the laws at each level of government under which you live.
State laws on employees and independent contractors can differ dramatically from federal law, and are usually much more restrictive. A representative at the Illinois Department of Employment Security told me that “they were on to us in the grooming businesses”—in addition to several other industries such as cosmetology and construction —regarding widespread violations of independent contractor rules.
Groomers and grooming business owners should investigate the laws in your own state, which are generally much tougher on independent contractor practice than the federal IRS can be. For example, in Illinois, in order to be a legal Independent Contractor one must also be a Corporation. Being incorporated is not required by the IRS at the federal level.
Another difference in state law here in Illinois is that an Independent Contractor cannot work in the same line of business as the business operating there. So for example, a grooming business can hire a painter as an independent contractor, but not another groomer. We all must comply with both our state and federal law, obviously abiding fully by the stricter of the two standards.
WHICH IS BEST?
After consulting an Attorney/CPA, it was clear in my state that, legally, I could only opt to have employees working in my grooming business.
In an employer-employee relationship, the burden is on the employer to do all the paperwork and pay all the taxes, contribute to Social Security, Disability, Unemployment, and other costs and benefits. For example, since we work with live animals, I provide extra personal and professional liability insurance for my business and all my employees. I also own the clients, control the monies, and set the standards.
Groomers I employ now that have worked elsewhere previously as independent contractors tell me they vastly prefer our legal arrangement as employee-employer. My CPA estimates that in addition to the commission I pay my groomers, my cost to have them as employees runs an additional 10% in taxes, unemployment, disability, matching Social Security, and insurance. I have to factor those costs into setting commissions and wages. Advantage, employee.
In an independent contractor relationship, the burden is on the worker to entirely run and advertise her or his business, pay all the taxes, do all the paperwork including issuing a W-9 to the owner, collect all the income, comply with all the laws, keep all the records, and pay to lease a space from the business owner who only has to maintain the facility and issue an annual 1099 to any independent contractor paid more than $600 annually. Advantage, business owner.
Groomers and business owners should consult legal advice and make the decision that best serves their interests while complying with the law. Protect and respect yourself enough to not settle for anything less than what is legal and what is best for your life.
PROTECT YOURSELF–PROTECT YOUR BUSINESS
Mark Mandell, respected CPA running the Mandell Advisory Group in Northbrook, Illinois stated, “The penalties for not complying with the law are severe, if caught. Often those in violation are caught when a disgruntled employee leaves and files complaints that result in an audit of the business. Any business owner found to have employees but paying them as Independent Contractors must not only pay all back taxes and wages, but a 40% penalty and all the withholding as well.”
This would obviously be a significant burden to try to repair retroactively, therefore it is so important to get legal advice now to make sure everyone is protected.
Be proud of your hard work and your due diligence to be in compliance with the law. It is very much in the best interests of every business owner to carefully follow the law, and for every groomer to protect him or herself for their entire working life and into retirement. ✂