Recent IRS Decisions Against Employers of I.C. Groomers

Originally published in eGroomer Journal Spring 2013

Discussions of independent contractor (I.C.) classification amongst groomers typically focus on the groomers hired as an independent contractors. Are these I.C.’s doing this, or that, and also this? While these qualifications are part of the determination process to make accurate classifications, rarely do you hear an I.C. groomer ask, “Is my employer compliant in their own right to employ an I.C.?” That’s the flipside and the I.R.S. is apparently asking that question. We know of actual incidents where employers of I.C.’s were told they must immediately convert their I.C.’s to employee status, even when the I.C.’s themselves were compliant. These employers feel like bombshells have hit and they can be liable for past taxes and other  financial consequences that quickly multiply into thousands of dollars. Some over six figures!

Every I.C. groomer needs to realize that while they run their self-employment within compliance requirements their employers may not be compliant and  should have never hired I.C.’s in the first place. When is this true? Let’s take a look.

The IRS publishes Publication 4902 Tax Tips for the Cosmetology Barber Industry. We believe pet grooming operations are so similar to hairstyling for people that the IRS would apply the content of this publication to grooming businesses. In the section Shop Owner, “Your business may have employees who work for you or you made decide to operate without employees. Another common arrangement is renting space to another individual who operates an independent business. This is commonly referred to as a booth renter…once you decide to hire workers you must make a determination if they are your employees or if they will operate their own independent business (as booth renters).”

Hello! Without stating a lot of tax code you can bet the “booth renting” test is a strong factor when examining pet grooming operations with independent contractors. Today very few grooming business owners with independent contractors are renting booths to them. Alone, this test may not overrule the independent contractor test, but it will certainly raise eyebrows and incite them to look closer at grooming’s typical I.C. operations. There’s more.

We spoke with two groomers in March 2013 wherein this scenario happened. The  independent contractors were not booth renters. They met all I.C. qualifications shown on the previous page, and more. However, the IRS ruled against their employers, and ordered them to convert their I.C.’s to employees with payroll deductions. Both are awaiting fines, penalties and interest assessments. Now, why the bombshell rulings?

They related to us that the I.R.S. studied their financials and more important, the nature of the daily operations. They studied the control of the clientele, and who was performing the grooming for each business owner.

Here is where the unraveling began and why we are sharing this article as a warning to employers of grooming I.C.’s. Both employers were not renting booths. They  assigned the services ordered by their  clientele to multiple I.C. groomers. Both owners did some grooming for their clientele but the majority of their service demand was done by the I.C.’s. Some groomers loosely use the word “outsource.” For example, these owners outsourced what they couldn’t personally groom to their I.C.  groomers, yet retaining ownership of their clienteles. They were not giving referrals of new clients to I.C.’s running their own booth operations. Uh-oh.

The owners’ abilities to meet the demand of their clienteles was then significantly “contingent” on other groomers. In this light without booth renter setups the IRS ruled these operations were more characteristic of employer-employee setups. Both were advised to immediately compensate their groomers as employees.

Generally where you have booth rentals business owners share and provide leads generated by their businesses to their I.C.’s. These referrals may become the clientele of the booth renters.

You don’t have to be in the grooming industry long before you realize that not only are booth rentals rare, but owners don’t give away the ownership of their clientele to other groomers very often. Owners are increasingly asking I.C.’s to serve their clientele without contacting the I.R.S. to determine their eligibility to do so.

At GroomerTALK℠ we are hearing of other employers operating similarly and being ruled against and facing severe financial consequences. Heads up!  ♦