ASHLEY: Welcome to Outgrowth: A Slice of Pro Beauty with your hosts Ashley Gregory Hackett.
JAIME: And Jaime Schrabeck. If you get paid to work in a salon or pay others to work in your business, how do you know if the payroll has been processed correctly? Avoiding the financial and legal consequences of payroll mistakes is critical for every beauty business.
ASHLEY: We’re learning directly from Vicki Lambert, The Payroll Advisor, how to manage this responsibility. Let’s grow together.
JAIME: Welcome to Outgrowth, Vicki.
VICKI: Thank you for having me. This is the first podcast I’ve ever done, so I’m, I’m looking forward to it.
JAIME: Ashley and I have been anticipating this topic for some time and we discovered that you are The Payroll Advisor. We knew we had to have you on the podcast.
VICKI: Oh, well, thank you. Payroll is an interesting field and there are very few people that specialize in actually teaching it or talking about it. There’s hundreds of thousands that do it, but in actually the teaching or the talking about, there’s very few of us that are out there actually doing that.
JAIME: May I ask if it gets confused with HR and some other fields?
VICKI: Yes, it does. Way back, I started in payroll in 1977, and my degree is actually in human resources because there is no degree in payroll, obviously. So a lot of people think of the two as being combined. It’s always payroll/human resources, but they’re actually two fields of endeavor. They split in the, I would say, in the late seventies, early eighties and HR became more of equal employment, sexual harassment, discrimination, and wage and hour laws. It came more encompassing of the human element, cause remember it used to be called personnel. And then it went to human resources during that time whereas payroll stayed simply what I guess what you’ve been saying, the Department of Labor calls, tabulating data. They’re the ones that are responsible for actually doing the calculations, but they have to do those calculations within the laws.
So that’s what makes it a very complex field, but it is totally different from human resources.
ASHLEY: Well, speaking of laws, how do we avoid being misclassified by a salon owner or misclassifying others if we’re the employer?
VICKI: Well, if you’re the employer, the first thing you have to do is you have to look at the people that you’re hiring to do jobs for you. I’m not going to call them employees. I’m not going to call them independent contractors or freelancers. I’m just going to call them a worker. All right? So this worker, you want to hire this person and you want them to do a job. Okay, whatever that job is, you’ll have to make that decision. Then what you’ve got to look at is what the federal government says you have to calculate as this person’s job duties, what they’re doing, how much control you have over them. And then you have to make that decision on whether or not you think this person could be a freelancer, in other words, an independent contractor, or should they be an employee? Now the big difference between the two which a lot of people don’t understand, they think it’s, oh, you’re just withholding taxes. So there’s the big difference between independent contractor and employee is , as the employer have to withhold taxes. And that is not the big difference because in all honesty, those taxes are going to be paid either way. So if you hire me as an independent contractor, I’m going to pay federal income tax on that money. And I’m going to pay social security and Medicare on that money, plus, I’m going to pay the employer portion of it. So I have to pay twice as much as an independent contractor or freelancer. All right. As an employee, you would withhold that from my wages and you would pay the matching on the social security and the Medicare. But the other part of it that is critical and why the Department of Labor who has nothing to do with tax, why do they care if somebody is a freelancer? Because they are given protection. That’s really the big difference between someone who is freelance or an independent contractor, and someone who is an employee. An employee has protections. They have protection under the federal law, that you have to pay them a minimum wage, that you have to pay them overtime. They have to get unemployment insurance paid for them. They have these protections. You, they cannot be fired for just any old arbitrary reason. Now we do have at-will, of course, but you couldn’t say, I don’t like you because you’re blonde. I’m going to fire you. Okay, I don’t like you cause you do a bad job. You can fire somebody, but there’s discrimination rules. All of these protections come under the Fair Labor Standards Act, which is the federal law that we do for wage and hour law. And then there are 50 states out there, 51 if you count DC, okay, cause it does have its own rules. So they each have a law that protects employees. So if you have an employee in Mississippi, they would be covered under federal law cause like Mississippi has no state laws. But if you have an employee in California, they’re covered under every law known to mankind and three that nobody has thought up yet cause that’s how California is. So basically, that’s the big deal about making somebody an employee versus an independent contractor. It is more to do than just tax. So as an employee or as an independent contractor, as the worker, you want to make sure that you’re classified correctly so you have those protections. And the big shock to a lot of workers is they say, oh yeah, I’ll be an independent contractor and I won’t have to pay as much tax. And then they find out at the end of the year, they had to pay twice the FICA, which is the social security Medicare tax. It’s called FICA. They have to pay twice that because they have to pay the employer portion. Or the job ends through no fault of their own, the job ends. And then they go to apply for unemployment and they found that they’re not eligible because they were an independent contractor.
So as a worker, you want to make sure you’re classified correctly for that. And that’s the big thing about being a worker is you need to make sure that your boss is classifying you correctly.
ASHLEY: The reason that that was our opening question is the beauty industry is rampant with misclassification and it’s something that has been sort of steeped into our industry as, well, that’s the way it’s always been done. And especially this year, I think the question of misclassification and the understanding that what you get and don’t get as an independent contractor versus W2 employee is very different. And so I don’t know if this falls into your purview as far as payroll, but we’ve asked this to tax professionals and attorneys in the past. If you realize that you’re a salon owner that’s misclassifying your employees, what do you do?
VICKI: Well, you’ve got a couple of choices. The first one of course is to correct the situation. So let’s say you hired Ann, and you hired her as an independent contractor, and then you realized she wasn’t. You said that she doesn’t qualify. The sooner you correct the situation, the less pain will be if you get caught. All of IRS and the federal wage and hour law penalties are time-based. They don’t last ad infinitum. So if I hire somebody as an independent contractor and they shouldn’t be, the IRS will go back three years, two years, plus current, usually three years. If it was willful, they might go back a little further. In other words, you deliberately attempted. But most of the time, it’s not deliberate. You probably thought you were doing it correctly. So they’ll go back and they will fine you for those three years. And that fine is, is really heavy duty. It’s like over a thousand dollars every single time you pay somebody wrong under the wage and hour laws. So the fine is tremendous for misclassifying somebody because when you misclassify under the wage and hour law, it’s you failed to pay minimum wage and overtime. So it’s a big penalty. Under the IRS, it’s you failed to withhold the taxes, so a big penalty. So what you should do immediately is reclassify that worker. And once you reclassify that worker, then your time bomb starts ticking. And if nobody comes around, and this is the honest to God truth, if nobody comes around within three years and says, hey, this person should have been, then after the three years is basically up, you’re home free. If they come around a year later, then they could only go back so many years. And so since this person for the first year has already been correct, they might go back to the other two, but also sometimes, they may see that you’ve corrected the situation. So it’s plausible, I’m not saying it happens a lot, but it is plausible that you’ve already corrected it. Therefore, they may not even do the audit. When it comes to that, you really do need to be very careful that you fix it immediately. And one of the best times to fix it is right now, at the beginning of the year. So if you say, well, that person last year was an independent contractor and shouldn’t have been, then make them an employee this year. But one thing you should never do, and I’ll be very honest with you, is send a, what we would call a 1099 NEC now. It used to be miscellaneous, but this year it starts as an NEC, non-employee compensation. So you’re going to send one of those and the W2 to one person, that could trigger an audit, in all honesty. So if you find that you’ve misclassified somebody, sometimes it’s better to wait until the beginning of the year. I’m not telling you to do that. I’m just telling you that this is something that people think about. I wouldn’t advise you to do that cause I couldn’t do that. But also some people say, well, I misclassified them. I found out in February, what should I do? Go back and pay the taxes for that person, and make them an employee from the beginning of the year and, and just absorb it. Because once you get them off that 1099, then you’re free to give them a W2. But try to give somebody a W2 and a 1099 in the same year can trigger an audit actually.
JAIME: You probably just woke our entire audience up with that answer.
JAIME: No, that’s exactly what we’re looking for because let’s assume that a number of our listeners have received a 1099 from a salon owner, or they may be in a position where they issue 1099s to workers in their salon thinking that’s what they’re supposed to do. The 1099 issue is something that we point to repeatedly and say, when you have a 1099 in the salon setting, as far as our understanding is that should only happen when a booth renter is giving that 1099 to the salon owner to put them on record for the amount of rent that they paid. But otherwise, 1099s really don’t have a role in the salon setting.
VICKI: Pretty much. Yeah, because the 1099 is going to the person that you paid the money to. It’s not going to the other person. So I give 1099s. I receive 1099s, but I don’t give 1099s to anybody that has worked for me. I give them for people that I have paid, in other words. And then people who have paid me give me a 1099. But it isn’t for somebody that you have paid it to, and then they’re supposed to be an employee. So it’s very difficult because people think that because I gave you a 1099, I have done my due diligence with the reporting and that’s what they’re kind of looking at. People kind of think of that 1099 and W2 is interchangeable and they’re not. So if you’re required by IRS regulations to give somebody an informational return, which is a term the IRS uses and informational return is a 1099 or a W2 depending upon the classification. They aren’t interchangeable. And that’s what a lot of salon owners, I think, think that as long as I’ve done that the IRS should be happy and it doesn’t work that way. It depends on the classification as to which one they get. And now that they’ve introduced a new form this year, that makes it even a little more confusing because some people still trying to give out 1099s are going to be trying to do that miscellaneous, okay, to their non-employees and they can’t do that anymore. So it’s going to get even a little more confusing.
ASHLEY: Well, that sounds like the perfect storm. Can’t wait for that. So we know that if independent contractor is a classification that usually doesn’t have a standing in the salon industry, as we understand how employment should work. When you bring employees on, we know that federal wage law requires an hourly rate of at least a specific federal minimum wage. Why then can’t employers just pay a flat day rate, a fixed salary, or just straight commission-only to their beauty professional employees?
VICKI: Well, it’s possible they may be able to. There’s all kinds of things that you have to look at when you’re paying somebody. For example, could I pay you a flat day rate? Yes, the federal law would allow me to do that, as long as it’s equal to the number of hours times the minimum wage including overtime. That’s all they care about. They honestly don’t care that it’s paid by the hour. They simply care that it is paid correctly. So if I pay you $10 an hour, and you work eight hours, and I give you $80 as a flat rate, and you never work over eight hours, I’ve paid you more than minimum wage and I have paid you for the hours you have worked. That’s what they care about. So it’s not quite black and white when you look at it that way. Now about not paying overtime, well, other laws kick in. See, the federal law says that every single employee in the United States is eligible at this moment, I don’t, this is going out later on so we’re speaking rules that are in effect right now. And I’m prefacing that because I’m going to quote the minimum wage and I know in four days it’s going to be different. So, but basically I have to pay you $7.25 an hour on the federal level. So as long as I pay you that, and I pay you the appropriate overtime, the federal law is fine. As long as it equates to that, they’re okay with that. Basically, a person who is subject to overtime or minimum wage is called a non-exempt person. That’s how the worker is classified non-exempt. We do not use the term hourly and salary. We use the term non-exempt and it means that they are subject to minimum wage and overtime. But there’s also a thing called salary non-exempt, which says if I basically do the same job all the time for the same number of hours, you could pay me a salary to cover that as long as it covered the equivalent, if there were overtime that that was in there. So you could pay me a salary of $80 a day or a weekly salary, however you did that, as long as it paid me for the appropriate hours, that is part of the federal law. When you look at how to pay somebody, there is more than one way. But the other thing you have to look at is what does the state law say. And that’s what a lot of salon owners forget about. A lot of employers forget about that there’s that pesky state law. I’ve had people say to me, well, I’m, you know, they’re paid $7.25 an hour, so I should be okay. And I’m going, what state are you in? And they say, well, I’m in California. Well, the minimum wage is like 13, so you’re not okay. Or I’m in a, you know, somewhere in New Mexico. The minimum wage is over $8 an hour. Or if you’re in New York or Seattle, $15, $16 an hour. When you go to pay somebody, you have to look at everything and now to make it even more complicated, you have to look at local. Now we don’t have that in Nevada where I’m located right now, but we do have it all across the country where smaller than state have set up their own minimum wage and their own rules for paying people. There’s like 26 cities in California alone. There’s four cities in a county in New Mexico that have their own minimum wage. So it’s everywhere. When you’re looking at paying somebody, you have to look at those laws for what we call non-exempt. Then we have a law for people who are called exempt. And what that is you can just pay them a flat salary no matter how many hours they work to get that salary, but they have to do certain jobs. It’s called the EAP law, executive administrative and professional, and they have to perform certain job duties. Like as an executive, they have to supervise two or more people. As administrative, they have to work in certain jobs and do certain tasks. As a professional, they must have a college degree that is in a field of science. They don’t accept any other degrees. They don’t accept any other training, okay. I’m certified in my field and they wouldn’t accept that. So you may go to, to beauty college. I’ll just call it that. You may spend five years learning your craft, but that would not make you exempt under these rules and the states follow these same rules. So when you’re looking to pay somebody, you have to look at all of those facets, not just what you feel like doing, but does the person qualify as exempt? That would be one way. Do I want to pay them on a salary as a non-exempt? I have to make sure it covers the rules. And then what does the state want? A long answer, but that’s basically what you have to look at.
JAIME: In that answer, Vicki, we haven’t even touched on some of the things that are required of employing someone hourly, or as a non-exempt person, which would be meal and rest breaks, and then these issues of paid family leave and paid medical leave.
VICKI: Well, on the meals and rest periods, yeah, that would affect you as well. Now we don’t have a federal law on that. This is the spooky thing. And now you’re going to make me get on my soapbox so I’ll have to get on that for just a minute. We are the only country in the world that is considered industrialized, I’m putting quotes around that, that does not have meals, rest periods, paid sick leave, and paid family leave in the entire world, the only one. A paid vacation? Not mandatory. Every other country, yes. Paid sick leave? We don’t have it. Every other country, yes. So these are the weird things that you look at when you look at payroll. Everything is a state law in this area. So for example, if I’m in Mississippi, I never have to go to the bathroom and I never have to eat. Why? Because they have no rest breaks or meal periods. If I’m in California, I have to go to the bathroom basically every two hours, and I have to be able to eat, sometimes three times a day, depending upon how long I’m working. It’s all state law, and that’s what you have to be aware of, what your state wants. I don’t know where you guys are located, but I’m in Nevada. And here in Nevada, you must have a 10 minute rest break every four hours or major fraction thereof, and you must be given a half hour lunch, but other states don’t have that. Like I said, Mississippi doesn’t have one. Georgia doesn’t have one. There’s a lot of states that have no lunch periods or rest breaks. Therefore, in that state, you could make an employee work for eight hours and not let them go to the bathroom. It’s technically possible and you would not be in violation of wage and hour law. In other states, you would be in major violation and would face, obviously, penalties. And then when you look at paid leave, again, nothing on the federal level. I’ll go to the other ones in just a minute. Permanently, we have nothing, but we have 10 or 15 states, 20 states now that are mandatory leave. It started in San Francisco about maybe 10 years ago that they forced paid sick leave on employers, found out that the city did not go bankrupt, and it took off from there. All of New Jersey, all of Rhode Island, Nevada has a paid leave. California, dozens of States have paid leave laws now, and dozens and dozens of cities have paid sick leave laws, mostly all paid sick leave. In fact, there’s only two states that have paid leave, Nevada being one of them. They don’t refer to it as sick. They put it down as paid which means I could use it for vacation. I think Maine is the other one. And then basically all the rest are paid sick leave which means I actually have to be sick. There are circumstances that control when the employee can use it, but you have to allow for those. Once you get out of the automatic, I have to offer sick leave based on state law, then we come into last year and COVID. Now what happened universally affected the United States far worse than any other country, again, because we don’t have a federal law in place for paid sick leave or paid family leave. Other countries do. So when employees in Britain had to have extra time for their sick leave for COVID, the British government just goes, add it to their sick leave account. And that’s what everybody else did, but we had to set it up all new because we didn’t have it. The last time anybody actually advocated for paid sick leave on the federal level was Teddy Kennedy, so you’re going way back. What they did was under the Families First Act, which is the federal law wage and hour side, they established paid family leave and paid sick leave under this law. And what it says was basically you had to give everybody so many hours, depending upon how often they worked. Were they full-time? Then they got 10 days. If they were less, you had to calculate it of paid sick leave and they were offered 12 weeks of family leave, 10 of which were paid. The first two weeks are not paid, but you could use the sick leave to cover those first two weeks. Now the sick leave was paid at your full rate. The paid family leave because it could only be used to take care of a child. It was very specific. It was not if you got COVID. The paid family leave was only if you had to stay home to take care of your kid. It was just basically for childcare. So it was at ⅔ your salary, basically and they have limits of how much money. It’s like $200 is the max you can pay and things like that.
For sick leave, I think it was like $511 a day or something like that. Everybody had to do this if they had less than 500 employees. Well, you’re talking about most of the United States doesn’t really start offering sick leave until they get to at least a couple of two, three, 400 employees. They usually don’t even offer sick leave. So I would say that most of your salons probably had never done sick leave before, but now they were required to by law if the employee got sick with COVID. If they got sick with a heart attack non-COVID related, if they sprained their ankle tripping over the dog, that didn’t count. That goes back to state law and sick leave policies. So it got very confusing for employers as to which, am I adding the sick leave on? Is it instead of? And it’s actually a separate requirement. So if you’re in California and you’re required to pay sick leave, you also were required to add those 80 hours of paid sick leave onto it. If I had 80 hours on the books and I got COVID. I didn’t have to spend my 80 hours on the book. I got my 80 hours from COVID. The monitoring of it was extremely tricky. And if you never had a sick leave policy before it became even trickier, because you also had to post it. You had to tell your employees about it then just to make sure this was going to be really fun because we can’t have any fun, okay, unless we have really good laws. They pass the CARES Act which said now because we’re mandating that you offer sick leave, you can take a credit, except this credit is so crazy that even payroll professionals who’ve been around for 20 years are not understanding what you want us to do. And again, on my soapbox, that’s because nobody in Congress has ever written a paycheck, okay. They come up with these weird rules. They always say, oh, I used to own a business. I do payroll. You had no idea what your payroll person does. You didn’t even know their name. Basically, you get these credits that go against your taxes, and then the sick leave and the paid family leave were not subject to the employer portion of the FICA taxes, of social security. They were subject to Medicare, but not social security, the employer portion, but they were subject to the employee portion, which totally changed your reporting form called the 941 form. Totally made it look different and added 18 new lines. So you got one credit for paid sick leave, another credit for paid family leave, if you were required to issue them and then on top of all of that, they weren’t taxed the same way. And on top of all of that, then you were allowed to postpone or defer the employer tax on those until a later time. And then you were allowed, which I understand nobody has been doing except the federal government, you are allowed to defer the employee portion of the tax which had to be paid back in the next year. All of these things came in at one time within the space of five days. The IRS had issued the 941 form for the first quarter and then I’m on a call with the IRS every month. There’s a whole bunch of us, hundreds and hundreds of payroll people are on this call and the IRS was scattering like ants everywhere trying to get this implemented because it came in April 1st and they only got notified of it like March 20th. That’s a very difficult short period for a major tax law. This is where all business owners stand now, especially salon owners is you’ve got to track all of this now, not one cannot be tracked because there are penalties for every single one you violate. Once you start getting into those kind of benefits, sick leave and mandatory leave, it gets to be extremely complicated for the business owner, but they must comply or they get penalized.
ASHLEY: Seeing as though there’s quite a bit involved, and what can really be a bit intimidating if we’re being honest, let’s say assuming we want to hire someone and do it the right way, what actions should we really take before becoming an employer? What are the building blocks and the groundwork we need to lay ahead of time?
VICKI: Well, I’m going to speak two ways on this one. One is a payroll professional for over 40 years. The other is a business owner for over 30 years and that is you’ve got to follow it step by step. If you’re deciding you’re going to have employees, then you’ve got to sign up with the IRS for an EIN, what’s called an employer identification number. Now you can run a business without one of those without a problem as long as you have no employees, but once you either get an independent contractor or an employee, you’re going to need one of those. I always mention that first, even though it seems so easy because there’s also the state equivalent. So you have to sign up for state income tax if your state has one. There are nine states that do not. You have to sign up for other tax situations which your state may or may not have, for example, a city, county, or local tax. You have to pay those once you get employees. So for example, in Ohio, there are 525 cities that have a city tax. Here in Nevada, we have the modified business tax. So even though we have no state income tax, we still have to do that as an employer. There are all kinds of different taxes out there that you would have to register for. So you have to make sure you’re set up correctly with the state and the federal government for your tax files. Now there’s nothing to set up as an employer for the federal government for wage and hour law, but there are posters and that’s a fine if you don’t have those up. And you don’t have to buy them. Do not fall for that thing where you can buy a poster for 29.95 that has all the posters on it that you need because all the posters that you need are all free. If you need a minimum wage poster from, let’s say the state of California, you simply go out to the website, and download it, and post it. You don’t need to pay $40. All of the posters you need are readily downloadable, printable, and postable. They don’t have to be laminated or anything special, but they do have to be up there. Once you’ve solved all those, then you have to look at the idea of how are you going to pay them, how often you’re going to pay people. That’s something that people don’t always look at is how often you have to pay people. You have to make that decision and stick with it because the state law won’t let you change it. You have to say, okay, we’re going to pay weekly. We’re going to pay by weekly, but maybe you don’t want to pay by weekly. Maybe you want to pay monthly. You say, well, I’m just going to do this once a month cause it’s too much work. Well, that would be nice, except there’s about 20 states that will fine you because you didn’t pay your employees soon enough. Because many states only allow you to pay semimonthly, which is twice a month and you can’t pay any less frequently than that. Other states will allow monthly. So you have to make sure that you set your payroll up that it’s within the parameters of the state. The federal government doesn’t have a mandate on that. The next thing you have to do after you’ve done that, and decide what benefits you must or are willing to offer, is then once you hire somebody, you have to make sure you have the proper paperwork from that person. So I hire somebody as an employee. Well, first thing I’m going to need is you need all this stuff that you need to identify them, their name, and address, and all that, and whatever paperwork you take on that, but you need on the payroll side of it, a W4. They’ve got to fill out a W4. You know, of course, you have to do the I9s, okay. But once I’ve hired them, I need a W4 on them before I can start paying them. But also in some states, not on the federal government, but in some states you have to give the employee a piece of paper. You have to give them one when you hire them that states how much they’re being hired at, when they’re going to be paid, when exactly payday is. In other words, is it every Friday, every other Friday, every second Tuesday? Whatever you decide. You have to decide also when your work week begins and ends. People say, what workweek? Well, you know, the one I’m going to base your overtime on, cause everybody must be paid overtime based either on a 40-hour work week, which is the federal government, or there’s four states that have daily. So you have to establish what’s called a workweek and you have to say, okay, my payroll’s going to start on Monday and end on Sunday. It has to be a seven day period. Or it’s going to start on Tuesday and end on Monday. I mean, you could actually start it at Wednesday at noon and end it the following Wednesday at 11:59 if you wanted to, but you got to stick to it and you can’t change that once you establish it. It’s very difficult to change. You’re going to have to figure all that out before you even clock one person in, and that’s the basics. You’re going to have to figure out how you’re going to track their time. You’re going to have to figure out how you’re going to collect that time. Are you doing it on paper? Are you doing it electronically? You have to figure all this out before you get your first employee in the door. So it’s a difficult thing to hire your first employees, but if you do it step by step by step, it can be done.
JAIME: And that’s just the basics. Ashley and I have many more questions for Vicki Lambert, The Payroll Advisor, in part 2 of our discussion, so stay tuned.
ASHLEY: If you’re enjoying Outgrowth, please leave us a review on Apple podcasts now with just one click. Visit bit.ly/outgrowthpodcast.
JAIME: As always, you can follow us in comment on recent episodes on Instagram at @outgrowthpodcast.
ASHLEY: Well, Jaime, until next week. Be smart.
JAIME: Be Safe