Independent Contractor Status Confusion
Editors Note: Be sure to read new articles at this web site regarding the latest crackdowns on independent contractors by the IRS affecting grooming businesses. See the Jobs & Wages category of articles here. It appears thousands of groomers are not correctly classified as valid independent contractors today. Be careful!
From a financial point of view this may be the most important career information you ever read. It is alarming how many grooming employers advise you to be hired on an independent contractor basis, yet the arrangement doesn’t meet legal requirements. It may take years but trouble usually comes knocking on the doors of these establishments. The impact strikes both employers and independent contractors who are actually employees. Yes, we are being outspoken when we say that some of these employers know they are doing the wrong thing. Yet, they do it. What about the repercussions for employees when authorities get involved to correct the employer? These employers put employees at risk of audits, penalties and fines too. That’s not ethical. There we said it! Be careful. The sad fact is that the IRS is reporting that the current recession has sparked many thousands of employers to switch employees to independent contractor basis in order to save money. That would be fine except their operations are not adapted to meet legal requirements. They operate the same and simply say, “You are now an independent contractor.” Putting a new label on the working relationship is not how it works. There are grooming operations facing the music with the IRS and sometimes state revenue agencies over this issue every year. This is an important warning.
Why would business owners want to avoid being employers and instead treat you as an independent contractor?
Does money have something to do with it? Of course it does. The independent contractor status eliminates the owner’s financial liability for employment-related taxes and workers compensation coverage. In fact, the savings can amount to 25% to 30% more than the cost of the gross wages.
The real cost of payroll is not generally known by groomers without experience as employers. If gross payroll wages are $500 for the week, the real cost of payroll for the employer is closer to $625 to $650 after account for the cost of worker’s compensation, unemployment insurance and other employer contribution taxes. Can you imagine the appeal of saving 25% to 30% every payroll? So why don’t more owners go for the savings? They are compliant with employment regulations. More than 90% of all groomers working under independent contractor status today are doing so illegally.
Do you think the government lets this slide by? No, we’ve gotten hundreds of calls from business owners in trouble with the IRS and state agencies for independent contractor violations. They typically end up in court and suffer penalties, interest and fines that may keep them encumbered for years.
What about the independent contractor who was really an employee. Well, they get into trouble too. Here’s why, all independent contractors must pay self-employment taxes. The independent contractor status shifts the burden for employer contributions from the business owner to the groomer working as an “IC.” Generally speaking, independent contractor status means you are self-employed.
Now how many pet groomers working as independent contractors file the correct tax forms and pay self-employment taxes? Thousands have been caught not doing so thinking they were earning “W-2 wages” like employees. Therefore, both parties are at fault and both face the music.
Why do so many pet groomers accept independent contractor status? They don’t know better. However, that excuse won’t get you out of trouble, including fines, penalties and interest. Others naively believe that business owners must be authorities on employment law and do as they are told. Same result. We know groomers who said being an independent contractor made them feel more important. That’s fine, but you better pay the extra cost for the pride. You are liable for expensive self-employment taxes. In fact, independent contractors may require business insurance, a business telephone and business permits or licenses. Are you really making enough extra income as an independent contractor to account for the added costs? Rarely, the full benefit was heisted away by the hidden employer. Most employers don’t give you a higher commission when paid as an “IC.” It really is a heist.
Not all business owners are intentionally pulling a scam. Some really don’t know the legal differences between employees and independent contractors. That’s no excuse. Every business owner (including true independents) should have legal and accounting counsel. Seek professional determinations to maintain compliance. Anyone who doesn’t know if they are actually legally classified an employee or independent contractor can refer to IRS publications. In fact, you can complete a SS-8 form and the IRS will provide a written determination. The same is true of the tax agencies part of your state government. Keep in mind you may be considered an independent contractor by state government, but not the federal government, and vice versa.
Update: In early 2017 we discovered that the State of Tennessee has ruled that most pet groomers there are employees with few exceptions. See discussion in the the I.C. section of the GroomerTALK Message Board.
Surveys indicate that about one-half of all groomers eventually become legally self-employed. Some return to employment because self-employment does require many more responsibilities beyond grooming. Managing a business requires several hours weekly for financial planning, personnel management (if you have employees), client relations, supervision, repair and maintenance, bookkeeping, tax compliance and more. However, you have more control of your working lifestyle, and there is an incomparable thrill and pride of owning your own business that makes the extra work acceptable if not pleasurable.
The industry’s highest annual incomes are derived from large businesses with employees. We have consultation clients with 10 to 25 employees, and some own major pet centers. They often buy their own commercial property too. It isn’t a given, but personal incomes (before taxes) exceed $100,000 a year and more. Remember, self-employment with a small or large business is no guarantee of earning an income greater than employment.
Mobile groomers account for the large number of self-employed groomers without employees. The out- of-pocket cash required to start a mobile grooming business is relatively low when compared to opening a new salon or shop in a shopping center. Many mobile owners enjoy not having to hire and supervise employees. Mobile grooming surveys have shown the average income for a full-time, five day a week, mobile grooming business owner is typically $35,000 to $45,000 a year after deducting operating expenses.
Home-based grooming businesses account for another large number of one person grooming businesses. However, a growing number of them hire part-time bathers all or part of the year depending upon demand.
Many groomers misrepresent their self-employment income. You are likely to hear errant figures when you ask groomers about their self-employment, and they are willing to share. When you ask a business owner, “How much did you earn last year?” you really don’t know if their answer is the gross sales of services and retail, or are they telling you what their personal income was from their business.
Have you heard the saying, “It’s not what you earn, it’s what you keep!”? Let’s look at an example. A business owner sells $60,000 worth of grooming services in one year before deducting operating expenses (rent, utilities, supplies etc). What is leftover is known as the “net operating income.” Unless the owner also took a salary or draw accounted for in the operating expenses, the net operating alone is the true personal income of the business owner (prior taxes).
Countless times we’ve heard self-employed business owners state gross sales to others as if it was their personal income from the business. This issue becomes critical when you are considering the purchase an existing grooming business. State your questions in a more specific manner. Ask, “What were the gross sales of the business last year?” and “What was the net operating income of the business last year.”
We know there are some readers of this report already making significant incomes. Most are willing to take a temporary reduction to enter the industry, but they are not willing to stretch that out for more than two to three years. Point blank they ask us, “Can I make a six-figure personal income in pet grooming.” Yes it is possible. Many of these career seekers talk to grooming business owners and are given both good and bad information when it gets to finance. Why? Today, the average groomer or grooming business owner doesn’t count among their friends or associates someone making this level of personal income. Our trade magazines rarely write anything about these owners, and a large majority of pet groomers don’t join associations where they might network with them. In fact, nationwide very few groomers network with other groomers in their areas.
So what is the difference between pet grooming business owners earning significant six-figure personal incomes from their businesses, and those making far less? Choice, you have to grow the business and manage it effectively. If you go out and conduct a survey you’re probably not going to get such a diplomatic answer. In fact you are likely to get misinformation, even jealousy. You are certain to be told, or hear it implied, that the pets are not as well taken care of because the owner is essentially greedy and all the pets are groomed on an assembly-line without care. Yet most of these large businesses hand-dry pets, and don’t leave pets alone in cage dryers like the majority of smaller shops (not mobile groomers). In other words, you are going to hear defensiveness and inaccurate criticisms most of the time.
If your choice is to earn a major self-employment income we want to tell you it is possible if you are committed. Our founder pioneered the process of growing a small grooming business into a seven days-a-week business including evening shifts. She didn’t do much advertising either. It was word-of-mouth just as it is today. Today there are exceptional grooming business owners besting her records, and many are our clients too. Yes, they do exist. Quite a few have asked to help them write their business plans to buy their commercial buildings, add boarding, add daycare, add training or become a school of grooming.
To make the highest incomes in the industry you will have to hire employees as you grow the business. You must accept the duties and responsibilities of being not only a business owner, but an employer, manager and supervisor. We have clients that even go on to own two or three salons. It should be good news to you as a career seeker that we can just say to you, “The sky’s the limit for effective owner/managers motivated to grow large pet care businesses.”
Once more we come back to what we said early on, pet grooming is a diverse industry on many levels. There are many career paths and associated incomes. Most pet groomers still fall into the category of average earnings ranging from $25,000 to $40,000 a year in gross wages before taxes. If that was their goal they are successful people.
Some people will write to tell us they don’t earn that much. We understand and remember we used the word “average,” which means that the range still includes groomers earning less than $25,000 a year, and some more than $40,000 a year. What you will earn as a pet groomer is entirely up to you. Are there other factors that affect your income. Sure.
How Your Area Affects Compensation
Generally the more “upscale” the area served by your employer, or your business, the better your odds to maintain a steady year round business. Higher service fees mean higher commissions, and the same often holds true of salaries or hourly wages. It is generally agreed upon that the more moderate the climate the more the likely you will have steady business year round.
During harsh winters business may slow. Snow days often bring cancellations. If your local economy varies seasonally, such as a resort area, your sales of grooming may do the same. Most dogs live in single-family homes. If your market area is largely apartment dwellers it could have an impact on your sales. Many of our clients have set up second businesses in areas where thousands of new homes are being built and take the town by being the first groomer in these newly developed areas. You can learn a great deal more about marketing pet grooming in our book, From Problems to Profits-The Madson Management System for Pet Grooming Businesses.
This was a long chapter with important knowledge. For this with a passion to groom ahead it’s time to understand that pet grooming careers progress in stages.
Optional Quiz – Make Sure You Can Calculate Commissions & Project Earnings
If you don’t want to test your skills at calculating commission earnings and projecting your earnings as an employed groomer, click here to read the next chapter (or click the “Next” dog bone above).
If you plan on being an employed groomer and earn commission wages, be sure you understand how your wages will be calculated. Test your skills below. If you don’t get all of the answers we suggest you read Chapter 8 again.
(1) Your employer offers you 55% commission. On this day you groom:
Dog #1, service fee $52.50
Dog #2, service fee $36.00
Dog #3, service fee $28.00
Dog #4, service fee $40.00
Dog #5, service fee $77.00
What are your gross wage earnings for grooming Dogs #1-5?
(2) Your employer offers you 50% commission. On this day you groom:
Dog #1, service fee $40.00
Dog #2, service fee $38.00
Dog #3, service fee $50.00
Dog #4, service fee $42.00
Dog #5, service fee $60.00
Dog #6, service fee $45.00
Dog #7, service fee $29.00
Your employer provided you with a pet bather to bathe, dry, clip nails and clean ears all 7 dogs. The employer deducts $5 for pet when assisted by the pet bather.
What are your gross wage earnings for grooming Dogs #1-7 before you deduct the cost for the bather?
The bather assists you for all 7 dogs
What are your net wage earnings for grooming Dogs #1-7 after reimbursing your employer for the bather?
(3) The following information is fortunately provided by a potential employer who pays by commission. The employer doesn’t inform you how much you will earn annually simply because you work on commission and doesn’t know how many pets you will groom in the year ahead. It’s up to you to estimate what you could earn in a year with steady work.
Average service fee: $40.00
Work schedule: Monday through Friday, no paid vacation
Commission rate: 50%
Bather: none provided
At this time you know you can groom at least 6 pets a day on average. To be conservative, figure that you will groom 6 pets a day.
What are your estimated gross wage earnings for one year if you grooming 6 pets per day?
Answers provided below.
Congratulations for taking the quiz. Many career seekers simply don’t realize that commission is a complicated system. It sounds great to earn 55% commission, but there are groomers at 40% that actually earn more income. Others turn down a salary in favor of commission only to learn later they would have made a greater income with salary.
Answer to Question #1: The answer is $128.43 after rounding to nearest penny. $233.50 (x) 55% = $128.43.
If you didn’t get this correct refer to Chapter 8, Page 7 of the Career Start 2008 report.
Answer to Question #2: The first answer is $152.00. $304.00 (x) 50% = $152.00. The second answer is $117.00. $304.00 (x) 50% (-) $35.00.
If you didn’t get these correct refer to Chapter 8, Page 7 of the Career Start 2008 report.
Answer to Question #3: The answer is $31,200.00 a year. $40.00 (x) 6 (x) 50% (x) 260.