Are you still asking "Can I expense this...?" Use our free tool!
Every salon has a stylist who says, “I’m basically my own boss.” Whether the IRS agrees has a lot less to do with what gets said in the break room and a lot more to do with how your salon actually runs day to day.
When you bring a stylist on, you’re putting them in one of three buckets: booth renter, commission stylist, or employee.
That choice decides who pays which taxes, who keeps track of tips, what paperwork you send in January, and who gets the bill if the IRS later decides you picked the wrong bucket. It’s one of the bigger money decisions a salon owner makes.
We’ll walk through what being a commission-based stylist booth renter, or employee means, how to tell which one you really have, and how to pick the one that fits your salon.
What really decides which bucket a stylist is in is how much say your salon has over their work, no matter what your agreement with them calls it. The IRS looks at who controls the work, who controls the money, and how the relationship is set up, and it looks at all of that together rather than any one thing.
In a salon, the three options usually look like this:
Any of these can work, and problems only show up when the label doesn’t match real life, like a “booth renter” whose hours, prices, and products are all set by the salon. Before you pick one, it helps to know what Texas does and doesn’t require.
If you search for a “Texas booth rental license,” you’ll still find older articles telling you to get one, but Texas stopped issuing it. The Texas Department of Licensing and Regulation, the state agency that licenses salons and stylists, dropped the booth rental license in its 2022 rule changes for barbers and cosmetologists. That included the old rule that a stylist renting space “must hold a booth rental permit.”
So today, a stylist with an active Texas cosmetology license can rent a chair from you without getting a second license. Your salon still needs its own salon license from the state, and every stylist still needs their own current license.
The licensing side got simpler, but the tax side didn’t change, because the IRS test looks at who’s in control, not at state permits. The question then becomes how much your salon is running things.
A booth renter starts to look like an employee once the salon is running their business for them.
The more of these that are true in your salon, the harder it is to call someone a booth renter:
Let’s look at an example. A Fort Worth salon has six stylists it calls booth renters, and each one pays rent every week, which looks fine. But the front desk books every appointment, clients pay the salon, everyone works off the salon’s price menu, and stylists are told which Saturdays they’re on. On paper that’s six small businesses, but the salon is running the schedule, the prices, and the money, and that looks a lot more like six employees.
Nobody in that salon was trying to cut corners. Booth rental setups usually start out clean and pick up a few “small” salon rules along the way, until the salon is in charge.
That owner had two good options. They could give control back, so each stylist sets their own prices and hours, books through their own app, and takes their own payments. Or they could accept that they’re really running a team and start paying the stylists as employees. Either one works, and the only setup that causes problems is calling it booth rent while running the place like a boss. That decision changes the tax jobs on your desk, too.
Booth renters pay you rent, and that rent counts as income for your salon. You don’t take taxes out of anything for them, because they handle their own taxes, their own tips, and their own quarterly tax payments to the IRS.
Commission stylists you treat as contractors need the most care, because your salon usually controls the booking and the money, which is exactly what the IRS looks at. If you pay a contractor enough in a year, you send them a Form 1099-NEC in January, which is a simple form that tells them and the IRS how much you paid them. For payments made in 2026, you only need to send one if you paid them $2,000 or more, according to the IRS 1099 instructions. That cutoff used to be $600, so if you’ve been sending 1099s for years, it’s worth knowing the number went up.
Employees get a regular paycheck through payroll, which means taxes come out of every check before the stylist gets paid, and your salon pays its own share on top. Tips are part of that too. Your stylists tell you about their cash tips each month (unless they got less than $20 in tips for the month while working for you), and taxes come out on those tips the same way they do on regular pay, as the IRS tip reporting rules explain. That’s exactly what our team handles for salons every month.
There’s also a newer perk on the employee side. A recent federal law, the One Big Beautiful Bill Act, opened up a tip tax credit to beauty businesses like hair salons, barbershops, nail salons, and estheticians, as long as tipping is normal in your business. Before that, it only covered food and drink businesses like restaurants and bars.
A tax credit takes money directly off your tax bill, and this one is based on the Social Security and Medicare tax you pay on most of your employees’ tips. You claim it on Form 8846, and it only applies to employees.
Picking the wrong setup has its own costs, though.
If a stylist you’ve been paying as a contractor turns out to be an employee in the eyes of the IRS, you can end up owing the taxes you should have been paying all along, plus penalties and interest. It usually comes up at a bad time, like when a stylist files for unemployment, a former stylist files a complaint, or an IRS letter shows up asking why your “contractor” looks a lot like staff.
The IRS says a business that had no reasonable basis for treating an employee as a contractor can be held responsible for the employment taxes on that worker. Texas also does its own check through the Texas Workforce Commission, which runs state unemployment, and the state doesn’t have to agree with the IRS.
If your setup has drifted, it’s better to fix it before anyone asks. The IRS has a program called the Voluntary Classification Settlement Program that lets a business start treating workers as employees from now on and pay a reduced amount for the past, with no interest or penalties on that amount. To use it, you need to have always treated those stylists as contractors and sent them 1099s for the past three years, and you can’t already be in the middle of an IRS employment tax audit or a state or Department of Labor review of how you classify workers.
It’s a good one to talk through with us early, before you decide which setup you want going forward.
The right setup is the one that matches how you actually want to run your salon.
If you want stylists building their own client lists and you’re happy just being their landlord, booth rental can work well, as long as you really let them run their own schedules, prices, and payments. You give up some control, and in return you don’t have to run payroll for them.
If you want every client to get the same experience, with one booking system and set prices, that’s an employee setup. Payroll takes more work and costs more, but it fits how you run things, and the tip credit can help with the cost, depending on your situation.
Plenty of salons run a mix of booth renters and employees, which works fine as long as each group is handled consistently.
Whatever you choose, put it in writing. A booth rental agreement should spell out what the renter is in charge of, and an employee handbook should cover schedules, tips, and pay. When your paperwork and your day-to-day match, any questions from the IRS or the state tend to go a lot more smoothly.
If you’re not sure which bucket your stylists fall into, that’s exactly the kind of thing our hair salon accounting team helps with. We’ll look at how your salon really runs and help you set it up so your taxes match.
If you run a barbershop too, we also wrote about barber tax write-offs that are worth knowing this year.
Ready to get your stylists sorted out before tax season?
Get in touch with Adam Traywick and we’ll take a look together.
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Adam Traywick CPA small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
