Salon Payroll Made Simple: How to Handle Stylists, Booth Renters, Commissions, and Tips

Running a salon or spa involves far more than offering great services. Behind the scenes, owners must balance scheduling, customer relationships, product costs, and one of the most complicated parts of the business: payroll. Unlike many small businesses that have a straightforward payroll structure, salons must account for employees, independent contractors, booth renters, commissions, and tips. Each of these categories carries its own tax obligations, reporting rules, and compliance risks.

For new salon owners or those hiring their first stylist, the process can feel overwhelming. Even experienced salon managers may find themselves questioning whether they’re classifying staff correctly or reporting tips correctly. These uncertainties can cause stress and distract from what matters most—providing quality services to clients.

This guide breaks down the essentials of salon payroll, explains where many owners make mistakes, and shows how Down to Basics Payroll provides salon payroll services designed specifically for small businesses.

Employees vs. Booth Renters: Classifying Your Workers Properly

The first significant challenge in salon payroll is determining whether the people working in your salon are employees or independent contractors. This decision shapes how taxes are handled, what forms are required, and whether you’re on the hook for payroll contributions.

Employees (W-2): Employees are those you hire to work under your direction. Since you control the “when, where, and how” of their work, the IRS considers them employees. As the employer, you must withhold taxes from their paychecks, pay Social Security and Medicare contributions, and provide a W-2 at the end of the year.

Booth Renters (1099): Booth renters are independent business owners who lease a space in your salon. They usually set their own hours, purchase their own supplies, and manage their own clients. While they may share your salon’s address and brand recognition, they are not considered your employees. They pay their own taxes, manage their own marketing, and receive a 1099 form if payments are issued through your business.

Getting this wrong can be costly. For example, if a stylist is treated as a booth renter but you control their schedule, the IRS may determine they are actually an employee. This could result in back taxes, penalties, and even fines for misclassification. That’s why clear contracts and consistent practices are essential.

How to Handle Commission-Based Pay in Payroll

Many salon owners use commissions to motivate and reward stylists. While effective, commissions add another layer of complexity to payroll.

Some salons use a flat-rate commission, where stylists receive a set amount per service. For example, they may earn $10 per haircut on top of an hourly base. Others use a percentage commission, such as 40% of the service price. Both methods can work, but each requires accurate tracking to ensure compliance.

Even when commissions make up most of a stylist’s earnings, hours must still be recorded. If the stylist is classified as an employee, you must ensure they make at least minimum wage for every hour worked. For instance, if a stylist spends several hours at the salon with only a few clients, their commission earnings might not meet minimum wage standards. In that case, you are legally required to make up the difference.

Overtime adds another wrinkle. Commissioned employees who work more than 40 hours a week are typically entitled to overtime pay. This isn’t calculated at a simple “time and a half” rate—it must be based on their “regular rate,” which includes commissions. Many salon owners overlook this, but it’s a common compliance issue.

By using small business payroll services with built-in commission tracking, you can ensure calculations are accurate and fair. Instead of juggling spreadsheets and receipts, payroll software automatically applies commission rules, calculates overtime correctly, and integrates with tax reporting.

Tips: What You Must Report and How to Do It Right

Tips are a daily reality in salons, but they also come with reporting requirements that many owners underestimate.

The IRS considers tips to be taxable income. Employees are required to report cash and credit card tips if they total $20 or more in a month. Once reported, you must include these amounts in payroll, withhold applicable taxes, and report them on year-end W-2 forms.

The method of payment matters. Employees report cash tips, but you remain responsible for ensuring they are included in payroll records. Credit card tips, on the other hand, are processed through the salon and distributed to employees, often along with regular paychecks. These also require proper tax withholding.

Failing to report tips correctly can lead to serious consequences. The IRS conducts regular audits in industries where tipping is common, including salons and restaurants. Maintaining clear systems for recording and reporting tips helps to protect your business and your staff. Payroll providers can simplify this by giving employees an easy way to report tips and by automatically adding those amounts to taxable income.

Tax Withholdings and Reporting for Salon Staff

Beyond wages, commissions, and tips, payroll also involves tax responsibilities. Salon owners must manage both employee withholdings and employer contributions.

At the federal level, you are required to withhold income tax, Social Security, and Medicare from employee paychecks. You also contribute the employer’s share of Social Security and Medicare taxes. At the state level, you may need to withhold income tax, unemployment insurance contributions, or other local taxes, depending on your location.

Quarterly filings are another key responsibility. Employers typically file Form 941 to report federal withholdings and pay their share of taxes. At the end of the year, employees receive W-2 forms summarizing their earnings and withholdings. Booth renters or contractors who received payments may need 1099 forms.

Managing these tasks requires organization and consistency. Missing a deadline or miscalculating withholdings can result in penalties. For many small salon owners, outsourcing payroll ensures that filings are accurate and submitted on time.

The Risk of Getting It Wrong: Audits, Penalties, and Worker Complaints

The risks of payroll mistakes in the beauty industry are real. Misclassified workers, unreported tips, or improperly calculated overtime can all attract attention from tax authorities or trigger disputes with employees.

For example, a salon that pays stylists commission but fails to track hours may end up violating minimum wage or overtime rules. Or, if tips are not included in payroll, employees may underreport income, creating problems during audits.

These issues affect compliance and employee trust. Stylists who feel they aren’t being paid fairly may leave, file complaints, or pursue legal action. For a small salon, even one complaint can be disruptive.

Staying proactive is the best defense. Clear payroll processes, written agreements for booth renters, and accurate reporting protect both your business and your team.

How Down to Basics Payroll Simplifies Salon Payroll

While payroll may seem complicated, it doesn’t have to consume your time or create constant stress. Down to Basics Payroll specializes in helping small businesses like salons handle payroll correctly without unnecessary complexity.

We work with salons of all sizes, from single-chair operators hiring their first employee to established businesses with 20 or more staff members. Our services begin with helping you properly classify workers, ensuring you understand the difference between employees and booth renters. We then set up payroll systems that seamlessly handle hourly wages, commission structures, and tips.

Once your system is in place, payroll becomes as simple as sending over your staff’s hours and earnings. We calculate pay, withhold the correct taxes, and handle filings on your behalf. That means no scrambling over quarterly forms, no guessing about overtime, and no stress about whether tips were correctly reported.

Because we focus on small business payroll services, our pricing is designed to be affordable. We know salon owners don’t need complicated extras or software that requires hours of training. What you need is a reliable, straightforward solution that keeps your business compliant and your staff paid on time.

Work with Us for all Your Salon Payroll Needs! Call Today to Learn More! 

Payroll in the salon industry is more complex than many owners expect. Worker classifications, commissions, tips, and tax reporting all add layers of responsibility that can’t be ignored. At the same time, payroll doesn’t have to be a constant headache. With the right systems—and the proper support—you can keep your salon compliant, avoid costly mistakes, and maintain strong relationships with your staff.

Down to Basics Payroll makes it easy. Whether you’re hiring your first stylist or managing a full team, we simplify payroll, allowing you to focus on your business. 

Contact Down to Basics Payroll today to streamline your salon’s payroll and stay compliant without the stress.