When it comes to watertight lease agreements, details is better than brevity. A well-inclusive lease is your best bet for basic protection.
If you operate a booth-rental salon, the IRS and your state tax agency require a written agreement between the salon owner/landlord and the booth renter. This agreement sets up the separation between owner and renter and spells out how the working relationship will function. Whether your business is nails, skin care, massage, makeup, electrolysis, or hair design, this agreement constitutes the contract between a landlord and a renter.
The first both the INRS and your state tax agency will look for is whether a written agreement exist between you and your renters, then, they determine whether the documents outline whether the documents outline a true independent contractor agreement. Finally, they examine your business structure to determine if you have in, fact, operated your business according to the agreement.
Your agreement/contract must define who has control over which areas, and how that control is effectively implemented. I estimate that 90% of all salons that call themselves “booth rental” would not pass muster in a tax audit.
If you do not have a well written and well-executed lease with each of your renter, both the IRS and your state will view you as a business owner with employees, not all landlord with both renters. This means that in an audit situation, you could be liable for thousands of dollars in back taxes, attorney and accounting fees, penalties, and interest. And that’s just the beginning. No matter which agency (state or federal) audits your business, the other will follow closely behind. And they can go back three years or more, depending on the circumstances. Add to that the frustration you will experience and the time you will spend gathering information to prove your point, and the situation gets pretty bleak.
You can avoid some of these pitfalls by taking an honest look at how you operate your business. In my seminars on booth renting. I always ask for a show of hands on how many people are currently using a rental lease in their salon. Next, I ask those people whose lease contract is three pages or less to put down their hands. Amazingly, more than 95% of those hands go down.
I believe it is possible to cover all your bases on all the IRS and state guidelines in a lease contract that is three pages or less. You can’t adequately outline the business structure necessary to protect you in a document that short. Following are all the essential elements in a lease that will protect your business from problems with the IRS and/or equivalent agencies at a state level.
- All service being furnished as part of the base (rent, heat, air conditioning, electricity, hot water)
- The time span covered by the lease.
- The days/hour the space is available to the lease.
- The amount of rent to be paid and its due date.
- Any late fees assessed for late payments.
- A list of any products included in the base rent (towels, nail table, etc.).
- Who is responsible for maintaining and repairing the station and any other leased equipment.
- A list of all state board guidelines the lessee must adhere to.
- Telephone policies: who answers it, how appointments are booked, and who pays for phone service.
- A breakdown of receptionist duties, where applicable.
- Guidelines that the lease is responsible for paying all applicable city, country, state, and federal taxes.
- Notice that the lease shall meet all local, country, and state licensing requirements.
- Subleasing restriction, if applicable.
- A description of all insurance requirements, including the types and amounts of coverage.
- A description of the retail product sales agreements and how commissions, if any, are paid.
- A cancellation clause, giving both parties an appropriate opportunity to cancel the agreement.
A basic agreement must address all of these, but there is much more information that needs to be included before the lease can be truly effective for salon owners. Too often, salon owners borrow a lease from a friend or associated in another industry and attempt to cut and paste it into a workable document for the salon industry. This is extremely dangerous to your long term business health. It makes no sense to take a chance on losing everything you’ve worked for by not providing yourself basic protection in the form of a well-written, all-inclusive lease agreement. Although in a court of law you are innocent until proven guilty, in tax situation you are guilty until proven innocent.
It’s not enough to hire a professional well-deserved in the industry to write a comprehensive lease for you. It must be updated regularly to reflect changes in laws and regulations and tax laws. It’s also important to understand that certain items cannot be considered “rent” or part of rent payment.
These item include:
- Insurance (unless you have a very small group of renters)
- New client referrals
- Retail commissions
- The collection of client fees
And remember: rent must be a flat fee, not a percentage of service income.
Kassidy’s Salon Management Consulting Company markets a business lease geared specifically for the salon industry…you just fill in the blanks based on how you want to operate your business.
Kassidy’s also offers an audiotape series that clarifies about booth renting. The tapes include a great deal of information on how to set up your business profitably and includes all IRS and most state guidelines on this issue.