Booth Rental vs Commission: How US Salons Classify, Pay and Profit

Booth rental and commission are two different businesses under one roof. With booth rental you are a landlord: a licensed stylist rents a chair, runs their own book and pays you rent. With commission you are an employer: the stylist works to your prices and schedule, you take the client's money, and you pay them a share through payroll.

Below: how the IRS and the states tell them apart, what each costs you, and the math for one chair. Rules are federal unless a state is named; check yours.

#What is the difference between booth rental and commission?

The difference is who runs the business at the chair. A booth renter controls their own prices, hours, clients, products and payments; a commissioned stylist works inside your business.

IRS Publication 4902 lists the signs of a real renter: a key to the premises, and their own hours, products, phone number, business name and prices. Without them, it says, the worker is likely an employee.

#How does the IRS decide whether a stylist is an employee?

The IRS applies common-law rules: a worker is your employee if you have the right to control what they do and how they do it, even if you rarely use it. It weighs three groups of evidence, and no single fact decides.

• Behavioral control: do you direct how, when and where the work is done, through instructions, training or rules?
• Financial control: who invests in tools and space, who pays expenses, how the worker is paid, and whether they can make or lose money.
• Relationship: the written agreement, benefits such as paid leave, how permanent the arrangement is, and whether the work is central to your business.

Publication 4902 turns this into salon questions: who sets opening hours and shifts, who buys supplies, sets prices and books appointments, and who pays for insurance and advertising? If you give extensive instructions on how, when or where to work, the IRS says you are more than likely the employer.

What each answer means for your paperwork

• Employee: you withhold income tax and the employee's Social Security and Medicare, and pay the employer's share: 6.2% Social Security on wages up to $184,500 in 2026, plus 1.45% Medicare. You also owe federal unemployment tax, file Forms 941 and 940, and issue W-2s by January 31.
• Contractor you pay for services: for payments made after December 31, 2025, you file Form 1099-NEC once you pay someone $2,000 or more in a year (it was $600).
• Booth renter who pays you: you aren't paying them, so there's no 1099-NEC. The renter may owe you a Form 1099-MISC once rent reaches $2,000 in a year, unless your salon is a corporation.

Treat an employee as a contractor without a reasonable basis and the IRS can hold you liable for their employment taxes. Either side can ask for a ruling on Form SS-8, and the Voluntary Classification Settlement Program lets you reclassify workers going forward with partial relief.

#Which states use the ABC test?

Some states presume anyone you pay is your employee unless you prove all three parts of an "ABC" test: (A) the worker is free from your control, (B) the work is outside your usual course of business, and (C) the worker has an independently established trade. California, Massachusetts and New Jersey are examples. Wage law, unemployment insurance and workers' compensation can use different tests even in one state, so ask your labor department.

California

California applies the ABC test by default. Licensed barbers, cosmetologists, estheticians, electrologists and manicurists can instead be judged under the more flexible Borello test, but only if every industry condition is met, according to the state's Employment Development Department:

1. Sets their own rates, processes their own payments and is paid directly by clients.
2. Sets their own hours and alone decides how many clients and which services.
3. Has their own book of business and schedules their own appointments.
4. Holds their own business license for the services.
5. If working at your salon, issues you a Form 1099 for the space they rent.

Six general business factors must also be met, such as a separate business location (their home can count). Miss one and the ABC test applies. Manicurists lost the exception on January 1, 2025; AB 1514, chaptered in October 2025, makes it available to them until January 1, 2029. Only the owner can hold the establishment license, and the state board holds the owner responsible for everyone working there.

Massachusetts and New Jersey

Both put the burden on the business to prove all three prongs. New Jersey's labor department adds that "it does not matter what tax form your employer issues to you." Prong B is hard to meet for anyone doing hair or nails inside a salon, so take advice from an employment attorney in these states before you rent chairs.

Federal wage law and state boards

Under the Fair Labor Standards Act (FLSA), the Department of Labor asks whether the worker is in business for themselves or economically dependent on you. It proposed a new version of that rule on February 26, 2026; check its page for a final rule. State boards add their own rules: Oregon requires renters to hold an independent contractor registration and inspects them like salons, and Texas makes a salon keep a list of its renters' names and license numbers.

#What do you owe a commissioned employee?

At least the applicable minimum wage for every hour in every workweek, and time and a half for hours over 40 in a workweek, with commission counted in the rate, unless an exemption applies.

• Minimum wage: $7.25 an hour federally, unchanged since July 24, 2009. Many states and cities set more; pay the highest that applies.
• The workweek is the unit: the week's pay divided by hours worked (the regular rate) may not fall below minimum wage. A good month doesn't cover a slow week inside it.
• Overtime includes commission: the overtime premium is worked out on commission plus any hourly pay.
• The 7(i) exemption removes overtime (not minimum wage) for some commissioned employees if all three hold: you're a retail or service establishment (75% of sales not for resale); their regular rate exceeds 1.5 times minimum wage in each overtime week; and over half their pay across one month to a year is commission. Tips never count as commission.
• State rules can be stricter: California pays overtime after 8 hours in a day as well as 40 in a week, and has required commission agreements to be in writing, saying how commission is computed and paid, since January 1, 2013.

Paying the higher of an hourly rate or commission each workweek, and saying so in the pay plan, builds the floor in.

#How do tips work in each model?

Tips belong to the stylist either way, but only an employee's run through your payroll.

• You can't keep any of an employee's tips. Under the FLSA, employers, managers and supervisors may not keep any part of them. On a card tip, you may deduct the card fee on the tip, and no more.
• Reporting: employees report tips to you by the 10th of the following month unless they received under $20 that month. You withhold income tax, Social Security and Medicare on reported tips and pay the employer's share.
• Tip credit: federal law lets you pay a tipped employee (one who regularly gets more than $30 a month in tips) a $2.13 cash wage and count up to $5.12 an hour of tips toward minimum wage, with notice. Alaska, California, Minnesota, Montana (businesses with sales over $110,000), Nevada, Oregon and Washington require the full state minimum before tips.
• A payroll tax credit: the 2025 tax law extended the credit for employer Social Security and Medicare paid on tips (Form 8846) beyond restaurants to hair, barbering, nail, esthetics and spa services. Ask your accountant from which year it applies.
• Booth renters: their tips are part of their own gross receipts, reported on their own return.

For 2025 through 2028, workers in occupations the IRS lists as tipped, including hairstylists, cosmetologists, barbers, manicurists, skincare specialists and makeup artists, can deduct up to $25,000 a year of qualified tips, phasing out above $150,000 of modified adjusted gross income ($300,000 joint). It's claimed on the worker's own return, so accurate tip reporting is what lets your team use it.

#What should a booth rental agreement cover?

It should set out the space and the rent, and confirm that the renter runs their own business: their prices, hours, clients, products and payments. Leave out anything that tells them how to do the work.

Keep out required hours, a price list you set, mandatory training, quotas, a percentage of their sales, and bookings or payments through your front desk: each is control that points to employment. Have an employment attorney in your state review the final version.

#The money math: commission vs booth rent

A busy commissioned stylist leaves the salon far more than booth rent would, and a quiet one can leave less.

Assumptions, all illustrative: one chair, $8,000 of service sales a month (after discounts, before any sales tax), 160 hours worked, backbar product at 8% of sales paid by whoever runs the chair, and booth rent of $250 a week, or $1,083 a month (250 × 52 ÷ 12). Plan A pays 45% straight commission. Plan B pays a $15-an-hour base ($2,400) plus 10% of sales up to $6,000 and 20% above it.

Plan A pays $3,600 (45% of sales); Plan B pays $2,400 + $600 + $400 = $3,400 (42.5%). What each model leaves the salon from that chair, before your rent, front desk and other overheads:

Unemployment insurance, workers' compensation and card fees aren't in the employer columns; they vary by state and provider. The renter collects the $8,000 and pays rent, product and, say, $400 for card fees, insurance and booking: $5,877 before tax, against $3,600 on Plan A, out of which they pay 15.3% self-employment tax.

The slow month is where minimum wage bites. At $4,000 of sales in 160 hours, Plan A's commission is $1,800, but a $15 state minimum lifts pay to $2,400. After $184 of payroll tax and $320 of product, the chair leaves you about $1,096: barely more than the rent, with all the risk.

#Which model should you choose?

Choose commission if you want one price list, one service standard and one client database, and can carry payroll through slow weeks. Choose booth rental for fixed income and little to manage, accepting that you can't set renters' prices, hours or methods.

• Commission needs payroll, weekly minimum-wage checks and a pay plan stylists trust; salon commission structures compares the options.
• Booth rental suits owners whose stylists bring their own clients, in a state that allows it.
• Both in one salon can work if the groups stay genuinely separate. A "half and half" stylist is the arrangement to avoid.
• Either way, a busy stylist who leaves takes clients along; see how to keep good stylists.

Then price services so commission still leaves a margin (salon service pricing) and track revenue per chair (salon KPIs). Still setting up? Start with how to open a salon in the US.