Salon Payroll: Demystifying Pay Structures & Employee Tips (2024)

Most of us look forward to payday, and yet it can be a real source of anxiety for salon owners due to the sheer range of workers they employ (are we right?). Paying different employees (e.g., hourly, part-time, full-time) different wages on different days leaves a lot of room for error without the right payroll tools and compensation model and can get in the way of running an efficient, profitable hair salon. Assuming you have a robust payroll system in place (a hallmark of any good salon software), let’s explore the most common employee pay structures with some practical tips for implementing them at your salon business.

Choose Your Pay Structure: 5 Ways to Pay Salon Employees (+1)

Salon compensation structures vary, from hourly compensation to commission-based pay or a combination of both. When setting up your business’s payroll, make sure you clearly define the terms of employment, including rates of pay, commission percentages, bonuses, and any other incentives. Choosing the right salon compensation structure is crucial for the success and satisfaction of both the business and its employees.

And, of course, make sure that your salon’s payroll software can accommodate the following 5 main payment structures:

1. Hourly Wage

This compensation model involves paying employees a set rate for each hour worked. This structure is ideal for salon staff who work predictable hours and may not rely heavily on commission-based earnings.

Hourly pay is popular in the salon industry. On one hand, it ensures that your employees are compensated for the actual hours they work, which helps incentivize productivity and efficiency. Hourly pay also offers you flexibility in managing your labor costs during different busy and non-busy seasons.

However, managing hourly pay structures requires accurate timekeeping and payroll calculations to ensure employees are paid correctly.

When setting an hourly rate, remember to:

Determine a competitive hourly rate that aligns with industry standards, regional wage trends, and the skills and experience of their employees.
Implement an automated timekeeping feature that accurately tracks employee hours and streamlines payroll processing.
Manage overtime hours effectively to ensure that employees are compensated fairly and in compliance with regulations.

Pro Tip: Vagaro’s role-based hourly pay feature simplifies payroll even further by allowing salon owners to set up pay rates based on different job roles, making it easier to manage payroll and taxes, and ensuring that employees are compensated fairly.

2. Salary

In this pay structure, certain employees, usually your managers or senior stylists, may receive a fixed annual salary instead of hourly wages or commission.

There are pros and cons to offering salary-based compensation at your salon. On one hand, it allows you to predict costs, budget more accurately and streamline your payroll process since you won’t need to calculate hourly wages or commission-based earnings. The prospect of a reliable, competitive salary can help you attract top talent as well.

On the other hand, fixed costs can be a burden during slower periods and lead to overpayment relative to the value of services given and hours worked. Moreover, without the incentive carrot, some employees may lack motivation to maximize their productivity or client satisfaction.

When determining employees’ salaries, keep the following in mind:

Run performance reviews regularly to assess employee contributions and adjust annual salary levels accordingly.
Reward high performance with merit-based raises or a performance bonus. Keep your best talent motivated!
Ensure compliance with labor laws and regulations governing salary payments, including minimum wage requirements, overtime rules, and record-keeping.

3. Commission-Based Pay

Commission is common particularly for hairstylists, nail technicians, and other service providers. Offering commission at your salon is a great way to motivate your employees to work hard and upsell various services and products. For these reasons, your payroll software should be able to handle various commission rates and structures.

In fact, here are the most common commission structures, with simple examples of each:

Service-Based Commission

Service-based commission is a common commission structure calculated as a percentage of the total revenue generated from the services performed by your salon employees.

Example:

Hair Stylist Commission Rate: 40% on all services performed.

Services Provided: Haircut ($50), Color Treatment ($100), Styling ($30), Total Revenue Generated: $180.

Commission Calculation: 40% of $180 = $72.

Total Earnings: The hair stylist earns a total commission of $72 for the services provided during a specific period.

Product-Based Commission

The product-based commission model is straightforward. Your salon’s employees simply earn a commission of a set percentage on all retail product sales:

Example:

Product Sold: Nail polish set priced at $50.
Commission Calculation: 20% of $50 = $10.
Commission Payout: Your nail technician earns a $10 commission for selling the nail polish set.

Tiered Commission Structure

In this commission model, your salon worker’s commission rate increases by a certain percentage based on performance milestones.

Example:

Base Commission Rate: 35% for total monthly service sales up to $5,000.
Tiered Commission Rate: 45% for total monthly service sales exceeding $5,000.
Total Monthly Service Sales: $6,500.
Commission Calculation:
For the first $5,000 (at the base rate of 35%): $5,000 * 35% = $1,750.
For the additional $1,500 (at the tiered rate of 45%): $1,500 * 45% = $675.
Total Commission Earned: $1,750 + $675 = $2,425.

Team-Based Commission

In this structure, all your employees receive a bonus if the salon exceeds its monthly revenue target. The bonus is calculated as a percentage of the total income achieved beyond the target, and includes services and product sales.

Example:

Monthly Revenue Target: $20,000.
Total Monthly Revenue Achieved: $25,000.
Excess Revenue: $25,000 - $20,000 = $5,000.
Commission Percentage: 10% of excess revenue.
Commission Calculation: 10% of $5,000 = $500.
Commission Payout: Each salon employee receives a $500 bonus for surpassing the monthly revenue target.

4. Hybrid Pay Structures

Some salons may use hybrid payment structures that combine elements of hourly wages, commissions, and booth rental fees. For example, a hair stylist may work part-time as an employee, receiving hourly wages for certain shifts, while also renting a booth as independent stylists for additional hours and earning commissions on services provided.

This compensation model comes with challenges, thought anything is possible if your payroll system can accommodate it. However, there are tax implications to hybrid employee pay, which we’ll discuss below.

5. Booth Rental

OK, so you don’t pay booth renters, but the practice is very common in the salon industry, and worth mentioning here. Essentially, hair stylists, barbers, and other professionals rent space within a salon to run their own business. Instead of receiving wages or commissions from you, the salon owner, booth renters pay a fixed rental fee (usually monthly rent) for the use of space and keep all earnings from their services. We’ll discuss what this all means for you in the employee classification section below.

6. Gratuity (Tips)

In addition to their base pay or commissions, your salon workers likely receive gratuities (tips) from clients. We didn’t use the word “gratuities” to sound (gratuitously) smart; it’s a term that will pop up during tax season. No, you don’t pay your employees their tips, but gratuity, whether given in cash or credit card, is taxable income and must be reported to the IRS. Failure to do this can lead to consequences for both you and your employees, so ensure that gratuity is visible in your payroll history.

Pro Tip (for Tips): The benefit to receiving tips via credit card payment is that they are recorded and distributed to employees (which is reflected in their pay histories) through your salon's point-of-sale system, which is connected to the rest of your salon software. It makes this whole tip thing a lot easier to keep track of!

Not surprisingly, each compensation model listed above depends on how you classify your stylists and other employees, which we’ll dive into next.

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Classifying Your Employees for Payroll

Your salon business staff likely includes a mix of employees, from hairstylists, lash and brow technicians, and estheticians to receptionists and independent contractors. As a salon owner, it’s important that you classify each worker correctly to determine their payroll treatment, because misclassifying your employees can result in penalties and tax audits.

Regular Employees

These hair stylists and beauty professionals are directly employed by you/your salon and work full-time or part-time hours as per your salon’s employment agreement. With full-time employees, this can range from 35 to 40 hours per week, although it may vary; part-time employees fall short of this range.

Part-time employees also earn an hourly wage, though may also have limited access to benefits compared to your full-time employees. For example, they may not qualify for comprehensive health insurance or paid time off (research your state’s rules on this). However, let’s break down some important payroll attributes shared by both full-time and part-time employees that you must consider:

Taxes: As the salon owner, you are responsible for withholding federal, state, and local income taxes from the wages of full-time and part-time employees. Additionally, you must withhold and contribute to Social Security and Medicare taxes (FICA taxes) on behalf of their employees.
Protections: Full-time and part-time employees are entitled to different labor protections under federal and state laws, including minimum wage requirements, overtime pay for hours worked beyond 40 hours in a workweek.
Rights: Full-time and part-time employees have certain employment rights, such as the right to receive accurate wage statements (pay stubs). Pay stubs should be easily accessible via your payroll software.

Independent Contractors

Salon Booth Renters: Hair salon booth renters are self-employed, responsible for managing their client base, schedules, and finances independently, keeping control over their services, pricing, and business operations. Many salons rent out space to booth renters.

Since they are not actual employees of your salon, booth renters are not subject to tax withholding, and they handle paying their own income taxes and self-employment taxes. While that’s less for you to worry about, you still must supply them with a 1099-K form come tax season.

As with regular employees, you must also clearly define your booth renters’ roles via a booth renter agreement form. These agreements should explain compensation structures, responsibilities, working hours, and any other things relevant to employee pay. Like the 1099-K, you should be able to produce them through your salon management software.

For tax purposes, booth rental fees paid to you are considered rental income, and you must report rental income on your tax returns and may be eligible to write off expenses related to providing rental space (e.g., utilities, maintenance).

Hybrid Workers

This one can get a bit murky. In some cases, salon employees may work under hybrid arrangements that combine elements of both traditional employment and independent contracting. For example, your stylist may work part-time as an employee, receiving an hourly wage for certain shifts, while also renting a booth for additional hours as an independent contractor. It’s rare, but it does happen.

As you may imagine, hybrid workers require careful classification to ensure compliance with relevant labor laws and tax regulations for each aspect of their employment. Thorough record keeping is especially crucial here. Maintain detailed records of wages paid, hours worked, rental income received, and documentation of employment and rental agreements. Consult a legal or financial professional if you're unsure about classification.

Salon Employee Payroll FAQ

Do Salons Pay Weekly or Biweekly?

This depends on the salon owner’s preference and compensation structure (hourly, salary, commission, etc.), and the capabilities of the salon’s payroll software. Many salons choose bi-weekly, or even monthly, as a more frequent schedule can put a strain on finances. On the other hand, a weekly pay frequency can work for larger, or particularly busy salons.

How Does Commission Pay Work in a Salon?

This is dependent on the commission structure. Service-based commission pays a percentage of service revenue generated by employees. Product-based commission pays a set percentage on retail sales. Tiered commission increases rates based on performance milestones. Team-based commission provides bonuses when the salon exceeds monthly revenue targets, calculated as a percentage of income above the target for both services and products.

What is Team-Based Pay for Salons?

Team-based pay is more of a culture than a specific compensation system for salons. It rewards employees based on the entire team's collective performance, typically combining a base salary or hourly wage with bonuses tied to shared salon goals. This approach is commonly structured as an hourly rate plus team bonus compensation method.

How Should a Salon Owner Pay Themselves?

Salon owners have several options for compensating themselves: owner's draws, regular salaries, or a hybrid approach. The choice depends on their business entity type, whether sole proprietorship, LLC, or S-Corp. When setting compensation amounts, owners should first establish their net profits after covering all operational costs and tax obligations, then decide on either a steady percentage of monthly revenue or a set dollar amount that won't strain cash flow.

What is the Average salon Commission Rate?

Average salon commission rates range from 40-60% but focus on keeping your total service payroll between 30-35% of complete revenue (services plus retail) rather than chasing industry averages. This percentage applies to your entire payroll costs from your P&L statement, not individual stylist rates. Within this 30-35% framework, you can offer competitive commission percentages. For hourly-wage salons, individual rates typically stay under 35%.

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Salons offer a wide array of services and employ an even wider array of professionals, which can make payroll especially murky. Once you’ve decided on employee compensation structures that work for your salon, you’ll need the right tools to accommodate them. By this, we mean a flexible, automated payroll software that ensures accurate, timely compensation, follows all tax and labor laws, and can ideally accommodate direct deposit. It may sound like a wonder tool, but it’s something you should expect from your salon management software—and one that Vagaro provides. What else is there? Quite a bit. Raise your expectations. Start your FREE 30-day trial.