This is exactly the question that I tried to answer about ten years ago, back when I was young (hah!) and thought every question should have an answer, it would be only necessary to ask the question properly and have enough facts and then there would be an answer. The question about the salon owner/operator has no single answer.
It's a huge number of *different* gray areas. For starters, the relationship between the shop owner and the worker/tenants may end up being different for different purposes: federal taxes, state unemployment, landlord-tenant law, liability, etc.
Then you get into the criteria that are actually applied. Best I can recall, and this is only anecdotal, in one case it was a tie - the "authority" who was writing the ruling said that there could be no decision or ruling - until it was stipulated that the workers each had their own key to the shop. That meant that they could set their own hours, which meant that - in the particular situation in the ruling - they were independent enough that they wouldn't be classified as employees. But there were a whole bunch of *other* critieria that were also taken into account, apparently because any of them - or maybe a combination of some of them - could tip the scales the other way.
Actually I don't remember if this was a ruling - like telling someone in advance - or a case, deciding after the fact, who's liable for what. I use it just to illustrate that one "small" fact may be the only difference in a situation like this.
Do the workers keep their own appointment books? Does the owner of the ship assign walk-ins to the workers? Do the workers provide *all* their own tools and all their own supplies? Are they expected to carry their own insurance? Do they?
Here's my other message: After you've gathered up all the info you can and tried to make a supportable decision about the "landlord" or "shop operator" - Schedule E vs. Schedule C - then go look up the specific rules for *employment taxes*, especially the state unemployment rules, and you may find that those rules are different... Different enough that although your client seems OK as a landlord for federal income tax purposes, they turn out to be an *employer* for unemployment.
I'm not sure about the beauty salon itself, but I know barber shops are among the best places to get any kind of tax help.
Seriously, it is easy to find information on the subject. I must caution you, however, that very much depends on the DETAILS of how the business is set up. You will undoubtedly find that the taxpayers have not carefully thought about the best tax results. Even worse, as you deliver the bad news their somewhat casual descriptions will somewhat casually change.
You might start with the MSSP audit guide on the subject, which will define the principal issues for you.
I'd go with the sched c. Usually there's 1 person as a receptionist and I'm certain that the hair dresser would have a deduction for part of the salary and overhead of the shop. Also salons usually sell supplies to the customers as well as the hairdresser. It's not just renting the chair.
They may even collect and pay sales tax on the items sold to a customer.
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