The ISBN dedicates most of our government relations work to the passage of the Small Business Tax Equalization and Compliance Bill in Washington D.C. This bill would save salon owners thousands of dollars every year on the FICA taxes they pay on their employees’ tips. Please keep reading to learn more about the bill and how it would affect our industry.
Small Business Tax Equalization and Compliance Bill
The IRS and the Salon Industry
IRS studies show that tip reporting by cosmetology and barber industry employees is about 7% of what it should be. It is estimated that on service sales of between $20 billion and $50 billion, reported tips should be between $1.4 billion and $3.5 billion. In 1997, tips reported for the entire industry were $69 million.
1997 was also the year the IRS introduced TRAC agreements in the salon industry. By 2000, tip reporting was up to $93 million.
What the Law Says Now
Salon owners have responded to the IRS’s efforts to bring the industry into tip reporting compliance. Now we are seeking a fair solution to the problem of taxes on tips.
Currently, salon owners are liable for paying FICA taxes on the tips our employees receive. Although we receive none of that revenue, we pay 7.65% tax on those tips. Examples:
| |
Salon A |
Salon B |
| Total service revenue: |
$1 million |
$8 million |
Employees’ tip revenue:
(estimated using 15 percent) |
$150K |
$750K |
| FICA taxes owed by salon: |
$11,475 |
$57,375 |
Why This Contributes to Greater Challenges
When salon owners aren’t vigilant about tip reporting, it can become a short-term problem when the IRS shows up to do an audit. Even more serious, though, is the long-term problems it causes. Years of under-reporting tip income has made cosmetology appear less lucrative as a career choice for young people, feeding the cycle of cosmetology worker shortages and impeding our growth as an industry.
When salon owners are vigilant about tip reporting, the fear is that their stylists will leave to become booth renters, where they are virtually invisible to the IRS.
The Small Business Tax Equalization and Compliance Act
This piece of legislation, currently before Congress, would provide salon owners with a tax credit for the FICA taxes we pay on our employees’ tips. The restaurant industry currently receives a similar tax credit.
This legislation would save the nation’s salon owners millions of dollars a year – money that would be reinvested in their businesses, fueling the growth of the industry.
The “Compliance” section of the bill would require salon owners to provide a standard IRS form to all cosmetologists, regardless of whether they are employees, booth renters or other independent contractors, and to provide the IRS with their names, SSNs and TINs. And the owner would have to provide them each with a copy of the IRS publication describing their tax obligations.
This bill is a win-win for the salon industry and the IRS. Providing a tax credit to owners will encourage more accurate tip reporting across the industry. Closing the “booth renter” tax loophole will level the competitive playing field between employment-based salons and booth rental salons. Increased tax compliance and tip reporting will raise the level of professionalism in the industry, and will encourage young people to want to pursue careers as cosmetologists.