FICA Tax Credit
Small Business Tax Equalization and Compliance Act
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.
|Salon A||Salon B|
|Total service revenue:||$1 million||$8 million|
|Employees' tip revenue:
(estimated using 15 percent)
|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 paid on 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. The owner would also 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.