New federal legislation would give salon and spa owners a dollar-for-dollar credit on the employer’s share of FICA (Social Security and Medicare) taxes paid on employee tips. What does this FICA Tax Tip Credit mean for you? Keep reading!
Tip Reporting + Taxes
Here’s the situation: Hairdressers receive a significant amount of income through tips—which, by law, must be reported as income. Salon owners must pay taxes on this reported tip income, but don’t actually receive this income themselves. Beauty industry employers are responsible for paying 7.65% FICA taxes on all employee income, including customer-paid tips.
The restaurant industry shares a similar tip reporting structure, but since 1993, restaurant owners have enjoyed a law that gives a dollar-for-dollar FICA tax tip credit. Under the new legislation, H.R. 1349, this credit would be extended to salon and spa owners, helping offset administrative costs associated with ensuring employee compliance n reporting tips.
More Details on the FICA Tax Tip Credit
H.R. 1349 also includes A “Tip Program Safe Harbor,” in which the IRS won’t audit an employer’s reported tips if the employer meets the following criteria:
- The salon owner starts an education program for new employees on the proper way to report tip income
- The salon owner establishes a procedure for employee tip reporting
- The salon owner complies with all rules
- The salon owner ensures employee records relating to tipping are maintained for at least four years
Finally, the bill would simplify and coordinate efforts regarding information reporting of income between rental space owners and renters providing professional beauty services.