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The Small Business Tax Fairness and Compliance Simplification Act, known commonly in the beauty industry as the FICA Tax Tip Fairness legislation, would extend the current 45(b) FICA tax tip credit to salon and spa owners – a credit granted to restaurant owners in 1993 – while providing equality and increased compliance for America’s small businesses in the salon and spa industry.
Like the restaurant industry, salon and spa professionals receive a significant amount of their income through tips, which by law must be reported as income. Salon and spa owners do NOT receive any of this tip income yet are required to pay taxes on it: Beauty industry employers are responsible for paying the 7.65% FICA (Social Security and Medicare) taxes on all employee income, including customer-paid tips.
H.R. 1349 Full – Read ❯
While the restaurant and salon and spa industries share tip reporting burdens, salon owners continue to shoulder the added burden of paying FICA taxes on the tip income of their employees. Along with ensuring tax fairness, the FICA credit could help offset administrative costs associated with ensuring employee compliance on reporting tips and allow business owners to reinvest in their business and employees.
Job growth in the salon industry has outpaced the overall U.S. economy in 16 of the last 18 years. According to the Bureau of Labor Statistics, the number of personal appearance jobs is projected to increase 13 percent between 2016 and 2026, which is nearly double the projected 7 percent growth in total U.S. employment during the same period. Even so, this industry is not immune to economic challenges. Extending the 45(b) tip tax credit to salons will help this vibrant and important sector.
Although non-employer salons compromise 92 percent of establishments, their reported sales represent only 49 percent of total salon industry revenues, implying a significant underreporting of income in the non-employer segment.
H.R. 1349 also includes two provisions which may reveal a valuable new source of tax revenues for the federal government by:
- allowing an Employer Tip Reporting Safe Harbor from an IRS tip audit if the employer establishes an educational program for new employees regarding the proper reporting of tip income, establishes a procedure for employee tip reporting, complies with all rules, and employee records relating to tipping are maintained for at least four years
- simplify and coordinate efforts regarding information reporting of income between rental space owners and renters providing professional beauty services
The Small Business Tax Fairness and Compliance Simplification Act is the professional beauty industry’s opportunity to gain tax fairness through a dollar for-dollar tip tax credit on all FICA taxes paid on employees’ tips.
Darin LaHood (R-IL)
Suzan DelBene (D-WA)