SalonSENSE Magazine Trade Magazine for Beauty & Barber Professionals

Tip Reporting in the Salon and Spa business has continued to remain a challenging issue for the business owners, the employees and the IRS for many years. Tip Reporting is essential as per the law because both the employees as well as the employer are liable to pay taxes on that income, even though the employers do not get any share of the tip collection.

The Salon and Spa owners under the umbrella of Professional Beauty Association (PBA) have been lobbying for the passage of Small Business Tax Equalization and Compliance bill in the Congress. The bill essentially demands that the Salon and Spa industry be treated at par with the restaurant industry with regard to tips taxation. Just as the restaurant owners receive tax credits with regarding to tips income of their employees, the same way the Salon and Spa owners should be treated at an equal footing.

Tips Reporting is a crucial issue for the government because as per several studies conducted by the IRS, there is a huge disparity between the actual tips collected and tips reported by the employees at Salons and Spas. The IRS estimates that hardly 7% of the actual tips collections are reported, leading to a substantial shortfall in tax revenues for the IRS from the Salon and Spa industry.

Salon and Spa owners have consistently shown their willingness to acknowledge and resolve the discrepancies on tip reporting facing the industry. The fairest way to resolve this problem, as per the industry association PBA, is to bring the industry at par with the restaurant industry so far as the tips taxation is concerned. The Salon and Spa owners must receive tax credits on the tips collections by their employees.

This situation will encourage the industry owners to implement stricter methods of vigilance and fair tip reporting to the IRS. It is in the industry’s benefit to create a transparent system of tips reporting because it will act as an incentive for talented prospective employees to choose this industry for employment, considering the monetary rewards in terms of tips. Secondly, the industry owners will be free of their obligations towards the IRS if they act with strict vigilance and proper reporting of the tip collections by employees.

Overall, transparent tip reporting will become a win-win situation for all the parties involved. Therefore, it is in the interests of the industry as well as the government to ensure a fair legislation in this regard.