The rumors of an IRS crackdown on salon tip reporting is causing salon owners and nail technicians once again to examine their gratuity policies.
As for the argument that nail technicians make less than doctors, Mix rejects it. “We don’t tip store clerks, and they make even less. There are a lot of people out there working for minimum wage who don’t get tipped. My theory is that I want to do a good job. As nail technicians, we shouldn’t base the quality of our work on whether we will get tipped or not. Salons are becoming considered more and more a healing environment where we make clients look and feel better,” she continues. “I feel that tipping puts a negative energy in there.”
“I feel not accepting tips gives you control over your business and scheduling of appointments, etc.,” adds Obritz. “When you don’t accept tips, it totally dissolves the feeling that clients can buy you and get special treatment with a tip.”
Show Me You Love Me
That’s not to say these salons refuse tokens of appreciation from clients. Like Subel, for example, Obritz makes a point of telling clients that she wants them to tell their family and friends about her salon, and that she would rather see them spend their money on a retail product than on paying her extra money. And most of these salon professionals do accept gifts from clients on holidays or special occasions.
“I have a lot of clients who bring me gifts on my birthday, and I know they went to a special effort to do that. That means a lot more to me than giving me a few extra bucks each time they come,” Mix explains.
Obritz cautions salon owners from adopting a no-tipping policy based on what she or anyone else thinks, however. “I feel very strongly that it’s a personal belief,” she explains. “You have to be 100% sure in your heart before switching, because when you make that big of a cultural shift in your salon things may happen that make you want to go back. But once you make the left turn, you have to stay on that road.”
Is the IRS Eyeing Salon Tips?
Understandably, most salon owners feel unfairly burdened by IRS rules that require them to pay the employer’s portion of FICA taxes on employee tips, which is income the employer never receives. Still, the salon owners we interviewed say they comply with the laws that require them to notify employees of their reporting responsibility and that they collect employees’ reports and pay their share of the taxes.
“Our obligation as employers is to make sure employees now report their tips as income and to provide the documentation,” David Horton says. “If the IRS cracks down on the salon industry, I think you’ll see more people owing up to their tips.” Horton doesn’t believe a crackdown will cause more salons to go booth rental or to refuse tips. “I went booth rental once, and it was ugly. I still think it’s in your best interest to pay commission or salary and just pay the taxes,” Shelley Chaney says.
Hopefully, some relief will come in the form of a $10,000 federal tax credit for salons similar to one recently granted to restaurants. “There needs to be a legislative change that would affect the tax credit for salon owners,” asserts Paul Dykstra, executive director of the ABA (Chicago). “As of yet we don’t have anyone carrying the ball for us.” Even so, he adds,, salon owners must emphasize to employees their tip reporting obligations. In the restaurant industry, which has been closely examined by the IRS, Federal courts have ruled that just because an employee doesn’t report tips doesn’t necessarily release the salon owners from tax responsibility.
“It’s also easier to go after situation where many are involved,” Dykstra notes. “To audit a salon owner with 30 employees is a bigger angle than auditing one salon professional.”
Common Questions About Tips.
Q. What if I don’t report all of my tips to the government or my employer?
A. You could be subject to federal, Medicare, Social Security, state taxes, and any applicable interest on your earnings. Plus, there could be a penalty of 50% on the additional Social Security and Medicare taxes and a negligence penalty of 20% on the additional income tax. The bottom line? It’s not worth it, so be sure to report all of your tips.
Q. I didn’t report my tips to my employer, but I did report them on my federal income tax return. Is that a problem?
A. Yes. You may owe a 50% Social Security and Medicare tax penalty, in addition to a negligence penalty and estimated tax penalty. Plus, when you don’t report your tips to your employer, it places her at risk of penalties for her share to Social Security and Medicare taxes.
Q. I’ve heard of a compliance program. What is it?
A. This is a national program that helps improve tax compliance by tipped employees. If your employer participates in this program and you are a directly tipped employee, you’ll receive a charge/cash tips statements reflecting your charge/cash tips for verification. If you are indirectly tipped, you’ll receive a statement of the tips shared with you.
A 1993 survey of 7,000 Consumer Reports readers found that 43% of respondents said they would prefer to see the practice of tipping ended.
What’s in it for me?
The more money you pay into Social Security, the more you’ll receive in retirement.
You’ll increase your unemployment benefits compensation. (They’re based on your reported salary.)
You’ll increase your employer-sponsored pension, annuity, or 401(k) participation.
You’ll improve your credit standing when you’re trying to get a car or home loan.
When do I have to report tips to my employer and the government?
You need to report tips if you received $20 or more in tips during any month. (But remember if you tip out other employees, you’re only responsible for the tips that you keep.)
You’re required to register a daily log of all your tips. However, the government does make it easy for you. They have free publications and forms that were created just for that purpose.
Remember, even when you report all of your tips to your employer, you are still required to keep your own daily log in case a discrepancy should arise.
What’s the Deal on Tips?
Everything you need to know about reporting your additional income, courtesy of the Cosmetologists Chicago, reprinted with permission from a new brochure, “What’s the Deal on Tips?” For information on obtaining copies, call (312) 321-6809 or (800) 648-2505; fax (312) 245-1080. Or write Cosmetologists Chicago, 401 N. Michigan Ave., Chicago, IL 60611.
It’s a great feeling to go home with a pocket full of tips, but we’ve got some news for you … that money in taxable income. Federal income tax, social security, Medicare and state taxes need to be withheld. Frustrating, huh? Feeling like the government already takes enough? Join the club. Unfortunately, it’s the law and not reporting that income could get you into serious trouble.
You’re probably wondering how the government would even know if you just left off the tips you received. They’ll know! The government will look at your income taxes, see your base salary as a professional and wonder. “Hmm, salon workers usually get tips, why didn’t you?” Plus, since you’re required to report tips to your employer, he or she will end up in hot water, too.