Before 2022, the IRS required you to report all income. So that hasn’t changed; revised regulations that took effect January 1 still require you to report all income. The difference now is that if you receive payment for services through a payment app, there’s a paper trail to keep everyone accountable.
“This isn’t a new tax,” emphasizes April McDaniel, a CRSP and CPA with the accounting firm Kopsa Otte CPAs + Associates, which includes many salons among its customers. “It’s just a new reporting requirement. Income that hairdressers receive for services or tips through cash apps has always been taxable income.”
Background on the Tax
The pivot in reporting procedure isn’t driven by the payment apps, McDaniel notes. The apps are acting in response to the change in the tax code that was included in the American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package. Venmo, PayPal, Cash App and other apps are simply complying with the new law, which drastically lowers the maximum yearly payment amount you can receive in one calendar year without also receiving a 1099-K form from whatever third-party business processed the transactions.
Before 2022, cash apps were required to issue service providers a 1099-K form when business payments through that app during a calendar year both totaled $20,000 and came from more than 200 transactions. With that high bar and payments possibly split among various payment method options, salon pros may never have received a 1099-K form. The new tax code lowers the dollar amount to gross payments of more than $600 and altogether eliminates any reference to number of transactions.
Burden on the App
Some of the apps already were distinguishing between business income and personal income. If your client reimburses you for picking up her lunch, for example, it is not considered taxable income. If you were doing things right, you kept two accounts on, say, PayPal, and accepted reimbursements through your personal account while restricting your business account to payments for services rendered.
Now that the apps are responsible for issuing 1099-K forms, they’re looking more closely at what you’re reporting as personal income. But, again, that will not affect how much tax you owe if you’re already in the habit of reporting all business income. The difference is that under the current law, in 2023 when you report your 2022 income, you will receive a 1099-K form from every payment app or company that has processed more than $600 in payments to you in 2022. Of course, even when you receive no form because the total from that app falls under $600, you’re still responsible for reporting the income.
Calling itself a “payment platform,” Zelle is the one app that so far has not amended its policy. “The law requiring certain payment networks to provide forms 1099K for information reporting does not apply to the Zelle Network,” Zelle states on its website. “If payments you receive on the Zelle Network are taxable, it is your responsibility to report them to the IRS.”
Tips are Income
You may feel confident about which payments to declare as business and which as personal, but how about tips? Are they a gift—a “thank-you” for being you? An extra show of appreciation from a friend? You know the answer to that: No. Tips are income and always have been. Again, this is nothing new, but many pros think of tips as a gray area.
For that reason, some salons ask for tips separately—in actual cash or through a cash app. It’s not uncommon for a salon to post a list of stylists’ Venmo accounts to help clients make quick tip payments after charging the service on a credit card. This helps the salon owner, who then does not have to pay the credit card processing fee for that tip amount.
But now, just like other income, tips totaling more than $600 during one year will generate a 1099-K form from apps like Venmo. Failure to report the tips will be obvious in any IRS audit.
“The IRS looks for ways to have matching documents to eliminate unreported and under-reported income,” McDaniel explains. “The IRS agent sees the same thing we all see in the salon—the Venmo tip list. To be a Kopsa Otte client, you have to be reporting your cash tips. But with cash and cash apps, a lot of people don’t think you have to report that.”
The IRS was already struggling to keep up when Covid hit, so you may think there’s little chance of being audited. Is it worth the risk to not report all income? A Washington Post article on the topic concluded: “It’s the law, and failure to report it could land you in big trouble with the IRS. Yes, the agency is overwhelmed, but woe to the person who finally gets caught.”
McDaniel agrees. “The IRS has an entire chapter of the Audit Guide that focuses on the beauty industry,” she says. “They have a way to determine the amount of tip income you should be reporting.”
Fallout from an audit isn’t the only drawback of failing to report all income. Your personal finances are compromised when you under-report.
“Commission payments and tips are subject to the FICA tax if you’re an employee,” says McDaniel, who’s been featured on the podcast SOS Small Business Success with Bonnie Bonadeo. “If you’re a booth renter, your income is subject to self-employment tax as a Schedule C.” FICA tax has two parts—half is contributed by the employee and the other half by the employer. Your contribution means you’ll have less take-home pay.
But these taxes are not money down the drain. They go into your Social Security and Medicare accounts. Both the employee and booth renter taxes directly impact the money you’ll receive someday when you go to collect your Social Security and Medicare allowances. So even without an audit, under-reporting taxes eventually comes back to haunt you.
More immediately, under-reporting can hurt your chances of getting a loan to purchase a car or a house. You can’t walk into a bank and assure the loan officer that you really earn a lot more than your tax returns indicate. Ultimately, too, dealing in cash “under the table” conflicts with the general trend toward professionalizing the beauty industry.
“This is a multibillion dollar industry,” McDaniel says, “and a lot of salon owners are doing it right. It’s time for the rest of the owners to do it right so that honest owners don’t lose staff to owners who are willing to break the law by choosing not to charge the stylist tax on tips.”
Encouraging separate tip payment via Venmo can result in both inconvenience for the client and a lower tip for the stylist or technician, according to David Tashjian, CEO and President of Tippy, an increasingly popular digital tipping solution. First, the client must have a Venmo account or some other app to use. And then, Tashjian says, rather than do a precise 20 percent calculation, the client is likely to tip a lower, round dollar figure, believing that the stylist won’t bother to dig up the service ticket, calculate the tip, and compare it with the amount the client tipped on Venmo. And cash? No one carries that anymore.
“Service payment has rocked forward,” Tashjian says. “No salon will require clients to pay for services only with Venmo or cash. But that’s how they’ve been treating tips. Now that everybody’s going to be paying taxes on the tips, we say let’s figure out how to increase the size of the tips while making it easier for your clients to pay. They can pay for services with credit cards, by tapping their phone—lots of ways. The same should be true for tipping, and the salon owner shouldn’t have to pay a processing fee on that tip.”
With Tippy, the client does not download an app at all. Using a kiosk or salon iPad, clients are presented with suggested amounts to directly tip the service professional. Pros are notified on their mobile app of the client name and tip amount, which is direct-deposited the following business day.
Everything shows up on the salon’s dashboard, and it can digitally transfer to payroll. Tippy prevents false reporting while keeping detailed records of all tips received. Tippy’s processing fee is added to the client’s tip, so the client, rather than the salon owner, pays that.
“Consumers are accustomed to seeing fees attached to expenses,” Tashjian explains. “As long as they know it’s helping their stylist, they’re happy to do it—and it’s helping out the owner. This is similar to the way clients used to go back to the styling station and hand their stylist a tip.” Whether it’s due to the personalization or the convenience, Tippy’s research shows that tips increase, on average, 22.3% with Tippy.
“Salon professionals are so forward-thinking when it comes to product technology, but not with payment technology,” says Terry McKim, Tippy CIO and founder. “It’s antiquated, and they’re putting themselves at risk. Many stylists, estheticians—all service providers—probably don’t track any of this. With Tippy, the owner gets the dashboard to track and pay tips properly.”
Although she has no ties to Tippy, McDaniel observes that apps like that can advance the industry. “Tippy has done a good job of providing salon owners with accurate reporting information,” she says. “It really is a solution for owners who want their staff to get tips right away, and it gives them the information they need to stay in compliance for tip reporting.”
Staying in compliance and being transparent are no longer just options. “To be a good businessperson,” says McDaniel, “it takes doing thing right.”
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Originally posted on Salon Today