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EVOLVE #17 ARTICLES
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Tips, Taxes and Tyranny!The Cosmetologists’ Tax Fairness and Compliance Act, a.k.a The H.R. 3016 Small Business Tax Fairness Act will have a positive affect on every salon owner’s bottom line- that is, if it passes. Disappointingly, this bill is still in the first step of the legislative process and has been pending since 2001. Under present law, salon owners are required to withhold a percentage of an employee’s income for FICA taxes and are obligated to match the employee’s withholding. In other words, the employer is required to pay FICA taxes on the employee’s income. (Booth renters and independent contractors are required to pay both the employer and employee portions of the FICA tax.) Additionally, salon owners are required to pay FICA taxes on tips given to their employees, even though the salon owners do not pay tip compensation to the employees.
The goal of the bill is to allow salon owners to claim a credit for FICA taxes paid on tips to employees. Tax credits save salon owners a substantial amount of money. Unlike tax deductions, tax credits are subtracted from the final amount taxes owed. For example, salon employee Sally totals 1200 cuts per year with an average tip of $10 per cut. By law, Sally is required to report this tip income to the salon owner. Since it is considered income, the salon owner would need to pay FICA taxes on them. That’s $12,000 of ‘earnings’ that didn’t even come from salon owner! If the H.R. 3016 bill were to pass, the salon owner would receive a tax credit from taxes paid on Sally’s $12,000 of tip income. The tax savings could be spent on salon repairs, employee education, employee benefits or a Caribbean vacation! To add insult to injury, the food and beverage industry already enjoys tax fairness legislation. They receive a credit for FICA taxes paid on tips reported by their employees. The IRS has even developed a 3-year pilot program for food and beverage employers called the Attributed Tip Income Program (ATIP) that minimizes industry recordkeeping hassles, has easy enrollment requirements and encourages reporting tips on Federal income tax returns. Because the salon industry does not have the same luxury, it is important to educate your employees about tip reporting laws. The following are helpful hints on how to broach the subject:
In the meantime, H.R. 3016 is collecting dust until the 111th Congress, which is scheduled to meet on January 3rd, 2009 where it will be re-introduced. Like any political issue, exposure, press, and people are needed for this bill to become law. To stay informed, log into www.govtrack.us, write a letter to your U.S. Senators and Congresspeople, or better yet, join the National Cosmetology Association (NCA) and become a representative in your area.
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