Salon & Spa Tip Income – The Facts on Payouts & Reporting
December 12, 2016 | By Neil Ducoff | 16 Comments When it comes to proper income tax coverage at salons and health spa, the practice of tipping can well be described as an accident waiting to happen.
Internal Revenue Service (IRS) tax law says:
The topple income you receive as a avail supplier – whether cash or included in a charge – is taxable income. As taxable income, these tips are submit to federal income tax, social security and Medicare taxes, and may be subject to state income tax adenine well .
There is nothing vague about the tax law. All tips are taxable income and must be reported and taxed .
IRS tax law DOES NOT say …
- “If you only report tips on credit cards … you’re covered and you can keep the cash tips.”
- “If you only report five or ten percent of your tip income … we’re good with that.”
- “Hey owners, if you don’t want to bother with reporting tip income and withholding tax on tips … just tell your employees that it’s their responsibility. We’ll never come after you.”
The reality is that besides many owners, employees and freelancer contractors choose to make up their own rules quite than adhere to the legal requirements of tip report and withholding tax .
For Owners …
Reporting all employee income, both pay and tip income, is your responsibility. You can not randomly decide to opt out of this duty and put the duty of reporting tip income on your employees .
Employees must report tip income on Form 4070, Employee’s Report of Tips to Employer (PDF), or on a similar statement. This report is due on the tenth day of the following month that tips are received. No report is required from an employee for months when tips are less than $ 20 … which means all serve providers will be reporting tip income .
The IRS knows how much tip income is happening in your business. The trace is from the IRS Cash Intensive Businesses Audit Techniques Guide – Chapter 10 Beauty and Barber Shops :
“ Workers in the salon diligence supplement their basis compensation with peak income. independent Contractors ( booth renters ) will report their avail and sales gross plus their tips, as crude receipts. Employees should be reporting tips to their employers. ”
sample audits completed in Las Vegas, NV, showed tips equally high as 22 percentage of megascopic sales, but average tips are normally 10-15 % of the placard .
Simply put … the IRS is not dazed .
It’s time to clean up your tip-reporting act. Based on the preceding statements, if your salon/spa is wittingly reporting less than 100 % of the tips that occur … you are exposed to back taxes and penalties. IRS will apply their formulas to calculate the estimate tip income and compare that to the tap income you reported for employees. When IRS asks you to explain the gap … what are you going to say ? It ’ s your company and you will be held responsible.
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For Employees …
The tips you receive at work ARE income earned at work … and must be accurately reported and taxed. Tips are not gifts from clients. Tips are taxable income. Period. It ’ s the jurisprudence .
The decision to report tip income is not optional. Reporting less than your sum lean income is against the law. You are exposing yourself and the business owner to back tax liabilities and penalties .
The salons/spas you work for must follow the law. Owners are not looking to punish you by reporting and withholding tax on your tip income. It is unfair to retaliate against an owner that is following the tax laws. Adhering to tax law protects everyone .
Don’t allow tips on CCs? You have an ATM! Great … IRS will good look at the ATM transactions to compare with report gratuity income. If the reported cash point income for employees is a divide of your ATM withdrawals … you and your employees failed to accurately report topple income .
Your tip income adds up and increases your overall income. It could mean the dispute between getting approved for a dwelling mortgage or cable car loanword. Hiding income to have a little more cash in your scoop is ill-considered thinking … and it ’ south illegal .
For both Owners and Employees …
“ I didn ’ metric ton know ” is not a feasible excuse for defensive structure for failure to under-report tip income .
Tip Payouts …
- Times have changed with credit card payments. There just isn’t that much cash coming into salons and spas these days to cover daily cash tip payouts.
- Daily cash payouts may not be a big deal today with only a few employees. It can become a time-consuming chore when there are a dozen or more tip envelopes to stuff each day.
- Cash tends to be “sticky.” The more cash … the better the chance of theft. All it takes is one missing tip envelope to break trust in your culture.
- Cash tip payouts cost money to have someone run to the bank to get cash and then stuff envelops for the sake of instant gratification.
- It’s time to add tips to employee paychecks and get it over with. You’re covered for tax liabilities and your employees will eventually appreciate the bigger paychecks.
- Again, tip money adds up. It’s nice to have a pocket full of cash at the end of each day … but that cash is going to evaporate on needless spending. Seeing that extra few hundred dollars, or more, of tip income in each paycheck is an eye-opener for employees. Most, if not all, will thank you.
Here are some comments from owners who ended daily tip payouts that were posted on the Strategies Salon & Spa Business Idea Exchange Facebook group. These owners now include all tip income in employee paychecks … with the appropriate withholding tax.
Dallas Maxwell: “ Put it in their paychecks, make tip management easy. That ’ s what we did. They adjusted quickly and we didn ’ thyroxine skip a drum. It used to take me an extra 25-35 minutes each day to do tip payouts. In my opinion, it ’ s a total waste of prison term … not to mention running back and forth to the bank to get cash. Explain why, they will understand. ”
Bridgett DiVohl: “ We made the throw to tips on paychecks three years ago. There were some initial complaints but overall seem to like it. now they see all their tip money as a hunk union. Make the switch. ”
Sarah McGee: “ We switched seven years ago and it saved me so much headache. I reminded my staff that we don ’ thyroxine get match or credit rating circuit board funds immediately. The larceny publish is huge a well. I keep about a third gear of the cash on-hand compared to daily tip payouts. I gave them three yield periods of advance warn. They love that it ’ second all in one arrest. When they got cash, they ’ five hundred blow it thus promptly. now they save it and use that income for bills – not spending it shopping or at the prevention. You ’ ll be then felicitous when you switch. ”
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Pamela French: “ We include the tips in their paycheck. When I took over the salon one class ago, I wanted to change this practice after I realized that we carried that much cash on-hand for day by day tip payouts. It could create a larceny topic. With that in mind I decided to keep it added into their paychecks. once they get used to it they will like that their checks are bigger and that money will be spent more wisely. ”
Here’s my challenge to you: “ If your salon/spa is not reporting 100 % of the gratuity income that ’ s occurring … it ’ randomness time to clean up your act and get tax compliant. equitable go to www.IRS.gov and search “ Tip Reporting. ” You will find all the information you need to know about proper tip income report and tax conformity. You can besides read the Audit Techniques Guide for Beauty and Barber Shops. They know how to find the money. They know. ”