IRS info- SnippitySue

Federal Tax Guidelines

for the Cosmetology and

Barbering Industry

Courtesy of the Internal Revenue Service

Small Business and Self-Employed

IRS & State Licensing Agencies

Partnering to promote better understanding of federal

tax responsibilities.

THE ART OF DOING BUSINESS

Now that you are a licensed professional….

There is important information that you need to know about

your federal tax responsibilities.

This brochure explains the various federal tax requirements

for barber, cosmetology, and personal care professionals to

help you understand your tax responsibilities.

All income is taxable.

As members of the barber, cosmetology, and personal care

industry the money you receive for services you perform,

whether it is wages, commissions, fees, retail sales,

rent/lease payments, or tips; whether paid by cash, check,

charge, or bartering is taxable.

"All income is taxable unless

specifically excluded by the

Internal Revenue Code."

If you are an employee and receive tips, you must report

that amount to your employer. If you are a self-employed

salon or barbershop owner, booth renter, or independent

contractor, all income received, including tips, must be

reported on your Federal Individual Income Tax Return.

Filing & Paying Your Taxes

Has Its Benefits.

The benefits of reporting all of your income and

paying the correct tax include:

• Improved financial profile for loans based on reported

earnings

• Greater Social Security and Medicare benefits

• Greater unemployment and disability benefits

• Increased Workers’ Compensation

• Improved retirement options

• Allowable expenses are deductible against current income

• You may qualify for the Earned Income Tax Credit

• Peace of mind – You are obeying the law!

"Workers can be employees,

self-employed, or both."

The barber, cosmetology, and personal care industry is

unique because it offers you many different career and

employment opportunities.

What are the different types of worker

classifications?

The obligations and responsibilities for each worker

category are different. Proper worker classification will

enable you to file and pay the correct tax.

The choices are: employee, salon or barbershop

owner/employer, and booth renter.

Employees receive Form W-2 for wages earned and are

responsible for reporting their tips to their employer as

well as maintaining records of their non-reimbursed

employee business expenses. You can be considered

an employee even if you are a colorist, a shampooer,

or a perm technician.

Salon-Barber Shop owners/employers are in

business for themselves. They are responsible for

recording all income and expenses; withholding

employment taxes, if they have employees, such as

shampooers and receptionists; and paying all taxes

due.

Booth Renters, who are not employees of the salon or

barbershop, are independent contractors and are

always self-employed. They are responsible for record

keeping and timely filing of returns and payment of

taxes related to their business.

For information concerning state and local tax

and licensing matters contact your state or

local agencies.

Please visit our small business Web site at

www.irs.gov/smallbiz.

The Art of Doing Business

What are my tax responsibilities?

Your federal tax filing requirements will be based upon your

worker classification. The tax system is a pay-as-you-go

system.

Employees receive a Form W-2, Wage and Tax Statement,

from each employer. The Form W-2 combines all wages

and reported tips and it shows the amount of federal taxes

withheld and paid throughout the year. You will file a

federal income tax return (Form 1040, 1040A, or 1040EZ)

and report the income shown on Form W-2.

Self-employed (salon or barbershop owner, booth renter,

independent contractor) you are responsible for filing and

paying all of your own taxes. This would include filing your

federal income tax Form 1040, Schedule C, and Schedule

SE.

"Self-employed? You may be required to make

quarterly estimated tax payments using Form

1040-ES."

Employers in addition to your own personal tax

obligations, you will have employment tax responsibilities

which may include the following:

• Form 941- filed quarterly

• Form 940 – filed annually

• Form W-2 – issued annually

• Form 1099-MISC – issued annually to any person

(not a corporation) to whom you have paid over $600

for services rendered to the business.

Did you know…?

IRS offers you a way to file and pay your taxes electronically?

www.irs.gov/efile or www.eftps.gov

You can e-file for free? Find out if you qualify.

http://www.irs.gov/app/freeFile/welcome.jsp

IRS’ Tip Reporting Alternative Commitment (TRAC) Program can help

employers provide tip education to employees?

IRS has information to help taxpayers recognize home-based business

tax avoidance schemes – that promise tax benefits not allowed by

law?

IRS Publications & Forms

Business Tax Guides:

Publication 15

Circular E, Employer’s Tax Guide

Publication 334

Tax Guide for Small Business

Publication 505

Tax Withholding and Estimated Tax

When and How To Compute and File Estimated Taxes

Publication 583

Starting a Business and Keeping Records

Publication 587

Business Use of Your Home

Publication 1779

Independent Contractor or Employee

Factors used in determining status

Publication 3518

Beauty, Barber, & Cosmetology Industries

Publication 4035

Is It Too Good To Be True – Home-Based Business Tax

Avoidance Schemes

Tip Reporting:

Publication 531

Reporting Tip Income

Publication 3144

Tips on Tips for Employers

Publication 3148

Tips on Tips for Employees

Taxes and Other Topics:

Publication 3207

The Small Business Resource Guide CD-ROM

Publication 3959

EFTPS CD-ROM for Tax Practitioners, Taxpayers, and

Financial Institutions

IRS Tax Fax Services

1-703-487-4160

For tax forms to be faxed to you

1-800-829-3676

For tax forms and publications

to be mailed to you

1-800-829-1040 or 1-800-829-4933

For more tax information

Publication 4161 (Rev. 5-2003) Catalog Number 35908F

TipTipsonTips

AGuideto TipIncomeReporting

for Employees

Who Receive Tip Income

 

If you work at a hair salon,

barber shop, casino, golf course,

airport, hotel, or perform cleaning,

food delivery, or taxi cab services,

and receive tips, this

guide is for you.

The tip income you receive as an employee from the services such as those listed above — whether cash or included in a charge — is taxable income. As taxable income, these tips are subject to federal income tax, social security and Medicare taxes, and may be subject to state income tax as well.

The Internal Revenue Service (IRS) has prepared this guide to aid the employee who may need answers to tip income reporting questions.

What tips do

I have to report?

Do I have to report all my tips to my boss?

If you received $ 0.00 or more in tips in any one month, you should report all your tips to your employer so that federal income tax, social security and Medicare taxes, and maybe state income

tax can be withheld.

Do I have to report all my tips on my tax return?

Yes. All tips are taxable income and should be reported on your tax return.

I was told that I had to report only a certain percentage of my total sales as tips. Is this true?

No. You must report to your employer all (100%) tips you receive, except for the tips from any month that do not total at least $ 0.00.

Sometimes I don’t get tips directly from customers, but rather from another employee. Do I need to report those tips?

Yes. Employees who receive tips from another employee are required to report “tip-outs.” Employees often disburse tips out of their earned tips to another employee (tip-outs). Remember, all tips are taxable income.

Do I have to report tip-outs that I pay to other employees?

No. You report to your employer only the amount of tips you retain. However, you must maintain records of tip-outs with your other tip income (cash tips, charged tips, split tips, tip pool).

What records

do I need to keep?

What type of records do I have to keep?

You must keep a running daily log of all your tip income. tion 1 44, Employee’s Daily Record of Tips and Report to Employer, to record your tip income for one year. Publication 1 44 includes Form 4070, Employee’s

Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips. These forms have spacing for you to log your name, the employer’s name and address, date tips were received, date of entry, tips received, tips paid out, and name of employee paid. Your daily log would be your best proof should your income tax return be questioned. For a free copy of Publication 1 44, call the IRS at 1-800-8 9- 676.

What can happen if I do not keep a record of my tips?

If it is determined in an examination that you underreported your tip income, the IRS will assess the taxes you owe based on the best available records of your employer. Tip income adds up. Underreporting could result in you owing substantial taxes, penalties, and interest.

If I report all my tips to my employer, do I still have to keep records?

Yes. You should keep a daily log of your tips so that in case of an examination, you can substantiate the actual amount of tips received. There are a number of reasons why you might need records:

Your return could be randomly selected for a federal income tax examination.

For example: Your Form 1040, U.S. Individual Income Tax Return, establishes that you have your own home, two cars, and three exemptions, and your Form W- shows that you earned only $10,000 in income. nario, an examination may occur if the examiner determines that income may have been underreported.

A tip examiner could review your employer’s books and records. The examination could reveal unreported tip income that you may later need to verify.

An Internal Revenue Service Center may run a match of your income information

from your Form 1040, U.S. Individual Income Tax Return, with the income information from your Form W- . If these figures do not match, you could receive a notice about the discrepancy

and a possible examination of your tax return.

How does this affect my

income tax filing?

I forgot to report my tip income to my employer, but I remembered to record it on my federal income tax return. Will that present a problem?

If you do not report your tip income to your employer, but you do record the tip income on your federal income tax return,

you may owe a 50% social security and Medicare tax penalty and be subject

to a negligence penalty and possibly an estimated tax penalty. When you do not report your tips to your employer, it places your employer at risk of possible assessment of the employer’s share of social security and Medicare taxes.

If I report all my tips but my taxes on the tips are greater than my pay from my employer, how do I pay the remaining taxes?

You can either pay the tax when you file your federal income tax return or you can reach into your tip money and give some to your employer to be applied to those under-withheld taxes. ployer will then record these taxes and you will get credit on your Form W- . If you wait to pay when you file your tax return, you may be subject to an estimated

tax penalty.

What can happen if I don’t report my tips to the IRS?

If the IRS determines through an examination

that you underreported your tips, you could be subject to additional federal income tax, social security and Medicare taxes, and maybe state income

tax. Also, a penalty of 50% of the additional social security and Medicare taxes, and a negligence penalty of 0% of the additional income tax, plus interest,

may apply.

What’s in it for me if I report all my tip income?

There are many good reasons why you want to report all your tip income:

Increased income may improve financing

approval when applying for larger loan amounts (mortgage, car, and other loans)

Increased worker’s compensation benefits, should you get hurt on the job

Increased unemployment compensation

benefits

Increased social security and Medicare

benefits (the more you pay, the greater your benefits)

Increased employee pension, annuity, or 401(k) participation

Check with your employer for other increased benefits (based on pay) that your company may offer, such as life insurance, disability payments, and the right to purchase stock options

Compliance with the tax law

4

Is tip reporting unique to a

specific industry?

Does tip income reporting apply only to employees in a specific industry?

No. Anyone who receives tip income is required by law to report it to his or her employer. The Tip Rate Determination/

Education Program (TRD/EP) was first promoted in the gaming industry (casino industry) in Las Vegas, Nevada, and subsequently to the food and beverage

industry. Other individuals that

Why has tip reporting become such an issue?

To report all tip income has always been the law. The IRS has put greater emphasis on reporting tip income over the past few years because a significant

number of taxpayers are not reporting all their tip earnings as taxable income.

receive tip income include airport skycaps,

bartenders, hair stylists, bellhops, casino workers, delivery service people, golf caddies, hotel housekeepers, manicurists,

masseuses, parking attendants, railroad redcaps, and taxi drivers.

Why should I report my tips to my employer?

When you report your tip income to your employer, the employer is required to withhold federal income taxes, social security and Medicare taxes, and maybe state income tax. Tip reporting may increase your social security credits resulting in greater social security and Medicare benefits when you retire. Tip reporting may also increase other benefits to which you may become entitled, such as unemployment

benefits, worker’s compensation,

or retirement benefits. Additionally, a greater income may improve financing approval for mortgage, car, and other loans.

5

What is this compliance

program I’ve heard about?

My employer has entered into a compliance agreement with the IRS concerning tips. What is this?

The Tip Rate Determination/Education Program was developed in 199 to help those employees receiving tip income and their employers understand the laws on reporting tip income. Under this program, and depending on your specific business, your employer may enter into one of two arrangements — the Tip Rate Determination Agreement (TRDA) or the Tip Reporting Alternative Commitment (TRAC) (created in June 1995). Ask your employer for more information about this program.

Currently, the TRDA is only available to the food and beverage industry and the gaming (casino) industry.

At this time, TRAC is open to the food and beverage industry and the hair styling industry. Ask your employer for more information about this arrangement

as it may be extended to other industries where tipping is customary.

TRDA–What is my responsibility, as an employee, under the Tip Rate Determination Agreement?

You are required to file your federal tax returns. You may be asked to sign a

Tipped Employee Participation Agreement proclaiming that you are participating in the program. The employer, as a participant in the TRDA, has agreed with the IRS to a tip rate for the employer’s establishment. To stay a participating employee, you must report tips at or above the tip rate determined by the agreement. Furthermore, as part of the TRDA arrangement, the employer is required to report your name, social security number, the hours worked or sales made, your job classification, and your reported tips to the IRS if you do not report tips at or above the determined

tip rate.

6

TRAC–What is my responsibility, as an employee, under the Tip Reporting

Alternative Commitment?

Directly-tipped employee:

Your employer will furnish you with a written statement (at least monthly) reflecting your charged tips

You are to verify or correct this statement

You are to indicate the amount of cash tips received

When reporting your cash tips, you should remember that there is a correlation

between charged tips and cash tips.

(Your employer may be able to inform you of the establishment’s charged sales to cash sales ratio. For example, if the establishment is 50% charge and 50% cash, and you received and reported $100 in tips on charged receipts, it is reasonable to believe that you should be reporting close to $100 in cash tips.)

You may be asked to provide the name and amount of any tip-outs to indirectly-tipped employees.

Indirectly-tipped employee:

You are required to report all your tips to your employer. ment has the directly-tipped employee provide the name and amount of tips shared with you, the establishment could provide you with a statement of tips that you would need to verify or correct.

7

The IRS provides the following publications and forms relating to tip income reporting. These products can be downloaded from the IRS Web site at www.irs.ustreas.gov and ordered through the IRS by dialing 1-800-8 9- 676. (TTY/TDD equipment access, dial 1-800-8 9-4059)

Pub 505 -Tax Withholding and Estimated Tax

Pub 531 -Reporting Tip Income

Pub 1244 -Employee’s Daily Record of Tips and Report

to Employer. This publication includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips.

Form 1040ES -Estimated Tax for Individuals

Form 4137 -Social Security and Medicare Tax on Unreported

Tip Income

8

 

Department of the Treasury

Internal Revenue Service www.irs.gov

Publication 3148 (Rev. 8-2006)

Catalog Number 26307C

Author: Mags Kavanaugh

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