Federal Tax Guidelines
for the Cosmetology and
Courtesy of the Internal Revenue Service
Small Business and Self-Employed
IRS & State Licensing Agencies
Partnering to promote better understanding of federal
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
• 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
What are the different types of worker
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
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
Please visit our small business Web site at
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
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
"Self-employed? You may be required to make
quarterly estimated tax payments using Form
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.
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
IRS Publications & Forms
Business Tax Guides:
Circular E, Employer’s Tax Guide
Tax Guide for Small Business
Tax Withholding and Estimated Tax
When and How To Compute and File Estimated Taxes
Starting a Business and Keeping Records
Business Use of Your Home
Independent Contractor or Employee
Factors used in determining status
Beauty, Barber, & Cosmetology Industries
Is It Too Good To Be True – Home-Based Business Tax
Reporting Tip Income
Tips on Tips for Employers
Tips on Tips for Employees
Taxes and Other Topics:
The Small Business Resource Guide CD-ROM
EFTPS CD-ROM for Tax Practitioners, Taxpayers, and
IRS Tax Fax Services
For tax forms to be faxed to you
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
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).
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. ﾭtion 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. ﾭployer 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
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,
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
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
Is tip reporting unique to a
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. ﾭ
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.
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
TRAC–What is my responsibility, as an employee, under the Tip Reporting
Your employer will furnish you with a written statement (at least monthly) reflecting your charged tips ﾭ
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.
■ 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.
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
Department of the Treasury
Internal Revenue Service www.irs.gov
Publication 3148 (Rev. 8-2006)
Catalog Number 26307C