Nailpro - February 2015 - (Page 96)

You can report the tips you receive daily, weekly or monthly-but technically, the IRS requires that you report all tips from the previous month to your employer by the 10th of the following month. If you neglect to do this, and only report tips on your annual tax return, you might be penalized for not reporting them in a timely manner. "The penalty is 50 percent of the Social Security and Medicare taxes that were not paid because the tips were not reported, plus the payment of the taxes themselves must be made," says Luscombe. What's the best way to track the extra income so you don't get dinged? "We use Salon Transcripts software, or STX (, which keeps track of tips for us," says Sherrie Boyd, a licensed manicurist employed at Precision Nails in Carmel, California. Yes, that includes cash tips, according to Jaime Schrabeck, Ph.D., owner and licensed manicurist at Precision Nails. "Every employee records the entire amount collected from the client in STX, whether it's cash, check, gift card and/or credit for service(s), retail product(s) and/ or tips," she explains. "Tips have a separate field so the STX database can track and report. Employees are tipped out in cash at the end of each workday, and those amounts are reported as cash advances as part of payroll on a biweekly basis." If your employer doesn't supply you with an internal method of reporting your tips, you can use IRS Form 4070, Employee's Report of Tips to Employer or Form 4070A, Employee's Daily Record of Tips. So long as you do this, you should have an easy time ensuring that your total income is reported accurately to the IRS-and doing your taxes should be fairly easy. Bear in mind, however, that despite the perception that independent contractors in the nail industry are more likely to underreport their income, salons are the ones that get hit with audits more often, according to Sharpe. "The reason for this is that salons are easier to get a hold of," she notes. That's because, unlike contractors, businesses tend to have set hours during which the IRS can investigate full-time employees versus independent contractors who may only work a few days a week, Sharpe says. "It just seems it is easier for the IRS to target large salons with several employees or locations rather than independent contractors renting a [booth]," she says. So if you get the urge to throw out your receipts and records tracking your income once you've filed your taxes, don't. The IRS can audit you for any return you filed in the last three years. However, it's a good idea to keep your documentation for at least seven years after filing and always keep a copy of all tax returns you file. Virginia I. Pelley is a freelance writer in Brooklyn, NY TIPS FOR SALON OWNERS If you're a salon owner, tips need to be handled with care. Here are the biggest issues to keep in mind, whether you have salaried employees or run a business full of booth renters: 1 Clearly distinquish your staff. Establish a written contract with your staff that makes it clear whether your workers are salaried employees or independent contractors. The distinction is important, since you pay taxes on tips collected by employees but not booth renters. Worth noting: The IRS might decide an independent contractor is in fact an employee if you, for example, set her hours or supply her with products, says Mark Luscombe, JD, LLM, CPA, principal federal tax analyst at Wolters Kluwer, CCH. Check out the details at to make sure you're operating appropriately and won't get hit with a tax bill for your booth renter! 2 Track all employee tips. For employees to whom you pay wages, you must withhold income tax and FICA taxes, forward that money to the IRS and give employees a W-2 form at the end of the year, Luscombe says. The kicker: Your employees' tips are considered part of their income, so it's imperative that they give you an accurate accounting of what they're earning so that you can pay taxes on the full amount. "The employee may have to return a portion of the tips to help pay her share of the taxes, or the employer can offset that against other wages due," Luscombe notes. If you don't have an established system for employees to report their tips at the salon, they can use Form 4070, Employee's Report of Tips to Employer or Form 4070A, Employee's Daily Record of Tips. You can also direct them to IRS Publication 1244 for more information regarding income reporting compliance. You also need to keep an accurate record of your independent contractors' income (but not tips) in order to file a 1099 form for them. 3 Demand a break. Beauty professionals are the second highest tipped employees in the United States just after restaurant servers, according to the Professional Beauty Association. But unlike restaurant owners, who get a dollar-for-dollar tax credit on tips, the average salon or spa owner pays $11,000 in FICA taxes on employee tips each year. The good news: That could all be changing with the Small Business Tax Equalization and Compliance Act, also known as the FICA Tip Tax Fairness Legislation. If passed, salon owners would finally get the same dollar-for-dollar credit for taxes paid on employee tips. At press time, the legislation had been introduced in Congress and the PBA was optimistic about its prospects. Visit to find out how you can support this positive change for salon owners. 96 NAILPRO FEBRUARY 2015

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Nailpro - February 2015