Senators propose tax break for beauty salon, barber tips

Senate Small Business Committee chair Ben Cardin, D-Maryland, and Sen. Tim Scott, R-South Carolina, introduced bipartisan legislation Thursday to offer tax credits for tips to beauty services providers, such as manicurists, skincare specialists, hairstylists and barbers.

The Small Business Tax Fairness and Compliance Simplification Act would expand the tax tip credit under the Federal Insurance Contribution Act so beauty service businesses could be treated similarly to the food and beverage sector, where workers also heavily depend on tips from customers. 

Section 45B of the Tax Code currently allows food and beverage establishments to claim a credit against the business' income taxes for FICA taxes paid on tip wages. The bill would amend Section 45B(b)(2) to apply to tips for barbering and hair care, nail care, esthetics, and body and spa treatments.' 

"Workers in the beauty services industry are as reliant on tips as food and beverage workers, and it is time for the Tax Code to catch up. I am proud to introduce this bill with Senator Scott to modernize the Tax Code so local barbershops, nail salons, and other beauty service establishments can grow their businesses and create jobs in Maryland and across the country," Cardin said in a statement. "These salons provide a reliable path to the middle class for women and minorities across the country and they deserve parity in our tax code."

Over 80% of the 1.2 million establishments that provide beauty services, such as hair and nail salons, have 10 or fewer employees and the majority are owned and operated by women and minorities, the bill's proponents point out. They believe the S. 45 tip credit would improve tax compliance and the accurate reporting of tips by employees, and preserve Social Security benefits for such employees. 

In addition to expanding the FICA tax tip credit to the beauty service industry, the legislation would also provide administrative relief and regulatory clarity for the industry by specifying certain reporting requirements and establishing an employer tip reporting safe harbor. The safe harbor would provide an exemption from certain IRS tip examinations for employers who meet certain requirements for educational programs, reporting procedures, compliance with tax law and recordkeeping.

By clarifying reporting requirements for income received from renting space to individuals who provide beauty services, the proposed act also aims to improve compliance by shifting the filing burden away from freelance self-employed professionals to landlords who rent to two or more individuals. The change would reflect shifting business models in the beauty service industry: Over a quarter of skincare specialists and three-quarters of barbers were self-employed in 2018, according to the Bureau of Labor Statistics.