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H.R. 1349 FICA Tip Tax Fairness – One Salon Owner’s Courageous Fight
July 28, 2019 | By Neil Ducoff | 2 Comments
In the salon/spa industry, tipping is a blessing and curse. It’s a blessing because the custom of clients giving gratuities can add significantly to salon/spa service providers’ personal income.
It’s a curse for a number of crucial, often misunderstood, reasons:
- IRS Law states, “All tips are income earned at work and therefore subject to the same withholding tax as regular income.” This means every tip dollar must be reported and taxes withheld.
- It doesn’t mean only reporting tips on credit cards and keeping the cash.
- It doesn’t mean reporting 10% of service sales when tipping easily exceeds 15% and higher.
- Owners cannot say, “It’s my employees’ responsibility to report tips on their tax returns — not mine.” As the employer, IRS law clearly states that the employer is responsible for collecting tip income amounts from employees and withholding payroll tax — exactly the same as regular pay.
- As the employer, salon/spas must pay the matching FICA tax on tip income.
- When tips are added to credit card charges, the employer is paying card processing fees.
The restaurant industry stood up for itself — and won
The restaurant industry hired a lobbying firm and made their collective voices heard to get a bill passed in Washington that eliminated the employer’s FICA tax on tip income. The effort took 20 years, but they won. The key words here are “stood up” and “made their voices heard.”
About 20 years ago, the Professional Beauty Association (PBA) began the process, including hiring the same lobbying firm the restaurant industry used, to get a bill signed into law called FICA Tip Tax Fairness for the Beauty Industry.
FACT: PBA cannot do this alone. Salon/spa owners need to come together and make their voices heard.
Enter Paola Hinton, owner of Five Senses Spa, Salon & Barbershop, located in Peoria, IL.
Strategies has followed and supported PBA’s efforts from the beginning. But something dynamic happened this year when Paola Hinton joined PBA’s effort and began a most impressive grassroots effort to get H.R. 1349 FICA Tax Tip Fairness passed into law.
I was so impressed with Paola’s relentless passion, I wanted to learn more about her and how Strategies can support both her and PBA’s efforts to get H.R. 1349 passed.
STRATEGIES: In 2018 alone, the approximate $178,000 that your company, Five Senses, processed in employee tips, cost your company approximately $20,000 in taxes and processing fees.
You created a Facebook discussion group called, “FICA Tip Tax Fairness for the Beauty Industry,” that now has over 1,300 members.
You also created some excellent videos and charts to illustrate how every tip dollar an employee receives creates an added expense for the business.
Are owners getting the message why making their voices heard is so vital to the passing of H.R. 1349?
Paola: Slowly, but surely. The Facebook group page offers a great way to keep information in front of the members that have joined the group. The activity on the page, hopefully, is inspiring and motivating people to get involved. “People of Influence” who like, comment, post on the page certainly gets attention and has a higher chance to show up on people’s Facebook feed.
STRATEGIES: Beyond the reduction in FICA costs to process tips in your company, there is clearly a deeper passion that is driving you to create industry awareness and action to support H.R. 1349. What’s driving you to devote so much of your time and energy to this cause?
Paola: The Committee on Ways and Means is the oldest committee of the United States Congress, and is the chief tax-writing committee in the House of Representatives. My local Representative, Darin LaHood (R-IL-18th District), is a member of this highly regarded committee. I am grateful that when I reached out to Rep. LaHood, he listened and believed in me to the point where he introduced Bill H.R. 1349 on behalf of the beauty industry. Over the 20+ year conversations that PBA has had in Washington DC, this is the furthest that this topic has made it into legislation! I will not let Rep. LaHood down, so I am charging the hill for the beauty industry.
STRATEGIES: Do you see H.R. 1349 passing this year? If not, why not?
Paola: No, I do not see H.R. 1349 going to vote and passing until we can get more salon and spa owners reaching out to the key committee members on the House Ways & Means (and eventually Senate Finance) to gain more Co-Sponsors to the bill. Changing Federal Law is an undertaking. To think that it can be done quickly and only by a few people is impossible. Our beauty industry has the opportunity to come together as a united and powerful voice. Only then can we make a difference for our businesses and service professionals across the United States. This is exactly what I’m committed to doing.
STRATEGIES: In 2006, you took a risk in building a business in an industry that you had no experience in and opened Five Senses Salon Spa Barbershop. Your favorite line is, “I have no business being in this business.” You also attended our Strategies Incubator prior to opening to learn how to implement and lead a Team-Based Pay company. Over the past 13 years, you built and expanded an impressive company. How has Five Senses grown?
Paola: I was never a fan of commission and wanted my new company to have a true team culture. I also knew how difficult it was to control a commission payroll. I found the Team-Based Business Model I was looking for at the Strategies Incubator.
Our first day of business at Five Senses was June 16, 2006. We had 3,000 square feet in a busy shopping plaza. Ten years later, I bought that shopping plaza and in 2017, moved and expanded the company to 5,000 square feet with approximately 25 employees. In 2018, Five Senses generated $1.5 million in revenue, 14% of that in retail.
Three Proposals In Bill H.R. 1349
The Small Business Tax Fairness and Compliance Simplification Act, known commonly in the beauty industry as the FICA Tax Tip Fairness legislation, would extend the current 45B FICA tax tip credit to salon and spa owners, a credit granted to restaurant owners in 1993, providing equality and compliance simplification for America’s small businesses in the salon and spa industry.
Like the restaurant industry, salon and spa professionals receive a significant amount of their income through tips, which by law must be reported as income. Salon and spa owners do NOT receive any of this tip income yet are required to pay taxes on it: Beauty industry employers are responsible for paying the 7.65% FICA (Social Security and Medicare) taxes on all employee income, including customer-paid tips.
While the restaurant and salon and spa industries share tip reporting burdens, salon/spa owners continue to shoulder the added burden of paying FICA taxes on the tip income of their employees. Along with ensuring tax fairness, the FICA credit could help offset administrative costs associated with ensuring employee compliance on reporting tips and allow business owners to reinvest in their business and employees.
Although non-employer salons compromise 92% of establishments, their reported sales represent only 49% of total salon industry revenues, implying the likelihood of significant underreporting of income in the non-employer segment.
H.R. 1349 also includes two provisions to improve compliance resulting in higher tax revenues for the federal government by:
- Safe Harbor from IRS Tip Reporting: Allowing an Employer Tip Reporting Safe Harbor from an IRS tip audit if the employer establishes an educational program for new employees regarding the proper reporting of tip income, establishes a procedure for employee tip reporting, complies with all rules, and maintains employee records related to tipping for at least four years.
- Reporting Compliance from Booth Rental/Suites: Simplifying and coordinating efforts regarding reporting of rental income received by rental space owners [landlords] from renters [service providers] providing professional beauty services. The intent is to finally level the playing field on unreported service and tip income.
Here’s my challenge to each and every salon/spa owner: PBA and Paola Hinton cannot do this alone. To succeed, EVERY owner needs to do the following …
- Get Involved
- EDUCATE yourself by watching Paola’s video that best explains the bill, the process and the help our industry needs. https://youtu.be/R21Upp_m89s
- JOIN the closed Facebook discussion group. https://m.facebook.com/groups/2214926768574933/
- SUBMIT the PBA’s automatic email to your local Representative. https://p2a.co/qApvKje
- Set Local Meeting
- LOOK UP and Call your local Representative to schedule a meeting date. https://www.house.gov/representatives/find-your-representative
- SUBMIT your 2018 tip numbers for all your locations using this form: https://docs.google.com/forms/d/e/1FAIpQLSctymFXVtgW7lhPAXE_ALjSJnSJGP5xpVePh58UIxe0LUKsew/viewform
- EMAIL your customized document to your local Representative’s office prior to your meeting. A customized PDF document will be emailed to you.
- Review Materials
- SUBMIT the date that you are meeting your local Representative’s office. Meeting Date Form: https://docs.google.com/forms/d/e/1FAIpQLSeKRP0YARRtN6nuoI6NPh6FSerPUzdMbB9WPQ7J2Su_WGHwGA/viewform
- PRINT & REVIEW your customized document (same document as in Step 2C) that presents your 2018 tip numbers and the bill description.
- VIEW example on how information can be presented and delivered at your meeting. http://www.facebook.com/paola.p.hinton/videos/10156423579025886
- Meet with Local Representative
- PRESENT information.
- Lifecycle of a Tip: $20, $100 and Total 2018 Tips
- Restaurant tip tax credit since 1993
- Three proposals in Bill H.R. 1349: Extend the restaurant 45(b) FICA tax tip credit to our industry, IRS Safe Harbor, and Booth Rental/Suite Reporting
- ASK the Representative for their support and to Co-Sponsor Bill H.R. 1349
- SUBMIT meeting details for PBA and Lobbying Firm to follow up. https://docs.google.com/forms/d/e/1FAIpQLScXSTOUQHR1769laBIFun83IMC2pvX8v8VedRaWePKmSWxqkg/viewform
- PRESENT information.
The Professional Beauty Association has been fighting and investing in getting Washington to give the salon/spa industry the same FICA Tip Tax Credit that the restaurant industry has enjoyed since 1993. They need your involvement.
Paola Hinton, a salon/spa just like you, has devoted her time, energy and resources to spread the word and rally salon/spa owners to stand together and make their voices heard. And it’s beginning to make a difference. But it’s not enough without total industry support.
The passage of H.R. 1349 is important to every owner, employee and independent.
It’s time to take action.
Categories: Financial Literacy