WASHINGTON – U.S. Senate Committee on Small Business & Entrepreneurship Chair Ben Cardin (D-Md.) and U.S. Senator Rob Portman (R-Ohio), both members of the Senate Finance Committee, have introduced the Small Business Tax Fairness and Compliance Simplification Act—legislation to empower beauty services providers, such as barbers, manicurists, skincare specialists, and hairstylists. The measure expands the Federal Insurance Contribution Act (FICA) tax tip credit to include the beauty service industry, bringing the industry in line with the food and beverages sector. Today, more than 80 percent 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.
“Barbershops, nail salons, and other beauty service establishments are some of the most reliable paths to the middle class for women and minorities,” Cardin said. “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 Portman to modernize the tax code so beauty services establishments can grow their businesses and create jobs in Maryland and across the country.”
“Much like the restaurant industry, employees at barbershops and beauty salons across the country rely heavily on tips to supplement their wages. It is more important than ever that the tax code be updated to reflect this reality, especially due to economic impact COVID-19 has had on these businesses,” said Senator Portman. “I am pleased to introduce this bipartisan legislation with Senator Cardin to simplify and create parity in the tax code for countless small businesses in the beauty services industry, so many of which are women and minority-owned.”
Section 45B of the tax code currently allows food and beverage establishments to claim a credit against the business’s income taxes for FICA taxes paid on tip wages. This tip credit enhances tax compliance, improves the accurate reporting of tips by employees, and preserves Social Security benefits for such employees. The tax credit is currently limited to the food and beverage industry, yet tipping is also customary in the beauty service industry. In fact, many beauty service workers rely on tips as a primary source of income to support their families and make ends meet. This bipartisan measure would extend the existing 45B FICA tax tip credit to the beauty service industry to ensure that these small businesses can claim this credit.
Before the pandemic, according the Bureau of Labor Statistics, job growth in the beauty service industry was projected to outpace the overall U.S. economy over the next decade, with employment in certain beauty service occupations, projected to grow at least 10 percent—double the expected 5 percent increase for all occupations. However, the industry has been greatly affected by the COVID-19 pandemic. According to a recent study from the Federal Reserve, barber shops, nail salons and other beauty service employers were the hardest hit by the pandemic. Between March 2020 and February 2021, closures of more than 100,000 establishments above and beyond the expected rate occurred for this industry.
In addition to expanding the FICA tax tip credit, this legislation would also provide administrative relief and regulatory clarity for the beauty service industry by specifying certain reporting requirements and establishing an employer tip reporting safe harbor. The safe harbor provides an exemption from certain IRS tip examinations for employers who meet certain requirements for educational programs, reporting procedures, compliance with tax law, and recordkeeping.
Additionally, by clarifying reporting requirements for income received from renting space to individuals who provide beauty services, the Small Business Tax Fairness and Compliance Simplification Act aims to enhance compliance by shifting the filing burden away from freelance self-employed professionals to landlords who rent to two or more individuals. This change reflects shifting business models in the beauty service industry: more than a quarter of skincare specialists and three-quarters of barbers were self-employed in 2018.
Cardin and Portman introduced similar legislation in October 2019.
The bill is endorsed by the Professional Beauty Association (PBA) and the National Association of Women Business Owners.
“The Small Business Tax Fairness and Compliance Simplification Act is an opportunity to create tax fairness for small businesses in the professional beauty industry which will encourage growth and increase employment opportunities,” said PBA Executive Director Steve Sleeper. “Many small business owners’ will be able to plan for the future, reinvest in their employment-based establishment, and provide benefits to their employees as a result of the relief provided through this much needed legislation. On behalf of the Professional Beauty Association and our members I thank Senator Rob Portman and Senator Ben Cardin for supporting small businesses and championing tax fairness for all.”
Andrea DeLeon of Kao Salon Division in Baltimore, Maryland said: “At the Kao Salon Division, we understand how the FICA Tip Tax Credit will relieve our network of Goldwell and KMS salons from an unbalanced tax burden in relation to other tipped industries. This reduction in taxes will free up capital that salon owners can invest back into their businesses allowing them to provide an enhanced salon experience for stylists and clients.”
Jackie Buckler, owner of The Hair Company in Leonardtown, Maryland said: “As a small business owner, like others, it’s a struggle. It is difficult to compete with large corporations and government for employees, as we are unable to offer the benefits packages they can. Our salon is 100% compliant with reporting tips. Paying on those tips that we receive no income for on top of now paying 40 hours sick pay to our employees is making it difficult to get ahead. We employee 48 team members. 95% of those we put through an extensive training program that is a huge expense to our company, however we do not want people to just have a job, but a fulfilling career both personally and financially. Being exempt from this tax break is making it harder to continue this.”
Brenda Kocak, owner of Modern Male in Dublin, Ohio said: “The FICA tip tax credit is the only fair way to manage the tax burden that salon employers have had to carry for so many years. My employees are blessed with generous clients and it would be counter-productive for me as an employer to not support accepting tips for them as a major part of their income. This has however become a major expense to the business. An expense that could otherwise support benefits to employees as well as higher wages for commission and noncommission employees. This tax burden has also forced salons to go to booth rent and 1099 rather than employee. We are losing salon owners and owners of small businesses due to this tax burden.”
Rowena Yeager of Studio Wish Salon in Twinsburg, Ohio said: “The benefits to the salon industry receiving the FICA tax tip will allow for greater growth within each salon. These funds could be reallocated towards education, pay raises, renovations as well as hiring and increasing employment opportunities. The restaurant industry receives this tax tip credit and passing this bill will create fairness within the 2 highest tipping industries. It is time so let’s make it happen!”