WASHINGTON – U.S. Senate Committee on Small Business & Entrepreneurship Chair Ben Cardin (D-Md.) and U.S. Senator Tim Scott (R-S.C.), both members of the Senate Finance Committee, have introduced the Small Business Tax Fairness and Compliance Simplification Act (S. 45) – legislation to empower beauty services providers, such as barbers, manicurists, skincare specialists, and hairstylist by expanding the Federal Insurance Contribution Act (FICA) tax tip credit so these businesses are treated similarly to the food and beverage sector, which also is heavily tip dependent. 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.
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. The S. 45 tip credit enhances tax compliance, improves the accurate reporting of tips by employees, and preserves Social Security benefits for such employees. Similar to the food and beverage sector, many beauty service workers rely on tips to support their families and make ends meet.
“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,” said Senator Cardin. “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.”
“Entrepreneurs in the rapidly growing beauty services industry are responsible for employing more than 1.3 million hard-working Americans,” said Senator Scott. “This critical tax code modernization effort will benefit small businesses, such as salons and barbershops, simply by creating a level playing field. I am proud to introduce this bipartisan legislation to make it easier for these small business owners and their employees to create wealth and make their American Dream a reality.”
S. 45 has broad industry support, including the Professional Beauty Association, International Spa Association, National Association of Barber Boards of America, Professional Beauty Employment Coalition, National Association of Women Business Owners, Personal Care Products Council, International SalonSpa Business Network and The Esthetics Council. The credit also is supported by the National Taxpayers Union.
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.
In addition to expanding the FICA tax tip credit to the beauty service industry, 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.
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 would also 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.
“We are grateful for our champions in Congress and hope the small businesses in the beauty industry will finally have access to the existing 45b FICA Tax Tip credit that has been utilized by other industries since 1993,” said Myra Reddy, Government Affairs Director for Professional Beauty Association. “Small business salons and barber shops are deserving of tools for IRS compliance, a fair and level playing field, and the ability to grow their businesses while continuing to employ members of their community.”
“Salons are the second-highest tipped industry. Salons should be allowed the same parity as the restaurant industry. The 45B tax tip credit will allow salon owners to meet demands and grow their businesses, expand employment, and offer better benefits to employees. Extending this credit to the beauty service industry is long overdue,” said Cindy Feldman, founder, owner and business director of Progressions salon spa store. North Bethesda, Md.
“As a long-time business owner, there has been an inequity in the federal tax code, giving restaurant owners access to a tax credit while salons have been left out,” said Lisa Lane, salon owner of Lisa’s of Annapolis, Md. “The 45B FICA tax tip credit allows restaurant owners a dollar-for-dollar tax credit on taxes paid into Social Security and Medicaid from their business on customer-paid tips. This ensures that their restaurant businesses are not losing money by allowing servers to accept tips from customers while maintaining the funds for their servers’ Social Security and Medicaid with the IRS. Considering the current state of inflation, business costs, and the demand to be competitive to retain employees, salon owners need to keep these tax dollars now more than ever!”
“As a South Carolina salon owner, it’s hard to reconcile why our highly-tipped industry doesn’t have access to same tip credit as our restaurant neighbors. This credit would keep needed funds in my business and in turn be a huge benefit to my hard-working employees,” said Archie Todd Currie, 5 location Sport Clips owner, Charleston, S.C.
“The Small Business Tax Fairness and Compliance Simplification Act will offer beauty services establishments parity with the food and beverage industry on the tip credit for federal payroll taxes. This is a commonsense measure and we applaud Senators Scott and Cardin for leading the charge,” said Andrew Lautz, Director of Federal Policy, National Taxpayers Union.