Tax Season Alert: Can a Salon Get In Trouble for Stylists Not Reporting Tips?
Albert Einstein once said “The hardest thing in the world to understand is the income tax.” And it’s true. With so much misinformation out there, sometimes it’s hard to pinpoint exactly what is taxable income. This is especially true for employees in service industries who rely heavily on tips—restaurant servers, bartenders and hairstylists. A concerned BTC Member works at a salon where she has noticed other stylists are not recording their tips. At this particular salon, all stylists record their tips in a “community” notebook of sorts, so as to allow the owner to record the tips as part of the employees’ income. The stylist asked: “Can a salon get in trouble for a stylist lying about their tips on a daily basis when it comes to filing taxes?”
An overwhelming response to this question was a simple: “Mind your own business.” There were a handful of “Don’t be that guy” or “Don’t spoil it for the rest of us” comments, mixed with some “Oh, you must be new” remarks. But the fact remains: whether or not a stylist’s place of employment gets shut down is their business.
Still, finding an answer to this question is not cut and dry—there are many variables at play here, mainly involving the location of the salon. State income tax law varies across borders, and different states impose varying degrees of penalties on salons whose stylists are not properly recording their tips. “Some states have actually gone after salons and stylists for not claiming their tips. There have been examples in Texas and South Carolina where salons are being fined enormous fines as well as losing their business licenses,” says Belle Storey-Burgess. The only way to know for sure is to check your state’s tax code and enforcement policies.
Federal law is more uniform so let’s focus on what we know.
Whether given in cash or credit, tips amounting to more than $20 per month are considered taxable income. As taxable income, tips are subject to the federal income tax. This has always been the law, and recently the IRS has been increasingly trying to close the tip income loophole, which has been growing significantly larger with time. This added scrutiny has led to a sharp uptick in audits for service industry employees. If an audit shows you have been underreporting your tips, you can be subject to outrageously high fines with interest.
Does this mean your salon will have to shut its doors for good?
No. At the end of the day, the IRS will not shut down a salon because of an individual stylist’s unwillingness to record their tips. The IRS will, however, come down hard on that individual as they are the one who underreported the tips in their personal tax returns. In most instances of salon closures, the salon owner has not been paying their personal income taxes and fines from the IRS drives them underwater, dragging their salon down with them. “As long as the salon takes care of its own taxes, I don’t see how you can get in trouble,” says Kimberly LaFlesh.
Do not forgot that state laws are different though, and states can levy different punishments against tax evading stylists and, possibly, the salons they work for. However, if you pay your taxes, you won’t have to worry about it. In the words of Brooke Darrow Bommer: “Tax evasion is not a cute industry.”