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SEARCHApril McDaniel, a CPA with Kopsa Otte, a leading tax and accounting firm working with salons across the U. S., explains why you should report your tips.
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Recently I was speaking at the Data Driven Salon Conference in Atlanta. I love it when people ask me questions. One of the participants stopped me after my presentation and asked, “Is there any reason that I should report my tips?”
My mind started rolling off the reasons that stylists should report tips, but then I froze on this point. It’s the law. If you don’t report your tips you are breaking the law, and you could be committing tax fraud. If you are audited the auditor will know that you get tips. IRS auditors do get their hair cut. They know. The IRS has an audit guide specific to the beauty industry, and it states that tips can be 8% to 15% of service sales.
In fact, the IRS recently did a study to determine the amount of unreported tips. They came up with a whopping $23 billion of tips not reported. You can bet that Congress will not be happy about this, and we will see more audits on tip reporting.
Of course, there are other reasons that you should report your tip income:
Helps in getting a loan. There are times when we need to go to a bank and lay out our financial affairs to apply for a home or car loan or other major purpose. The banker will want to look at your tax return to determine if you qualify. Tips income may make the difference on your loan approval.
Peace of mind. I have had stylists say that following the law and reporting tips took a lot of pressure off them. One stylist told me that she was always fearful that the IRS would show up at her door with handcuffs.
Better money management. Having that cash in your pocket can be like having free money that you can spend however you want. Reporting your tips and putting the cash in the bank will help you monitor your spending.
Regarding the IRS. We have a voluntary tax system. The IRS would like to scare taxpayers into compliance. They would love to see articles about stylists who were caught for not reporting tips. That would help stylists to ‘volunteer.’
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