On a rainy October morning, salon owners gathered at Five Senses Salon, Spa and Barbershop in Peoria, Illinois, for a community roundtable with U.S. Representative Darin LaHood(R-IL) on legislation he is co-sponsoring that would expand the tip tax credit to the salon industry.

Currently, salon employers are required to pay FICA taxes on tips, even though the tip income is the sole property of the service provider and the employer is not involved in the tip transaction.

In 1993, Congress granted the restaurant industry a dollar-for-dollar tax credit—now known as the 45(b) tip tax credit—on the employer’s share of FICA taxes paid on tip income above the minimum wage.

In September, LaHood and U.S. Representative Suzan DelBene(D-WA) introduced H.R. 6736 (The Small Business Tax Fairness and Compliance Simplification Act), bipartisan legislation to update the current law to provide equitable treatment and administrative relief to salon and spa owners.

In addition to promoting tax fairness, the legislation may improve tip reporting. Although nonemployer salons comprise 92% of establishments, their reported sales represent only 49% of total salon industry revenues, implying a significant underreporting of income in the nonemployer segment. This legislation includes two provisions which may reveal a valuable new source of tax revenues for the federal government by (1) allowing an Employer Tip Reporting Safe Harbor from an IRS tip audit if the employer practices proper tip reporting education, procedures, role compliance and record maintenance and (2) simplifying and coordinating income reporting between rental space owners and renters who provide professional beauty services.

“In the hair and beauty industry, where the majority of businesses are owned and operated by women and minorities, extending these businesses tax benefits and providing administrative relief when dealing with the IRS is long overdue,” LaHood says. “I look forward to continuing the dialogue started today as this legislation moves forward so we can continue to find ways to empower small businesses in our local communities.”

At the roundtable discussion, LaHood asked owners how a tip tax credit could benefit them and their businesses, and here's what they had to say:

• “In 2017, our guests showed their appreciation to our service providers with gratuities totaling $170,000. I paid for Social Security, Medicare, State Unemployment Tax and credit card fees that amounted to $19,000 in costs for which I received no revenue,” says Paola Hinton, owner of Five Senses Salon, Spa and Barbershop. “This credit could mean the difference between hiring more people, providing more education, obtaining equipment and growing my business.”

• “We are always looking to expand and grow in technology to be a step ahead, and an expanded tip tax credit would allow us to invest in technology, add services, expand the company and send bonuses out to employees,” says Nichole Corrington, owner of Capelli’s Salon in Decatur, Illinois.

• “For us, a tip tax credit could mean the ability to hire 10 more people for our growing company,” says David Hands, franchise owner of 28 Great Clips locations in Illinois.