5 Things Salon Owners Must Know About the FICA Tax Tip Credit

What is the 45B FICA Tax Tip Credit?

The goal of this extension to salons per the Professional Beauty Association is to “provide a lifeline to salons by temporarily extending the Section 45B FICA tax tip credit in H.B. 1349/S.2634 to the salon industry, effective 1/1/2015.” What this means is that the credit would absolve the mandatory 7.65% FICA (Social Security and Medicare) on tips that stylists receive.

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How will it help salons?

Currently, salon tips are counted with overall revenue for the salon, despite the money going to the stylists themselves. As it stands, a significant amount of stylists are choosing to go freelance, where the rules and regulations aren’t as stringent as working beneath a salon heading. This could ultimately destroy the salon industry—an industry that provides entry-level jobs and employs roughly 1.3 million professionals.

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Why is this credit important?

The guidelines set by the Paycheck Protection Program available to small businesses generally don’t apply to the majority of salons. The Professional Beauty Association addresses the following issues:

• Many salons will not reopen in the first or second phase, leaving them closed potentially into late summer or early fall. 

• Salons that can reopen have limitations placed on the number of staff allowed in the establishment. Only 93,000 people were on payroll at employment-based salons in April—down from 596,000 in February.

• Services provided to the clients are restricted, directly impacting staff and revenue

A survey of 1200 salon business owners shows that 99.7% of the industry has been closed for over a month and 93% anticipate being able to reopen on a partial basis. Only 53% of salons believe they have the financial capability to reopen. The 45B FICA Tax Tip Credit would create immediate liquidity for owners to claim, staying in business.

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Why would it be effective back to 2015?

Having the credit applied retroactively would enable access to taxes paid for four years. Salons are in dire need of these funds to avoid permanent closure and loss of staff. In addition, many states have new requirements for PE equipment, cleaning, and insurance—94% of salons expect to face these new challenges and need the revenue to do so. To claim back four years of taxes would grant an immediate relief that the Paycheck Protection Program doesn’t offer.

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What can I do to help?

The PBA has a petition available to help include salons in the upcoming stimulus legislation. As of this writing, it has nearly 22,000 signatures and growing. It takes one minute to sign. Your voice can help hundreds of thousands of stylists and salons across the country keep their doors open.

FAQs:

How exactly does the 45B FICA Tax Tip Credit work, and what are the specific benefits it offers to salon owners and stylists?

The 45B FICA Tax Tip Credit essentially absolves the mandatory 7.65% FICA (Social Security and Medicare) tax on tips that stylists receive. This means that stylists would not have to pay taxes on their tips, providing them with additional income. For salon owners, this credit could alleviate financial strain by reducing their tax burden and potentially allowing them to allocate resources towards other critical expenses such as rent, utilities, and staff wages. Ultimately, this could help salons remain financially viable and provide job security for stylists.

What are the potential long-term implications for the salon industry if this tax credit is not extended, especially in terms of job losses and salon closures?

Without the extension of the 45B FICA Tax Tip Credit, the salon industry could face significant challenges, including increased job losses and salon closures. Currently, many salon owners are struggling to meet operational costs due to closures, limited capacity, and reduced revenue. Without the financial relief provided by this tax credit, salons may be forced to lay off staff, reduce services, or even close their doors permanently. This could have far-reaching implications, not only for salon owners and stylists but also for the broader economy, as the salon industry employs a significant number of professionals and contributes to local economies.

Are there any potential challenges or obstacles to implementing the retroactive application of the tax credit back to 2015, and how might these be addressed?

Implementing the retroactive application of the tax credit back to 2015 may face logistical and administrative challenges, such as processing claims and verifying eligibility for past tax years. However, the immediate relief it would provide to salon owners and stylists outweighs these potential obstacles. Retroactively applying the tax credit would allow salons to access funds that they desperately need to cover expenses and stay afloat during these challenging times. Additionally, considering the ongoing impact of the COVID-19 pandemic and the new requirements imposed on salons, such as personal protective equipment and increased cleaning protocols, the retroactive application of the tax credit could provide much-needed financial support to help salons adapt to these changes and continue operating.